Covered calls

Discussion in 'Money & Investing' started by stockbroker, Oct 30, 2005.

  1. stockbroker

    stockbroker Registered Member

    I think that covered calls and dividend reinvestment are one of the best ways to grow your wealth in the market.

    In order to write covered calls you must have 100 shares of one stock. I'll use Altria (MO) in this example. At this time shares are trading at $75.11. We need to look at the options price right now, but these options are ones that arent "in the money"

    As of right now call options to $80 that are expiring Nov 18 are selling for $.50 a piece. ***uming that you own 100 shares, you can sell 1 contract of covered calls for $50, a .6% return in one month on your shares.

    One of two things now happen, on November 19 Altria shares will be higher than $80 and the options will be exercised. You have sold your shares for $8000 and have already earned that $50.

    Or the options will expire worthless (much more likely) and you have made a free $50 on your investment in just one month.

    While .6% might not be that great each month, but it will make a huge difference in your portfolio over time. If you currently own 100+ shares of a stock that has options I would consider writing covered calls to increase your gains.
     

  2. stockbroker

    stockbroker Registered Member

    I just wanted to add that over 12 months you will earn 7.4% with this example simply through covered calls. Add in the dividend yield of 4.3% and you can expect gains of 12% yearly just with covered calls and dividend, not to mention the capital gains.
     
  3. MenInTights

    MenInTights not a plastic bag

    thanks for the info. I have heard people talk about covered calls for a long time, but have never made the plunge. I'm trying to understand the risk here. In your example, if Altria (MO) sells for $100 on Nov 19, I've 'lost' $20 per share, becuase once I've written the contract there is a forced sell on the strike date? Is that true? (Lost meaning paper loss, in actuality, I'm ahead)
     
  4. stockbroker

    stockbroker Registered Member

    Yes, you did lose out on $20 a share but the risk of these investments is minimal. In the long run you benefit by selling covered calls.
     

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