This is a very simple example,
Every stock will be over bought sometimes, including our beloved TAVA.
If you bought TAVA at $5, and today TAVA is at a very attractive price of $16, you think that it will pull back to, say $13.
But if you sell your stock now, you will have to pay taxes based on
a price of 16-5 = 11. You will not be able to buy back the stock even if it dropped to $13 because of taxes on your gain.
I have several choices now.
1) Write 17 1/2 covered call next month at a premium of 3/4.
If the stock drops to 13, I can either let the calls expire at the next expiration period or buy it back cheap, say at 1/8.
The gain is 3/4 - 1/8, I will only be taxes on less than one dollar and I can keep all my stocks.
2) Write 10 covered call for next month for 6 + 1/4 premium.
Now I make 6 1/4 on the covered calls, if the stock drops to 13, I can buy the call back at 3 + premium, the actual gain is 3. And I still keep all my stocks.
3) If the stock goes to 20 later, I will simply let the covered call be exercised. That is I make 17 1/2 + 3/4 - 5 on choice 1) or
16 1/4 - 5 on choice 2). Still better than if I sell at 16.
This is just some simple strategies. It can get much more complicate, you can go to the research area, search for topic covered calls for information that you like.
And you can always buy some puts at say 10 at 1/4 to protect your investment. This is why a lot of people never buy stocks without option trades available, it's an endorsement for TAVA.
Anyway, this date has come faster than I thought, I could not be happier about this. |
