Saturday, November 14, 2009

Options are expiring next Friday...



I have been leaning towards building up a high-quality investment portfolio for the financial sector for some time already and I am thinking of doing that with covered calls.  The reason is that I believe the easy money is over.  We are moving into a phase where the market could be range-bound for most part but nevertheless will continue to gradually move up.  Covered calls thrive in such these markets.


Merrill Lynch recommends JP Morgan and Goldman Sachs while Bank of America is recommended by Morgan Stanley.  I have already started to take a few stabs at it couple of weeks back.  I bought some GS, BAC and C and sold some covered calls along with it.


These call options are expiring next Friday.  These are what I currently have:


  • 1 contract of 175 call for GS (ITM)
  • 1 contract of 185 call for GS (OTM)
  • 5 contracts of 16 call for BAC (ATM)
  • 20 contracts of 5 call for C (OTM)
The OTM contracts have a low probability of getting assigned given the few trading days left.  So, I will just get ready to book my profits for the premium received next Friday.  For the unassigned, premium equals profit:


Premium = 20 x 100 x $0.04 = $80
Profit = $80 or 1.04% (for this month)
This will bring the breakeven point to $4.21 and I can sell a new call.


Premium = 01 x 100 x $4.55 = $455
Profit = $455 or 2.49% (for this month)
This will bring the breakeven point to $178.40 and I can sell a new call.


The rest of the contracts which are either ATM or ITM are a coin-flip whether they will get assigned or not:


Scenario 1:  if all gets assigned
Premium = 01 x 100 x $4.85 = $485
Difference between Strike and Entry = ($175 - 170.29) x 100 shares = $471
Profit = $956 or 5.61% (for this month)


Premium = 05 x 100 x $0.46 = $230
Difference between Strike and Entry = ($16 - 15.38) x 500 shares = $310
Profit = $540 or 7.02% (for this month)


Scenario 2:  if none gets assigned
Premium = 05 x 100 x $0.46 = $230
Profit = $230
This will bring the breakeven point to $14.92 and I can sell a new call.


Premium = 01 x 100 x $4.85 = $485
Profit = $485 or 2.9% (for this month)
This will bring the breakeven point to $165.44 and I can sell a new call.


I may even consider rolling it out to December and move to higher strike -- covering my ATM and ITM options at a tiny profit and roll the calls to December at a higher strike.  I will decide on Tuesday, depending on the market situation.


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