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XMFConnor (97.31)

Covered Call Options Question (ATW)

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June 19, 2011 – Comments (7) | RELATED TICKERS: ATW

I'm a long-time stock guy but an options rookie.. looking for some help from more seasoned options vets to make sure I am thinking about this potential covered call the right way...

I have 100 shares of ATW that have appreciated considerably from my cost basis and at these levels, I would not mind selling at a higher price and am considering writing a covered call.

I am looking at a few different call options to potentially write but wanted to take this one as an example:

a) the July '11 $40 strike:

-Current Stock Price: 39.25- Stock Price: $40

-There are 21 days until expiration (starting tomorrow)

-the call option currently costs $1.20, which means the yield is 3.06% (1.20/39.25) assuming that the stock price does not move (the static return). The max return (if called) is Net Profit/ Stock Price= $1.95/$39.25= 4.97%

-The annualized return if called = 4.97%* (365/21)= 86.35%

- Breakeven price for this trade is stock price - call premium =39.25 - 1.20 = $38.05.

Summary: I get 3.06% downside protection by selling the call and 4.97% upside potential

Fools, are these numbers correct and am I generally thinking about this the right way?

 

 

 

7 Comments – Post Your Own

#1) On June 19, 2011 at 10:53 AM, TMFNewCow (70.91) wrote:

For the most part, you're thinking of it correctly. Most of the time the calculations should factor in your cost basis though. So for example, your actual Breakeven technically should be your Cost Basis - Premium. Static return calculation is correct. Max return should include your cost basis (41.20 / your cost basis - 1), but I understand you're trying to set up the numbers from this point forward. Most of the time you would calculate these figures at the initiation of the position. Like if you didn't currently have a position and were considering opening a covered call with these prices, your calculations are exactly correct.

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#2) On June 19, 2011 at 11:56 AM, shamapant (80.77) wrote:

yup, spot on.

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#3) On June 19, 2011 at 4:34 PM, MegaEurope (22.68) wrote:

Yep, those numbers look correct.  But remember to factor in trading costs (and bid/ask spreads), which are even more significant in options than stocks.

Personally I'd just keep the ATW position, it doesn't seem overpriced.  Now if you were thinking of getting out of another position, say LQDT, a covered call might make sense.

I suggest you download Options Oracle from www.samoasky.org, it's a free program that can help you determine the best strikes and dates graphically for any kind of options strategy.

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#4) On June 19, 2011 at 4:35 PM, MegaEurope (22.68) wrote:

Sorry wrong link. http://www.samoasky.com/

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#5) On June 19, 2011 at 6:59 PM, XMFConnor (97.31) wrote:

Thanks for the comments guys.

MegaEurope, I have been playing around with OptionsOracle.. seems pretty cool (thx for the link!).Just one more question..

When I put in the strategy I described in the blog post on OptionsOracle, it has a 9.69% max retrn vs. my 4.59. Furthermore, it says the return if unchaged % is 5.65% versus my static return of

2.68%. Do you know how they calculate these/ what the discrepancy is? Thanks again.

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#6) On June 19, 2011 at 9:08 PM, MegaEurope (22.68) wrote:

The numbers you calculated by hand are correct.

To fix the Options Oracle calculation, go to Config -> Margin and change Long Stock to 100% instead of 50%.

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#7) On June 20, 2011 at 1:17 AM, XMFConnor (97.31) wrote:

MegaEurope,

 Much thanks- I really appreciate it.

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