Sure here is how it works. You have 10,000 shares of CPQ with a basis of more than $30. Lets say your basis is $40. CPQ last check was trading at $29 13/16. Call options for the $30 strike price that expire in July are currently going for $1 3/16 x $1 1/4 (These are real prices but change quickly). Since you own 10,000 shares you can sell these calls for the bid of $1 3/16 no questions asked. So you would collect $11,875 minus commissions. You get to keep that money no matter what happens to the price of CPQ. Sound pretty good so far.
Your risk is twofold. The first risk is that CPQ will go down really low, but you have that risk anyways just holding CPQ like you are doing. The second risk is getting called out. If on July 17 the price of CPQ higher than $30, you will be forced to sell your 10,000 shares of CPQ for $30 (a capital loss of $100,000 if your basis is hypothetically $40.) You get to keep the $11,875, so the net loss would be $88,125. You can buy back into CPQ anytime watching the Wash Sale rules of course if you did get called out.
Getting called out at $30 is something you want to avoid. When writing calls its important to make sure that you write the calls as high as possible on a price peak in CPQ. The way CPQ is moving its probably better to just hold for now until it gets up to an important resistance level like $35 and then write the calls. |
