<<I did write covered calls (Apr 30) against about half of my shares today, to reflect my assessment that the stock is closer to fair value than it used to be and to buy myself about 10% downside protection. If the stock does get called away at $30 then I'll have a 15% gain on the part that's covered (119% annualized gain), and I'll still participate in the upside with the ~half of my shares that aren't covered. I'm including these details of my position only to educate those who are interested in how covered call positions work--not to suggest a particular position to anyone. Basically, after being very bullish, I'm now moderately bullish, and this is one way to play such a point of view. (If you view SFAM as a likely takeover target at a modest premium, then this is not the right strategy for you.)>>
As an update for those who are interested in this covered call strategy, I bought back the calls this morning when the stock dropped at the open. The downside protection had shrunk to only about 5%, and I still had the cap on the upside. There is good chance (better than 50-50, I'd say) that SFAM will break-even this quarter, despite the unanimity of the analysts' looking for losses of 5 to 13 cents per share. In such an environment, I don't want to cap my upside at $30 anymore--especially when that upside cap is only getting me 5% downside protection.
Looking at the covered call position, I entered it when the stock was about $29 and exited with the stock about $26.5. I made about $1.5 per covered share on the option and lost about $2.5 per covered share on the stock, for a net loss of about $1 per share instead of the $2.5 per share that I would have lost had I left the shares uncovered. For that downside protection, I had to cap my gain while the position was in place, a gamble that paid off in this case.
FYI,
Mr. Sam |
