Covered Calls
Andy, re your
Is it true that writing a covered call nets you the premium and the only way to lose is the possible missed stock appreciation higher then the stock price before the strike date? If one thinks Dell is going to be flat or down after any post-earnings run, this could be a solid way to make money on half of one's Dell stock? Never did this before, but it seems like a win - win. What's the downside? Please let me know.
You are right, though it is not quite that simple. You must have the appropriate permissions established with your broker.
Using today's closing prices, the DELL AUG 105 calls were quoted 5 1/4 x 5 5/8, and the DELL AUG 110 calls were quoted 2 7/8 x 3 1/4. Thus, we might assume that you could have sold the DELL AUG 110 covered calls for $3 / share. If you did that and DELL were to close next Friday below 110, you would keep the premium of $3. However, now the dark side... If DELL were to close next Friday at $200, you would still have to sell your DELL at $110. The downside is this: Once you sell a covered call, your maximum potential profit for the duration of the option is the strike price plus the premium you received. You cannot make more than that, no matter how high the stock price goes.
In general you are correct. If you believe that a stock is headed down for the next time period, t, you can sell covered calls through the end of t. If the stock price performs as you suspect you may get to keep the premium and the stock.
This is the simplified version. It is a LOT more complicated than that. If you plan to trade options at all, strongly suggest you study them thoroughly before you do so. A good place to start is William Spaulding's web page. He has an entire section devoted to investor education.
ADDENDUM: I see that now you have received much better replies than mine. Please refer to them.
regards, 3 |
