Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

The 6-Week Options Trading Kickstarter: Covered Calls

By

Steve Smith breaks down a popular options strategy.

PrintPRINT
In this case, the effective sale price would be $206.80, which is calculated by adding the strike price ($205) and the premium collected ($1.80).

A trader can adjust the risk/reward by adjusting the strike price and expiration date of the call sold. Selling options that are close to being in-the-money can bring in more premium up-front, but there is a higher probability of having the shares called away, limiting upside.
Another tradeoff comes in the form of volatility. A covered-call strategy works best, and will outperform a plain long-stock position, when shares are stable, or trending only moderately higher.

That's an apt description of low-volatility stocks, where premiums collected will comparatively low. For example, with AT&T (NYSE:T) trading at $38, the September $40 calls, which have an implied volatility (or IV) of 16%, can be sold for $0.18, giving a return of less than one-half of 1% if the stock stood still.

For comparison, let's take a look at Sourcefire (NASDAQ:FIRE), which is trading at $46 per share. The September $50 call, which has an IV of 55%, can be sold for $2.45, providing a 5% return if the stock stood still. And note that the Sourcefire calls are 8% out-of-the money (or OTM) while the AT&T calls are only 5% OTM. This means that Sourcefire also has more room for upside gain.

But let's also note that AT&T has a 4.7% annual dividend yield, which helps close the performance gap. In this low interest rate environment, writing calls against dividend-yielding stocks can be a decent way to boost income.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE