Today I sold the following covered call in General Motors
- 1 Sell GM Jan 15 2016 $40 Call (Open) --- $.98 --- Net proceeds --- $90.30
Unlike my first experiment with GE (deep in the money call) I took a much more conservative approach this time. Currently GM is trading around $35.75 as I type so a lot of price appreciation would have to occur to lose these shares. Quite honestly it wouldn't bother me to lose them at $40.
At first glance the premium of $90.30 doesn't seem overly impressive by itself. However, when you consider 100 shares of GM currently pays $144.00 (yearly) after its recent dividend raise the combination of the two is actually very nice.
Going forward these are the types of option trades that I plan on making. Lower risk plays that will give my yearly income a boost.
DEFY MEDIOCRITY
Very nice!
ReplyDeleteYou have plenty of room for price appreciation and you get to artificially boost the dividend by almost 100% over the option expiration period (assuming 3 more dividends).
Cheers
GYFG,
DeleteI'm just trying to keep adding more coal to the furnace every week. I really like the spread on the GM call I sold. I need to start trying to figure out more ways to multiply my dividends outside of traditional purchases. I'm looking for new ways to expand my empire and I think options be an integral part of my future income streams.
MDP
MDP, are you using sharebuilder for your options? Have you thought about other brokerages with lower fees?
ReplyDeleteDiv Son,
DeleteYes I am using Sharebuilder right now. The fees actually aren't that bad. My charge for this transaction was $7.70 ($6.95 + .75 per option sold). I think because I was so conservative with my strike price (ie it is quite a bit higher than the current price) it looks like my cost is unusually high compared to my premium.
My previous GE call was deep in the money and paid over $1150 to open and my transaction cost for the two calls sold was a little over $8.00.
As far as Sharebuilder's option price updates, it leaves a lot to be desired. I might use a better platform in the future.
MDP
I am trying to understand how this works.
ReplyDelete1) Is this a covered call because you already own the shares?
2) What happens if the price hits $40 before 1/15/2016? Does it matter when the price crosses $40? Will the option be automatically exercised when the price hits $40 or someone has to elect to exercise the option so that your shares are sold?
3) What happens if the price does not hit $40 before 1/15/2016?
4) Will you get dividends for this trade during this timeframe? If yes, is it because you already hold the shares?
DGJ,
DeleteBefore I answer the questions please refer to the DISCLAIMER above. :-)
1. They are covered calls because I own the shares already. This makes it easy to deliver the shares in the event GM surged to say $100 overnight. If I didn't own them, then I would have to produce the shares (ie I would have to pay $100 in order to deliver them at the $40 exercise price). That would not be good.
2. Since I received $.98 x 100 shares as a premium, the party who paid the $98 plus commission would probably not exercise their option to buy the shares at $40 since they actually would have to pay ($40 + $.98) x100 plus commissions to receive the shares. As far as I know the option doesn't necessary have to be exercised @ $41 (approximate breakeven) point. Common sense tells me that if GM was trading at $43 then it would make sense to pay the ($40 + $.98) x 100 because they immediately could resell the shares at a $200 profit. However it is an option to buy. In theory they could not exercise the option hoping the price continues to rise and then buy the shares at a later date prior to the option expiring. Remember the buyer of the option has only invested $98 plus commission. When he exercises his option to buy he has to pay the for the full share count $40X100 or $4,000 plus commission. A lot of option traders buy and sell the options without exercising them hoping to make their money on the spreads.
3. If the price stays below $40 +$.98 option price then no one would be interested in paying me $40 a share so I would keep the shares and the option buyer would lose his ($.98 X 100) and nothing else. I would keep my 100 shares as well as the option premium of $98.00 less commissions of course.
4. Since I own the shares I get to keep the dividends. So I could keep my shares, receive the dividends and make money with the option premium. Potentially this could almost double my income from the shares which is pretty cool.
I still have a lot to learn about options, but this is one of the simplest and least risky options trade to do.
I hope this helps.
MDP
Thanks MDP. These answers really helps and brings me one step closer (in a very long journey) to understanding how options work. I am sure this is just the tip of the iceberg and there is lot more to it. Will continue to read about this as I come across and maybe hopefully I start out with some simple option trades like this one.
Delete