I'm considering selling NUFO June covered calls, strike price of $15, premium of $1.85 (as of last check around 10:30 a.m. est, Wed. morning) and stock price at $14.33. I would love any advice anyone can offer particularly since it's my first shot at covered calls.
I used McMillan to calculate returns and get a 16.5% return if called and 13% return if not called. (I used commission costs but, unlike 1993 when McMillan published this edition, they are negligible so I'm not including them in this note.)
My reasoning is as follows. It doesn't seem to be a good time to write ccs against stock I own and wish to keep (QCOM, GMST, NTAP, SEBL, CREE, etc). Short term, the market seems in an uptrend. I could buy shares dedicated to that but (a) the premiums are fairly small and (b) given that I think the most likely market scenario is up for a bit, I would be better off just buying and holding.
But I still wish to learn and I know I learn best from working out the consequences of actions, rather than simply reading about them.
So, I looked elsewhere. Found a link on the www.CoveredCalls.com site to a list of stocks with the highest premiums. NUFO is/was among them. You see the numbers above. I should add that NUFO is a stock my wife and I are following, considering adding shares in the next six months or so. Thus, it seems to be a purchase that qualifies for the relevant ambivalence.
I see the following risk factors. First, the stock takes off. I get called which produces a 16% return. ok. I miss any bigger upside but I think that highly unlikely. And I expect to be able to get back in later in the summer around these prices, should we still be interested.
Second, it drops in price. The best strategy I see is to either buy the option back or let it expire, but, in either case, just hold the stock and write more calls against it, month after month, hoping the premium stays in these upper reaches. I could get stuck with a stock at a starting price higher than I would like. And with low option premiums. Some risk here. Part of my problem here is that I'm not clear about the way options get priced. Will need to read much more.
Third, the trading activity in these calls is a low volume affair. I could have a hard time getting the price I want when I try to close the calls. That would be a major learning experience and might lead to plan (b), just hold until expiration.
Thoughts, comments, criticisms more than welcome.
John |
