WSE covered calls :)

[wallstreetsedge]

i was a bit inspired by net's thread so i thought id start one too to keep things simple, i wont post spreads and ill assume trades are being done with a $10 commission charge on the stock buy and covered call then a $20 commission if youre called out and 8.5% margin rate if you do it on margin..

these plays have bull/neutral outlooks by me for the next month

these are based on 6/20 option exp, last price traded, and last bid on the covered call

GRMN 46.22
45 call 2.70
b/e 43.52
6% if flat
6% if called

BIDU 344.94
340 call 20.9
b/e 324.54
10% if flat
10% if called

BIDU 344.94
350 call 15.4
b/e 329.54
9% if flat
12% if called

AAPL 187.01
185 call 8.8
b/e 178.21
7% if flat
7% if called

AAPL 187.01
190 call 6.35
b/e 180.66
7% if flat
10% if called

NTRI 20.59
20 call 1/35
b/e 19.24
7% if flat
7% if called


CC 4.78
5 call .2
b/e 4.58
8% if flat
17% if called

[netwrangler]

Well, golly, that's a start WSE.

You are assuming full use of margin in calculating your % returns.
I suggest that is not an appropriate assumption because:

• Covered calls are relatively conservative option positions. Pairing a conservative option position with an aggressive margin strategy is inconsistent.
• Covered calls can not be bought with margin in IRAs and similar tax-deferred accounts. Thus calculating % return based on margin is a misleading fiction for those accounts.
• Even in accounts where covered calls can be bought on margin, that actual margin dollars borrowed is rarely the full margin allowed. Assuming full use of margin is one of those 'simplifying assumptions' that marketers love. It doubles the nominal return while sweeping away the messy math of figuring what the real return is.

Calculating the % return on the breakeven price, and without margin, is a better 'simplifying assumption'. It provides a more accurate and consistent number for use in comparing investment choices.

Of course, you are using paper trades. That makes it impossible for you to 'manage' your covered call positions over their life — well, makes it impossible for you to do that with any credibility. Still, it should be interesting to see how your positions fair at expiry.

[Rynn]

Originally Posted by netwrangler

• Covered calls are relatively conservative option positions. Pairing a conservative option position with an aggressive margin strategy is inconsistent.

And pairing an agressive option position with an aggressive margin strategy is a good way to end up like Bear Stearns.