INTC Covered Calls?

[Kerim]

Ok, so I currently own 765 shares of INTC. I purchased 700 shares, and have accumulated 65 more through reinvesting. Let’s say that I’d like to unload 300 shares.

Assuming a flat open on Monday, I could just sell the 300 shares at the current price of $22.98 for $6894, minus the $7 commission, for a final total of $6887.

Or I could use covered calls to juice my returns a bit. Here’s how I imagine that would work (go easy on me if I’ve botched this, never done it before):

I could write the October $22s for a premium of 1.23 per share. So I would collect $369 in premiums, minus $10 in commissions, for a total of $359 in. If the stock is above $22 when the options expire, they will get called away from me at $22 per share. So I’d collect $6600, less another $10 commission, or $6590. Add that to the premium I collected, and I’d net $6949. A slightly better outcome that the $6887 I’d get for just selling the shares. If the stock is below $22 when the options expire, I keep the $359 premium and start all over again.

Questions:

1) Did I get all of that right?

2) Should I choose a different strike price or expiration date to increase the outcome (relative to just selling outright)?

3) Very sadly, all of my INTC shares are in a regular taxable brokerage account. Is the option premium I collect treated as regular taxable income? Or is it considered part of my capital gains (short term? long term?)?

4) I’ve accumulated the INTC shares at various prices. I assume I want to sell the shares that I bought at the highest prices so as to either minimize the capital gains or perhaps even harvest a slight loss. Is that right? The brokerage should be able to make it easy enough to specify which shares I’m writing the call on, right?

5) Anything else important I’m overlooking?

Thanks in advance for your help!

[hendi_alex]

First, the decision to sell straight out or to sell calls, IMO, should be based upon comfort level with the position. I think that selling calls against a position that should be sold outright would generally be a mistake.

If reasonably comfortable with the position, but merely wanting to decrease shares, then the strategy you suggest makes sense to me. Though I am much closer to novice than veteran or expert. Depending upon comfort level, you may want to consider the November calls which would bring in about another dime, plus don't expire until AFTER the next dividend. Another issue worth exploring is the trading cost. TDA charges me the same $7 for an options trade. Sometimes just a call to the broker is all that it takes to get a lower fee or a lower margin rate.

TDAmeritrade has excellent resources on tax lots. The info is found under 'Accounts' 'Tax Center' and is listed at the bottom of the page under 'Understanding tax lots'.

For the trade that you are talking about, and the potential minimal gains, I doubt that I would bother in a taxable account.

[ChadR]

I agree with hendi_alex in that you should go out further for your option calls. If you don't think that the price will drop too much you could go out to the April 2014 call and get $1.87 for each option and pick up 2 more dividend payments. The option premium is a short term capital gain. This is the reason I do all my option trading in my ROTH IRA. You can specify which shares you want called assuming that the price is over $22 once the option expires. You might want to find out how much you are charged when a call is exercised. Some charge double the option price when one is exercised. I found this out the hard way the first time I had shares called. Hope this helps. And if I was in your shoes and was wanting to reduce my exposure to INTC I would do it this way. Worst thing to happen is that INTC drops to $18 before the option expires. The risk for trying to increase your returns by using options.

[NilesMike]

(09-28-2013, 10:36 PM)ChadR Wrote: I agree with hendi_alex in that you should go out further for your option calls. If you don't think that the price will drop too much you could go out to the April 2014 call and get $1.87 for each option and pick up 2 more dividend payments. The option premium is a short term capital gain. This is the reason I do all my option trading in my ROTH IRA. You can specify which shares you want called assuming that the price is over $22 once the option expires. You might want to find out how much you are charged when a call is exercised. Some charge double the option price when one is exercised. I found this out the hard way the first time I had shares called. Hope this helps. And if I was in your shoes and was wanting to reduce my exposure to INTC I would do it this way. Worst thing to happen is that INTC drops to $18 before the option expires. The risk for trying to increase your returns by using options.

If those longer out options are in the money by ex-dividend date, they will be exercised. When exercised you will NOT receive the dividend, the option holder will.