wesmip1
I wrote this up a while ago for some people and just updated the figures used so I thought I would post it for anyone to use as an example. Not sure how this will format but hopefully it looks ok.
The Simple covered call strategy involves buying some shares and then writing a call against them. This gives some downward protection but obviously limits the upside potential. If you want more info on this strategy then you should go search the web. It is assumed that everyone knows how to work this strategy. A quick example is below :
It should be noted that these option prices are from 12th August 2005 and have therefore already lost 2 weeks of time value. This would increase the potential return further.
Brokerage assumed at 0.54% round trip. ( Minimum $60 )
Shares bought are 10,000 for simplicity sake ( 10 option contracts ).
Buy NWS shares at 23.20 = $ 232,000
Brokerage = $ (625) (1250 round trip)
Sell NWS call at 23.50(Aug) for 20c = $ 2,000
Brokerage $ (60)
If Excercised
Brokerage = $ 1,250
Profit = 235,000-232,000-1250+2000-60
= $3690 or 1.6% a month or 19% a year
If Not Excercised
Profit = 2000-60 ( - 625 once )
= $1940 or 0.8% a month or 10% a year
Risks :
Read up on the risks on the Internet. There are lots
Some Alternative Ways to Trade this Strategy:
1. Buy a put at a lower strike price thus limiting your downside potential.
2. Only buy half (Or a certain percentage) of the security. Make sure you purchase the other half somewhere near the strike price.
3. Sell a put to acquire more shares at a lower price, thus doubling your premium that is received.
I will post a couple more methods for use with the covered call. In particular I have written up some info on trading covered calls with Margin loans, waves, calender spreads and LEPO's. I still need to update the figures for these methods though.
Good Luck Trading.