Covered Calls Explained
EXAMPLE ONLY
Commission costs not included, adjust accordingly.
I bought 200 shares of DECK this morning for $42.50 = $8,500. I then sold the $45.00 strike covered calls for $1.40, I just made $280 Now, DECK closed at $45.01 (it is in the money) so if somebody decides to exercise that option and take my 200 shares they already paid me $280 now they have to pay me $45.00 per share so I make an additional $500 ($45.00 - $42.50 = $2.50 X 200 shares)
So let’s say it’s options expiration Friday and DECK is below $45.00 and nobody exercises the option, come Monday you can then turn around and sell a covered call for September,
$42.50
-$1.40
_________
$41.10 is now the average you paid for the stock, so it can get down to there before you lose money over all. Average is less if you sell September covered calls.
OK, you haven’t sold September covered calls yet, DECK drops to $41.50 and has stabilized and my bounce back, you are still ahead. I bet you would get a pretty penny for those September $42.50 strikes if you want to risk losing your stock. If you want to lessen the risk of losing your stock go for a higher strike but make less on the option.
Once I had covered calls out and the stock price was like $1.50 above the strike and nobody exercised the option. It eventually came back down and I didn’t lose my stock. But then one time (at band camp) I had covered calls out on expiration Friday and the stock was only a few cents above the strike and poof, my stock was gone.
The options can be exercised at the strike price at any time before expiration, ya just never know.
Reminder: You can not sell a stock that you have covered calls out on, unless you buy them back first.
2 different reasons for covered calls
1. Growth (IRA, college fund, etc) long term. You don’t want to lose the stock
Sell the calls at a high enough strike so the stock doesn’t get taken. You make less, but you can make money every month. Plus if the stock has a divvy, you get the divvy because you still own the underlying stock, that’s what my broker told me, double check with yours.
2. Hedge your bet (lower your stock buy average) make money. You don’t care if you lose the stock.
Go for max option price, take the money and run, LO
