Below is a snapshot of the VLO current position on July 02rd 2012 at 4pm. Current price is $24.19.
Note that 3 trades were executed on 6th June 2012 :
Close position : Long 6 VLO Sept 2012 Puts strike $29 : bought $3.95, sold at $7.65 = $2220 profit
Buy Stock : Long 50 VLO @21.58 (cost $1079)
Open position : Long 7 VLO Dec 2012 Puts strike $22 : bought $3.15 (cost $2205)
REALISED GAIN/LOSS *
Closed position : Long 6 VLO Sept 2012 Puts strike $26 : bought $3.70, sold $2.44 = -$756 (loss)
Closed position : Long 6 VLO Sept 2012 Puts strike $29 : bought $3.95, sold at $7.65 = $2220 (profit)
Total: $1464 (profit)
(* including commissions)
Open position : Long VLO 650 shares : price is 24.19 = -$204 (loss on 600 shares) + ($130 gain on 50 shares) = -$74 (loss)
Open position : Long 7 VLO Dec 2012 Puts strike $22 : bought $3.15, price is $1.98 = -$819 (loss)
Total : -$893 (loss)
(* including commissions and assuming worst case option prices)
Total strategy return is : $571 (on a stock that is actually down 1.3% since the strategy was started on Feb 27th 2012.
Strategy is up (only) 3.3%, although for comparision underlying stock (“buy and hold”) is actually down 1.3% )
Note: we have also got 1 dividends payment ($90) in 4 months+ holding period that havent been included in the calculations to keep the maths simple. The advantage of “picking up” extra stock along the way is that the dividends will compound faster. Hyperthetically if this is run for several years the returns by getting extra stock and just getting the dividends could be significant by the power of compound interest (but thats not part of the trading strategy discussion).
Note : the average price for the total VLO holding is now lower because an extra 50 shares were purchased using put proceeds. The realised and unrealised profit on the put options is ($1464 – $893) = $571. We paid 21.58 * 50 shares = $1079. The put options didnt quite pay for all that stock, but we effectively got 50shares for more than half price ($1079-$571) = $508 (which isnt bad).
VLO has been up and down in a range between approximately $15 and $30 in the last 3 years, so you could argue this works for this strategy (e.g. large selloffs, relatively swift rallies)