To wet your appetite for our upcoming COOL Club sessions, here are some questions from one of my Covered Options webinar attendees. I thought I would share the answers with Club Cafe.

I currently own 300 shares of GE and would like to write a covered call option against them. Please see if my reasoning and calculation are correct
For a strike price of $21 (GE currently selling for $20.) the premium is:

Aug ..... .19--> three contracts yield $57 commissions $11 profit $46

Sept .... .33 --> three contracts yield $99 commissions $11 profit $88

Oct .... .45 --> three contracts yield $135 commissions $11 profit $124

Dec... .69 --> three contracts yield $207 commissions $11 profit $196

These calculations are all correct and so one large Gold Star!

You indicated that you do not like to have a contract expiration date of more than 1 month but in this case the yields on an Aug contract hardly seem worth it

I am not opposed to doing longer dated options than the first month but I do recommend that when you are starting, you stick with one month out. The primary reason is that the longer out the expiration date is, then the more time that there may be some unexpected news that might impact your stock.

If I sell the Aug contract my calculated return is about 8% (46profit/6000original asset)*(365/35days till expiration). An 8% return seems paltry.

Again you are a great student and the math is correct! (small correction would be that there are 39 days to August 18 expiration)

I agree, 8% is not an APR I personally would want to do. You could consider doing at-the-money calls at the $20 strike level.

Jul ......... $ .35 -> three contracts $ 105 net of commissions $ 94 .... APR 52%

Aug ..... $ .59 -> three contracts $ 177 net $166 .... APR 26%

These are exactly the types of Covered Option questions we will be exploring at our weekly COOL Club sessions, Hope to see you there.

Paul Madison

This is a great start – and I’m looking forward to understanding all this a little better, because it’s pretty Greek or Spain to me right now.  I like the real examples that I can sort of relate to….. Looking forward to tomorrow night and all the other sessions, I will probably have to review them over and over and over before they sink in, so hopefully they will be taped for future review at my pace (which is slow).  J 

Laura

 
I currently own 300 shares of GE and would like to write a covered call option against them. Please see if my reasoning and calculation are correct
For a strike price of $21 (GE currently selling for $20.) the premium is:

Aug .....  .19--> three contracts yield $57 commissions $11 profit $46

Sept ....  .33 --> three contracts yield $99 commissions $11 profit $88 

Oct ....   .45 --> three contracts yield $135 commissions $11 profit $124

Dec...    .69 --> three contracts yield $207 commissions $11 profit $196 

These calculations are all correct and so one large Gold Star!

I am not opposed to doing longer dated options than the first month but I do recommend that when you are starting,  you stick with one month out.  The primary reason is that the longer out the expiration date is, then the more time that there may be some unexpected news that might impact your stock.  

 

If I sell the Aug contract my calculated return is about 8% (46profit/6000original asset)*(365/35days till expiration). An 8% return seems paltry. 

Again you are a great student and the math is correct! (small correction would be that there are 39 days to August 18 expiration)

I agree, 8% is not an APR I personally would want to do. You could consider doing at-the-money calls at the $20 strike level.  

Jul ......... $ .35  -> three contracts $ 105 net of commissions $  94 .... APR 52%

Aug  .....  $ .59  -> three contracts $ 177                          net  $166 .... APR 26%