OT Covered call clarification
on 4/28/04 he sold 10 October 10/04 covered calls at $75.00
That is incorrect. The price quoted for options is per share, with an option representing 100 shares. While it is technically correct that I received $75 per option ($0.75 x 100 shares), in common parlance I sold 10 covered calls at 75 cents (for a total of $750).
I believe Sam still owns 1000 shares of WDC right?
Right.
Because you ran out of time your WDC covered calls never got to be in the money at ten. You still have a profit on your 1000 shares though so it's not all bad.
Note that I didn't run out of time. The option which I sold expired worthless, which is not bad at all. I realized a profit of 0.75 on the option, while I have an unrealized profit of 0.51 on the stock in six months. That is a total profit of $1.26 on a stock at $8.49, or 14.8%, or nearly 30% on an annualized basis. On a risk-adjusted basis, it's even better since a covered call write is actually less risky than a simple long stock position, because the premium has in effect bought me a bit of downside protection on the stock.
The gain on the option trade is a short-term capital gain. But I understand that since it was an out-of-the money call, it does not affect the holding period on the underlying stock, so it gets me halfway to a LT holding period in the stock.
You might also note that when selling an out-of-the money CC, the point of maximum profit occurs when expiration is at the strike price. In my case my profit would have been the same whether the option expired with WDC at $10 or $50. But you can be sure that my regret is minimized at $10, since at $50, I would have made a lot more if I had not sold the call.
Sam |
