I just sold my first covered call this morning 🙂 The proceed was deposited into my trading account and I am now $68.76 richer, yippee! I should do this more often (^_^)
What does it mean to sell (or write) a covered call option?
A “call option” is a contract between a buyer and a seller where the buyer has the option (but not the obligation) to purchase stocks from the seller at a set (strike) price, within a certain time period. If the option is “covered,” like in today’s example, then that means the seller already has the underlying stocks. Therefore, selling a covered call simply means giving someone else the option to buy your stocks for an agreed upon price point. Since you are potentially giving away a part of the stock’s future gain the buyer has to pay you money 😀 (called the premium)
Why did I sell a covered call?
I want to invest at least $10,000 in the profitable business of mortgages, which I discussed last week. So my current strategy is to sell some underperforming stocks with low dividend yield, in order to free up some cash, so I can buy a MIC that generates >6% annual returns. Selling covered calls is greatly supportive of this strategy, with minimal risks 🙂
One stock I don’t need anymore is Trican Well Services (TCW), which provides drilling services to large oil and gas producers. So that’s why this morning I sold a call option for TCW, with a strike price of $16.00 and an expiration date of August 16th, 2014. It was probably the easiest $68.76 I’ve ever made!
TCW is trading at around $15.50 today so even if the buyer of my contract decides to exercise the option and buy my TCW shares at $16.00 each, I would still make more money than simply just selling TCW on the markets today 😀 What a great deal for me!
How to sell a covered call.
Here are step by step instructions. I’m using TD’s WebBroker interface. Your account may look different depending on your brokerage, but the principle should be the same.
Step 1: Pick a stock that you already own and have at least 100 shares of.
Step 2: Take a look at the stock’s options table. Call options are usually in the right hand column. Choose the call option you want to sell. After the expiration date the buyer of your call option cannot buy your stocks anymore.
Step 3: Fill out the options order form accordingly. Choose “Sell to Open Covered” as your action. Not “uncovered.” Remember, 1 options contract represents 100 shares.
Step 4: Check your order status later to confirm that your order went through. Once the status reads “Filled” then congrats! You just sold a covered call 😀
That’s all there is to it 🙂 You can actually see your options holdings in your portfolio. Unlike stocks, options disappear from your account after they expire. Of course you still keep all your premiums though.
There are 2 main risks to selling covered calls. If my TCW shares rise to $100/share for example, then I would miss out on all the gains above $16.00. But that’s no big deal because it’s kind of like saying if you don’t buy the lottery, you risk not winning the jackpot. Yeah but it doesn’t hurt if I don’t win either. The other risk is I have to keep the stock, TCW, until my option expires on Aug 16th. So if the stock drops to $10/share, then I would have been better off selling my shares today, and not sell a covered call on it. But through my analysis I’m fairly confident TCW will not fall by much in the short term. Besides, I would have still beat the market, because I’d be $68 ahead of someone else who didn’t write a call option 🙂 lol.