BamBeano,
I have been following, printing, and studying your posts on CC's for the past month or so. I thank you for sharing your knowledge with us. I have been struggling to keep up with the class, but think I might now be only a chapter or two behind. Would you, or anyone on the porch, care to grade my paper?
The goal of writing Covered Calls is to maximize income generation. Volt has written that the stock is the vehicle for this. I am looking at it from a slightly differing view. The pile of money set aside to write CC's is the vehicle, and the stock is chosen from that dedicated CC money.
A portion of the investment portfolio is set aside to generate current income. For example, 25% of a $400,000 portfolio could be used. The other 75% would remain invested long term for equity appreciation. This will give us $100,000 of our portfolio to work with.
1.) Choose the correct stock to write CC's.
This will attempt to locate the best return for the month on our CC money. Only looking at quality companies whose stock is probably already in the other 75% of the portfolio. (I will try to make a ledgible table in SI)
Call Price is split of Bid/Ask
Return % Now is Call Price divided by Stock Price
Return % Potential is Return Now plus additional return if stock appreciates above Strike Price
Data at close today, Tuesday
For April 2000
Stock..Stock$..Strike..Call$...Return%Now..Return%Potential
QCOM.125.13....125....13......10.4..........10.4
QCOM.125.13....130....11.......8.8..........12.7
JDSU....125.......125....15......12.0..........12.0
JDSU....125.......130....13......10.4..........14.4
ELON...98.38.....100....14.75...15.0..........16.6
ELON...98.38.....105....12.5....12.7..........19.4
ELON is currently paying the highest returns. Expand table as needed.
2.) Invest
We have set aside $100,000 for CC's. This amount is marginable. Margin used each month will vary depending upon many, mostly personal, factors of risk/return. Assume about half of margin power used in this example.
Purchase 1500 shares of ELON @ 98.38 for $147,570.
Write either Strike Price 100 or 105 Covered Calls
100's
Sell 15 Contracts @ 14.75, Receive $22,125
If ELON over 100 at expiration, Receive additional (100 - 98.38) $1.62 X 1500 = $2,430
Total Potential Return $24,555
105's
Sell 15 Contracts @ 12.5, Receive $18,750
If ELON over 105 at expiration, receive additional (105 - 98.38) $6.62 X 1500 = $9,930
Total Potential Return $28,680
Strike Price chosen to write dependant upon immediate needs, and expected price action of stock. Note expantion of % return through use of margin.
It is my thought with writing CC's that the best thing that can happen each month is to get called away (with the exception as Volt said of extraordinary positive news on the stock written upon). Being called away will allow each month to replenish the original fund/pile (and expand with any unspent prior months gains), and analyze again to determine which stock is currently paying the best premiums.
Comments appreciated
(BamBeano = Babe Ruth) |
