Covered Calls for Income

I looked at some scenarios based on current prices as of Friday, Nov 2 to identify if there is a compelling covered call platform to derive medium risk income.  I selected 3 companies that I would consider owning for their long term prospects, but would not cry a river if the position was taken at a profit:  HBAN, CY and NOK.  Other criteria included:  a good dividend, predictable, sufficient option volume and stable pricing over the next 3-6 months (as the market goes so will these).

Here is the simple comparison

HBAN
Price at analysis 14.29
Cost basis
500 @ 14.29 ($7145)
Possible
1. $14 Call Dec 21, 2018 $0.62
a. Outcome with 500 shares (5 contracts)
i. A - Calls sold but not assigned - $310 gross (4.3%)
ii. B - Calls sold and assigned - $155 gross (2.1%)
2. $15 Call Dec 21, 2018 $0.25
a. Outcome with 500 shares (5 contracts)
i. A - Calls sold but not assigned - $125 gross (1.7%)
ii. B - Calls sold and assigned - $480 gross (6.7%)
CY
Price at analysis 13.51
Cost basis
500 @ 13.51 ($6755)
Possible
1. $14 Call Dec 21, 2018 $0.60
a. Outcome with 500 shares (5 contracts)
i. A - Calls sold but not assigned - $300 gross (4.4%)
ii. B - Calls sold and assigned - $545 gross (8.0%)
2. $15 Call Dec 21, 2018 $0.27
a. Outcome with 500 shares (5 contracts)
i. A - Calls sold but not assigned - $135 gross (1.9%)
ii. B - Calls sold and assigned - $1424 gross (21.0%)
NOK
Price at analysis $5.80
Cost basis
1000 @ 5.80 ($5800)
Possible
1. $5.00 Call Dec 21, 2018 $0.85
a. Outcome with 1000 shares (10 contracts)
i. A - Calls sold but not assigned - $850 gross (14.6%)
ii. B - Calls sold and assigned - $0 gross (0.0%)
2. $6.00 Call Dec 21, 2018 $0.17
a. Outcome with 1000 shares (5 contracts)
i. A - Calls sold but not assigned - $170 gross (2.9%)
ii. B - Calls sold and assigned - $320 gross (5.5%)

The CY purchase and $15 Call with these assumed prices appears the best idea.  This idea fits my objectives of increasing greatest cash flow in worst case scenario (i lose the position) as well as the probability of losing the position (lower w/ CY @ $15) … not a recommendation to execute this trade, but a look at how it might be done and how I came up with the idea.

One Reply to “Covered Calls for Income”

  1. An update / learning that should have been self-evident earlier, but sometimes, i am slow learner

    I purchased a chunk of CY shares at $13.30; i went to sell calls per above analysis, but could not execute the trade.

    Key learning – there needs to be sufficient open interest and daily volume on the calls else one might end up in boxed canyon of poor liquidity and prices

    I sold of the CY shares for a decent % profit and will re-tool the analysis measuing call volume more carefully.

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