wesmip1
The Simple covered call strategy involves buying some shares and then writing a call against them. When you use a margin loan you dont need to put in as much money. It is assumed in these examples that you need to put in 30% of the cash. This works very similar to the simple covered call except there is a bit more math involved and there are more costs involved. The interest rate is assumed to be 10% for the examples. ( The current margin loan rate is more like 8.5% ).
Also note the option contracts have already lost 2 weeks of time value. So the premium is smaller than it would be normally.
Buy NCP shares at 23.20 = $232,000
Only need to put in 30% = $ 69,600
Brokerage $ 625 (1250 round trip)
Sell NCP call at 23.50(Aug) for 20c = $ 2,000
Brokerage $ 60
If Excercised
Brokerage $ 625
Interest $ 1350 a month
Profit = 232,000-235,000-1250+2000-60-1350
= $2340 or 3.3% a month or 40% a year
If Not Excercised
Interest $ 1350 a month
Profit = 2000-60-1350 ( -650 once off for brokerage )
= $590 or 0.8% a month or 10% a year
Remember The percentage is determined on how much money we put in that being $69,600.
Risks :
Read up on the risks on the Internet. There are lots
Interest costs and Margin calls are an added risk.
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.
Good Luck Trading.