03-21-2015, 07:46 PM
I don't really know how to play options, but do use them to increase the cash flow/decrease downside risk quite often. I bought a lot of energy stocks during the mid December drop. Given the massive volatility, call contract prices were then and remain quite rich.
I bought 200 shares of COP on 12/8 for $65.53. May $67.50 calls were immediately sold for $3.40 bringing in a net of $671. During price weakness on 3/13, the calls were closed for $128, netting $543 from the original contract. On 3/18 there was a price spike, so Aug $65 calls were sold for $3.15, netting $621. So the total from call income on this position is $1164 plus one dividend of $146 has hit the pot. Total cash flow has been 10% in under 4 months. Cash out of pocket at this time is $11,802 or $59 per share. IMO the call writing has turned this into a huge cash cow compared to settling for the dividends alone. It has also provided a decent buffer for downside protection.
OIH was bought on 12/12 for 34.29. I was not so eager to sell calls, but rather decided to wait on a decent bounce. On 12/26 the share price had moved back up a good bit, so $37 calls were sold for $3.34, netting $659. On 3/13 during price weakness the calls were closed for $139, netting $520 of the original contract price. On 3/18 the share price enjoyed a nice bounce, so calls were sold once again, this time $33 calls were sold for $3, netting $591. Total call income is now $1111 plus one dividend of $171. So in under 3 months this position has kicked out cash flow of 18.6%. $5582 is out of pocket for a share price of $27.91. That gives a very nice buffer given the current market price of $33.30.
Covered call investing is not without its risks, but the method described above makes for a fairly conservative approach that really juices the cash flow from the position. Eventually the shares will get called, or the play will just no longer work for one reason or another. But there are always other fish to fry, no matter what direction the current covered call play goes.
I bought 200 shares of COP on 12/8 for $65.53. May $67.50 calls were immediately sold for $3.40 bringing in a net of $671. During price weakness on 3/13, the calls were closed for $128, netting $543 from the original contract. On 3/18 there was a price spike, so Aug $65 calls were sold for $3.15, netting $621. So the total from call income on this position is $1164 plus one dividend of $146 has hit the pot. Total cash flow has been 10% in under 4 months. Cash out of pocket at this time is $11,802 or $59 per share. IMO the call writing has turned this into a huge cash cow compared to settling for the dividends alone. It has also provided a decent buffer for downside protection.
OIH was bought on 12/12 for 34.29. I was not so eager to sell calls, but rather decided to wait on a decent bounce. On 12/26 the share price had moved back up a good bit, so $37 calls were sold for $3.34, netting $659. On 3/13 during price weakness the calls were closed for $139, netting $520 of the original contract price. On 3/18 the share price enjoyed a nice bounce, so calls were sold once again, this time $33 calls were sold for $3, netting $591. Total call income is now $1111 plus one dividend of $171. So in under 3 months this position has kicked out cash flow of 18.6%. $5582 is out of pocket for a share price of $27.91. That gives a very nice buffer given the current market price of $33.30.
Covered call investing is not without its risks, but the method described above makes for a fairly conservative approach that really juices the cash flow from the position. Eventually the shares will get called, or the play will just no longer work for one reason or another. But there are always other fish to fry, no matter what direction the current covered call play goes.
Alex