In my last posts I explained how Selling Put’s can be used by the conservative investor to buy stocks at a lower price, or how to make an income selling them on a regular basis. See the articles here and here.
In this article I’ll talk about how a very similar process, Selling a Covered Call on your existing stocks to enhance your income. It’s called “Covered” because you already own the stock in your account.
- When you “Sell a Covered Call” you give someone the right to buy your existing stock at a certain price (Strike Price), while collecting an immediate cash premium.
- Conservative investors use this trade to enhance their income on stocks they already own, like getting an extra monthly dividend.
- Using Facebook (FB) stock as an example. I already own Facebook in my account, it has been a great performer. Today April 29th Facebook is trading at $116.50/share, after a recent jump in price.
- I’m looking at the May 20th $121 Call Option, it pay me a premium of $1.07 per contract (100 shares).
- Therefore, if I Sell these Call’s I get $107 immediately in my account per contract. I am looking for the price of FB to be below $121 by the May 20th , the Expiration Date.
- If the price of FB is at or above $1210 on May 20th I must either sell my stock, or just buy out of my Call position.
- Another way to look at this is if my shares get “Called Away”, I will get $5.57/share in profit. $1.07 was the Call Option Premium, plus $4.50 from the price increase from $116.50 to $121 per share. That is a 4.8% return in 30 days or about 57% annualized.
- My favorite web site shows that this trade has an 73% chance of “expiring” which I want it to do, and my return is .91% for 30 days or 15.81% annualized.
- As a sanity check I check out the FB stock chart and see that the stock is trading at about an all-time high after a recent increase.
- This might be a nice safe little trade.
Here is what a Call contract looks like in your account. This contract is FB 160520C121, it looks cryptic but it’s actually easy to understand. FB (the stock) 160520(Expiration Date of 05/20/16), C121 (means a Call with a $121 Strike Price).
Here is what a Fidelity order entry screen looks like for a 3 contract transaction.
I always double check my Call Options trades with my favorite Options site: http://www.stockoptionschannel.com , here is what it said.
Here is what Facebook’s stock chart looks like:
So, can you make money doing this, yes, once you understand it. Here is a copy of my monthly Options Trading spreadsheet for July 2013. You can decide how much risk/reward you are willing to take. Look at the Call Options.