Covered call strategy

Discussion in 'Options' started by Fishbird, Apr 9, 2008.

  1. Fishbird



    Help an options novice and fill in the numbers please.

    Lets asume i bought 1000 MSFT stocks at 25.

    I sell MSFT 30 Calls with 3 month livetime left for the 1000 stocks.

    Thats 10 contracts right?

    They trade at about...? ( Do i have to multiply that price x 100? )

    What is the gain if they exercise out the money?

    If the stock rises continually i will not participate but wont lose either.

    How long will i approximately have to repeat the covered call selling until i made as much as the stock costs ( 1000 x 25 )?

    I guess that about 30% of the time i have to deliver my stocks because they are ITM. That means i have no gain for the period and some commissions to pay.

    If the stock goes to zero quickly i will lose but if it survives for more than say 3 years i will have made eventually more with the calls than what i payed for the stocks.
  2. MTE


    Yes, 1000 shares is 10 contracts.

    Jul 30 calls were at 1.32 bid as of 04/09 closing. That's per option. Options trade in contracts, where 1 contract is 100 shares so the price of 1 contract is 132, and 10 contracts would be 1,320.

    The options will not be exercised if they are OTM, they will expire worthless. Assuming you meant expire worthless then the gain depends on where the stock ends up. So, you p/l will be: stock selling price less 25 plus 1.32. Or in other words, your breakeven point is 23.68. Anything below that you have a loss, anything above a gain.

    If the stock is above 30 at expiration then the calls will be exercised and your gain will be 30-25+1.32=6.32. That's your max potential gain.

    Assuming your stock is never called and you keep selling 3 month calls at 1.32, it would take you 25/1.32=19 times, which is 57 months or almost 5 years.
  3. Fishbird


    Thanks MTE

    My plan was to buy a stock and hold it forever and sell calls on it. I am not interested in the stock rising, just collecting premium until i earned more than what i paied for the stock. Then ad a 2nd stock and so on.

    But when i see your calculation and add the ~30% exercised options, it would take me about 8 years until i reach the target.

    Not fast enough for me :) but100% in 8 years is pretty good i think. And the stock will probably be worth more than zero if you finally sell it too.

    I read in a book that some fund was selling options on currencies with this method. Every month they add some short options on their long currency positions.
    Was one of their main strats.

    Maybe the payout is better with 1 month options and high vola amrkets?
  4. you are better off with this strategy using an index or etf to sell calls against. they have more strikes and you eliminate specific stock risk ie stock going to 0
  5. Fishbird


    QQQQ is at 45.5.
    June Calls 10% higher ( 50 ) cost 0.43.

    So i buy 1000 stocks for $45500.
    I get $430 premium 70% of every three month period = $301.

    I would have to wait 450 month to make 100%

    Btw MSFT was at 29 yesterday, not 25.
    The MSFT example would take multiple times longer than 5 or 8 years.

    Looks like interest on the $45500 is higher than premiums earned.
  6. greddy


    I agree completely. What if you were doing CC on Bear Stearns,
    Countrywide, etc.?

    I got burned doing CC on XHB (the housing sector) last year. However, eventually I can get out of the hole by
    continuiously selling calls on a monthly basis. The risk of
    XHB going to zero is slim.
  7. MTE


    It's not just about digging yourself out of the hole, you have to consider the opportunity cost.