No. of Recommendations: 0
It is quite possible to add a significant amount to your annual return by selling
out of the money covered calls. The table below gives some numbers which may
be useful. By way of explanation: the 1st column is the amount (%) by which the
Call strike price exceeds the market price of the underlying stock. The 2nd
column is the duration of the option, from time of purchase (in days); the
remaining columns are the ANNUALIZED returns (as % of the underlying stock price)
for various level of stock volatility. These assume, of course, that the option
is not exercised. (I've subtracted $0.10 per share for RT commissions and fees.)
Bottom line: it is quite possible to make 10% to 20% (or more) by selling
out-of-the-money covered calls. The risk is losing some upside profit potential
(and you may have to sell the stock before you would otherwise do so).
. TOTAL ANNUALIZED RETURN
% Out of Option ……………………………………………………… volatility………………………………………
money Duration Low (0.3) Med (0.4) Med (0.5) High (0.6)
10% 30 days 6.0% 16.6% 30.4% 46.9%
10% 60 days 10.2% 19.7% 30.8% 43.1%
10% 90 days 11.3% 19.6% 28.8% 38.6%
10% 120 days 11.6% 18.9% 26.8% 35.1%
10% 180 days 11.5% 17.5% 23.7% 30.1%
10% 270 days 10.9% 15.6% 20.5% 25.3%
10% 365 days 10.2% 14.2% 18.1% 22.0%
15% 30 days 0.4% 6.5% 16.0% 28.3%
15% 60 days 4.6% 11.9% 21.1% 31.8%
15% 90 days 6.5% 13.6% 21.8% 30.9%
15% 120 days 7.5% 14.1% 21.4% 29.3%
15% 180 days 8.4% 14.0% 20.1% 26.3%
15% 270 days 8.6% 13.3% 18.1% 23.0%
15% 365 days 8.5% 12.5% 16.5% 20.4%
20% 30 days -1.6% 1.6% 7.7% 16.6%
20% 60 days 1.6% 6.9% 14.3% 23.4%
20% 90 days 3.5% 9.2% 16.4% 24.6%
20% 120 days 4.7% 10.3% 17.0% 24.4%
20% 180 days 6.0% 11.2% 16.9% 23.0%
20% 270 days 6.8% 11.3% 16.0% 20.8%
20% 365 days 7.0% 10.9% 14.9% 18.9%
25% 30 days -2.2% -0.7% 3.0% 9.3%
25% 60 days 0.1% 3.7% 9.4% 17.1%
25% 90 days 1.7% 6.1% 12.2% 19.5%
25% 120 days 2.8% 7.5% 13.5% 20.3%
25% 180 days 4.2% 8.9% 14.3% 20.1%
25% 270 days 5.3% 9.5% 14.1% 18.9%
25% 365 days 5.8% 9.6% 13.5% 17.5%
