Linda:
It is possible that a stock could run away from the investor An investor has to consider that possibility that her profit will be capped at the strike price ($50.00) + call premium ($4.50). That's a total $54.50 for a stock that was at $47.25 when the investor wrote the call. In that case, the investor would still make over 15% in one month, which is excellent appreciation in anyone's book.
It is also possible that an investor can get exercised before expiration. While I have been writing covered calls for 4 years, this has only happened to me one time. And as long as Pixar stays below $50, there is no chance of that happening. If it happens, I still made over 15%, but this time in LESS than one month.
If Pixar is above $50.00 on Dec 18, I have two (2) choices before the close of trading:
1. I can just let the stock go, knowing I have 15% in my pocket and there are thousands of other stocks to write calls on next month.
2. I can buy back the calls at a premium. This is not as bad as it seems because the appreciation on calls is only point for point above the strike price and the time value is close to nil at 3:45 PM. In your example, where Pixar runs to $75.00 by December 18, I would probably pay about $26.00 to buy back the calls I sold at $4.25. That leaves me $21.75 in the hole (-) on the calls. However, I am $27.75 to the good (+) on the stock.
Therefore, I am still $6.00 ahead of $47.25 on the whole deal, or $53.25 on an initial investment of $47.25. This is still over 12% in one month with a nice tax loss on the options to offset capital gains on other trades I made during the year.
And I have to add that at prices less than the $75.00 in your example, but more than $50.00, I do much better than %12 in a month.
So, the only real danger is a Pixar bankruptcy. As long as the stock keeps going up and down, I accumulate more money and/or more Pixar stock by investing nothing more than my time.
In short, I make money by selling time to speculators and people who have to hedge their positions.
A sweet deal that I use repeatedly in my funds as well as my personal accounts. Hope you could follow my long-winded examples.
Go Pixar! |
