Richard just gave me an idea. Covered calls! Say you bought $10K worth of TEU at today's prices. Then you write your own covered calls, as high as they will allow, (meaning my broker only goes as high as $15 strike on TEUapril contracts). Here's what I'm thinking:We know TEU is might announce, probably in the first week of november, that they are doubling their dividend, to a yield of 15.4% at today's prices. This is pretty much guaranteed to raise the stock price over the next few months, BUT let's see what we can do with covered calls. So you own 1270 or so shares of TEU, enough for 12 contracts. You write TEU15april12 and ask for double what you'd be willing to part with, for me that would be $.25, so I'll ask for $.50/share on day 1 and decrease it by a penny/day. ridiculously high I know but what the hell, what's it hurt to ask? You still own a while bunch of shares of a cheap company that is going to be paying you a heck of a lot of money to hold those shares, so why not?If TEU goes down? I win, because they are paying me an obscene amount to hold shares and I can reinvest the dividend income at even greater yields! Cash flow for the win!If TEU goes nowhere? Then I still win! Because I'm making 15.4% unadjusted returns and still reinvesting the dividends! Crushing the market and building future cashflow for the win!If TEU goes up to anything under $15? Then I basically make double my money on the shares, get to keep the premium, (in this example $300-$600) and still own a great cash generator and I'm still reinvesting the dividends! Capital gains+cash flow+ future cash flow+ premium for the win!If TEU goes over $15? Then the worst case scenario, I ONLY get to double my money;)This is a powerful idea that I shall ponder deeply. Thanks Richard! You may have just made me a lot of money!
Adam,You're still paying those high commissions on the calls you will write. Part of that problem is the choice of broker, but that's another story.And you plan to ask a ridiculously high price for the options, which means in all likelihood you'll never get a fill.Writing covered calls is a mildly bullish strategy best used on fair value stock that you don't expect to move much.If the stock is undervalued, just buy it (that's us).If overvalued, sell it.If near fair value, consider writing CCs, or writing puts if you don't own stock. (Also consider the possible risks of playing with fair valued stock.)CCs profit from stock rising between the current price and the strike, and from the time value portion of the option premium. The first piece of this would be had without options. So the only benefit from writing a call is time value erosion. And in exchange, you cap your gains (which is why we don't like CCs on undervalued stock).Time value is affected by (mainly) three things: volatility, time to expiration, and nearness to ATM.TV is highest near ATM, not way out at the $15s.TV decay accelerates in the final few months. Usually the best plan is to write slightly OTM, or ATM calls, three months out.You're trying to write the $15s, for pennies. Passage of time is working against you until you do write the calls (they get a little cheaper each day, all else equal).Good luck.-joe
That seems like a lot of work for potentially zero return. a $15 CC is so OTM that the commissions will most likely eat up any profit. I usually stay away from CC's. I fully admit, I'm not strong enough with fair value calculations and timing. You'd probably make more money by spending your time finding the next stock that's ready to double, not chasing covered calls on a small stock.Ken
Thanks every body, for pointing out how the devil is in the details and what details I was missing.
Best Of |
Favorites & Replies |
My Fool |