Richard,
If the stock were selling at 39 3/8 the intrinsic value was 0 and the time value of the option was 5 3/8. Your maximum profit at the time the options expire will be if the price of TYC is $40 or higher, and is capped at $6.
Excluding dividends, your cash basis is 39 3/8 - 5 3/8, or $34. So your maximum potential profit expressed as a per cent is 17.65%, which is not a bad return considering a six month hold (which annualizes to 38.4%!). But because there is time value remaining in the option it is generally foolish to repurchase. Just let your position ride and sleep well. The key is to look at your investment as a whole -- not just the options portion.
I believe that what you are noticing is that the stock moves a greater amount in terms of points than the option. This is entirely expected, and is captured by a metric called the delta. In fact, the delta only approaches 1 as an option moves more and more in the money. But when an option is in the money by a modest amount, or when it is out of the money, the option price moves are considerably smaller (on an absolute basis) than the underlying stock.
If your concern is having to part with the stock, a safer strategy might be to sell naked puts, which have the same profit and loss characteristics as covered calls. For example, I sold deep in the money puts on TYC (Jan 47 1/2) when the stock was at $39. The premium was $9.50 and so there was only $1 in time value. My break-even point is $38 at expirey (47 1/2 - 9 1/2), and at expirey my maximum profit is 9 1/2. I could have achieved the roughly the same profit potential by buying TYC and selling the Jan 47 1/2 call for $1, but in that case I would have net cash out of $38 ($39 - $1).
I suggest that if you want to learn about the characteristics of options visit cboe.com and down load the options tool box. You might also consider purchasing Larry MacMillan "Options As A Strategic Investment".
I hope this brief discussion helps.
TTFN,
CTC |
