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Strategies & Market Trends : Value Investing
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To: rllee who wrote (39512)10/1/2010 6:41:18 PM
From: E_K_S  Read Replies (1) of 78627
 
Hi rlee -

Sorry for the confusion. I sold the MHR May 2011 $5.00 call for $0.50. It is an out of the money call. If you assume that the stock is called away at $5.00 on the 3rd Friday in May 2011, the stock bought at $4.05 would generate a 36% total return for 8 months (or 54% annualized ROI).

$0.95 capital gain from the stock ($5.00-$4.05 = $0.95)
$0.50 call premium

Total return is $1.45. Cost of investment is $4.05/share. Total return (8 months) 36% = $1.45/$4.05.
(Note: annualized Return=54%)

If the stock is lower than $5.00/share in May 2011, you keep the $0.50/share call premium.. That equates to a 12% return for 8 months (or 19% return annualized).

My strategy is to generate some income and looking at the best case (where the stock price exceeds $5.00/share in May 2011), you CAN earn a total return of 54% annualized. You also give up the upside which can be huge with these low cost O&G companies.

That is why, I only sell covered calls on 1/2 of the shares I own. This strategy is not for everyone but I prefer to book the call premium(s) on part of my shares as these companies grow and build out their production wells. My plan is to sell on run ups (like significant news announcements) and buy shares on sell offs.

As the stock eventually increases in price and can show exceptional profit potential, I may stop selling covered calls and just peel off shares to generate the income I require.

EKS
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