1/31/22 Update – Covered Call: Today I closed the 2/18 22 strike call in Ford for a $33 debit, leaving me with a profit of $72 this month. So far we’ve collected a theoretical $86 in stock appreciation, $232 in premium from selling calls, and if you’re still holding the stock tomorrow, you would have received a total of $20 in dividends — for a grand total of $338. Over 16% ROI. Going to look for opportunities to roll again in the future once we get past Ford earnings on Thursday, after the close.
The Wait Is Over, Sell a February Call!
1/4/22 Update for Covered Call – $F Ford is rallying and has exceeded our Feb Call Strike of 22$. If Ford is trading above 22$/share on Feb 18, we will be obligated to sell 100 shares of Ford per contract (and keep all the premium collected). We will cease collecting additional profit from the stock over the 22 strike. We are still ahead in this trade over $259.20, plus the other premium collected, and dividends before we rolled. I’m not going to do anything, and just wait, but if you are concerned about having to potentially sell your Ford shares in Feb, remember you can always buy Ford again in Feb. Alternatively, consider adding more shares that are “unpaired” to the call, or purchase an upside call to continue collecting profits if you believe Ford will continue rising significantly. Remember, when we entered a covered call with Ford, this is what we wanted to happen. We will make the profit from our initial cost basis ($19.47) + the premium from all the calls we sold.
As always, hit me up in Discord or email me if you’re in this trade and have questions about management. (email@example.com)
12/1/21 -Covered Call update – I hope you’re having a nice week. With the market volatility, we have another opportunity to sell another Ford Motors call out in the future, this time at the 22 strike in February (18th) for a credit of 1.06 in premium. So far in this trade we’ve collected $75.25 in premium from rolling our calls, $10 in dividends, and $15 from the appreciation of the Ford stock itself (closing at $19.58 today). If we are able to keep 50% of the premium received today, that will be another $53 in profits!
11/30/21 – Buy to Close the F Call, and wait. With the large market selloff today, the January 22 strike call we sold only a few days ago has declined in value by 50%, which is the event I’ve been waiting for to take profit in that call. I originally sold that call for 1.06 and now I can Buy to Close it for .52, leaving us with a $54 profit for that call. Let’s hold on to the 100 shares of Ford and see if there is an opportunity to sell another call in the near future against it.
11/22/21 Update – Today I rolled the December 17th strike call out to January (the next monthly expiration period). To do this, I bought to close the 12/17 22 strike call, and sold to open the Jan 21 22 strike call, for a $48 credit. So far with this trade, we’ve collected about 1.06 in premium, and Ford has appreciated by about 1 dollar. We are ahead in this trade.
Covered Calls are one of the first options strategies many learn when beginning options. They are low risk, as long as the stock chosen is not too volatile and a decent premium has been collected. Sometimes called a “Buy-Write”, they are essentially 2 transactions, bound together:
1) Purchasing 100 shares of a stock
2) Selling a call option against those 100 shares and collecting some money
You are essentially buying the stock at a discount from the market, because it is offset by the premium collected from the option contract. Your goal should be for the stock to exceed the strike price of your call, so you collect the full premium from the call you sell, plus the difference between the price you paid and the strike price. At expiration, the stock is called away from you, and that’s a good thing. If the stock does not exceed the strike price you get to collect the full premium and then sell another call in the future 30-45 days out again! Win-win, right? Well, not so fast, there are a couple risks that one should be aware of before trading covered calls:
1) The value of the stock could go to $0. While this is highly unlikely with Ford, it is a theoretical possibility. In the screenshot below, you’ll notice that you do have some downside protection to $18.87 (a 3% drop), but below that, you begin to lose money.
2) The stock could go “to the moon”. Let’s say Ford rockets to 100$ a share before expiration. One might think that this is a good thing, however selling a call is a contract where you’re taking on the obligation to sell the stock at a specific strike price in the future. If you sold the 22 strike call and Ford is $100 dollars, you would have been better off just buying the stock outright without the call. You might be kicking yourself that you left lots of money on the table as you are limiting your upside profit potential because you wanted the premium. The diagram below shows the theoretical profit and loss graph for a covered call.
|What’s the Trade? |
With Ford Motors Trading at $19.44, consider purchasing 100 shares, and selling an out of the money December 17th 22 strike call against it for a $58 credit, bringing your cost basis down to $18.87/share.
1. Buy 100 shares of F
2. Sell to Open an OTM (Out Of The Money) 22 strike call, collecting around $58 in premium
Rationale: This is a defined risk trade. You can make up to $313 by 12/17 if Ford is trading above your 22$ strike. ($22.00-$18.87 x 100). What’s also nice is that entering this trade before the ex-Dividend date (11/19) you’ll also collect a .$0.10 dividend on 12/1.
Theta Decay: As of 11/4, this trade will pay you $1.43 in daily theta decay until expiration.
Assumption: Neutral / Bullish
Timeframe: ~6 weeks
Enjoy Selling Covered Calls for Profit and Income!