Selling Covered Call Options
Previously, I had talked about selling naked puts on a small mining stock. With one week to go the options are now worth only 5cents a share or about $25. I had sold them and pocketed $175. So it looks like they’ll expire worthless and I’ll get to keep my $175.
Its not a lot of money, but I’m still learning so it never hurts to make money while you learn!
I purchased a stock today. Its a low priced stock but I think it has the potential to do well in the long run. However I’m not sure it’ll do well in the short term. I bought it at $2.70 and sold a December $2.5 call for 40 cents. If the stock is over $2.50 in about 5 weeks, the stock will get “called” and I’ll have to part with it. In return I’ll get $2.50 per share plus I get to keep the 40 cents I got upfront. That equates to a 5.8% (after commissions) return in about 5 weeks. Annualized thats a 60% return!
But probably what will happen is the stock will trend down to about $2.50 where there is a lot of support(meaning its bounced off this price before) and the option will probably expire worthless. Meaning, if I’m lucky I’ll get to keep the stock and also the 40 cent premium.
Of course, if I’m unlucky the stock will tank and I’ll lose money. However, I don’t lose money unless the stock trades below $2.30 cents, which is a 14.8% below what I bought it at and below its support line. But there’s no risk-free reward in real life.
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November 11th, 2006 at 10:55 am
What stock trading for $2.70 has options? Perhaps LU?
August 23rd, 2008 at 11:46 am
I have been selling covered calls on good quality, dividend paying stocks for years. You don’t sell the call for less than you purchased the stock. You sell for 1 or 2 strike prices above the current price. The cash flow you make (combined with the dividends) you reinvest to buy more good quality stocks. Compounding monthly cashflow AND quarterly cash flow can add up quickly. If you need additional cash one month you take the cash. Once the dividends you recieve can replace your monthly income…you earn your freedom (from the “Rat Race”).