May 152014
 

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 (^_^)

14-05-coveredcalltcw-activity

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.

14-05-coveredcalltcw-choose covered call

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.

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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 😀

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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.

14-05-coveredcalltcw-hold

 

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.

 

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Ahmet OkyayAdamDivHutLiquid IndependenceGenXinvestor Recent comment authors
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http://asset-grinder.blogspot.ca/
Guest

Great post. I too use Td web broker and my interface as well as it should looks identical. Also if you ever need any option help the option specialist helpline at td are great. I was an option noobie and they helped me out and i was on the phone with them for over an hour answering all my questions.

For the conservative dividend investor the writing covered call option is the way to go. I think if you keep writing covered call options lets say 10% out of the money price you cant go wrong really. If it doesnt hit you just write another option. If it hits you are in the green 10% and whatever dividends you received so far.

The Canadian market kinda sucks for options because of the low demand and volume

Investing Pursuits
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Congrats on your first covered call. Well written post.

I sold to close a put option today a few days before expiration. I will write about it later on or tomorrow.

Financejourney.com
Guest

Congrats!!!

Thank you for sharing the detailed information about option.

Covered call option seems little riskier than put option. I like the put-option, I may consider selling put option for high quality stocks that I am planning to buy, but not for this year.

Have a wonderful long weekend!!

GenXinvestor
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Great Post! I’ve been considering options trading for some time now. I’m in the same boat as Finance Journey on the put options. It just seems like an easy way to make some extra money while you’re waiting for a market pullback and if the options are exercised than you get to own shares in a company that you would have purchased anyways.

DivHut
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I needed to see this. I have been thinking about covered calls or writing puts to enter into a position for a long time. Just never pulled the trigger on any option trading. The way I see it cover call writing or selling puts are both relative conservative manners to play the options game without losing your shirt since you know what you are getting into exactly. Covered call… you have to sell your shares (if assigned), writing puts (you have to buy 100 shares) if assigned. Maybe this will be my kick in the pants to get things started. I hope you share more options trades with us.

Adam
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Adam

Writing covered calls is an excellent way to earn income if you have substantial amounts of the underlying equity. You can select some that are far enough OTM that there is generally pretty low risk of being called away, and even if it is exercised, your stock is now sold at whatever this unlikely-high strike is! I’ve sold a few covered calls that have worked out well in the past. It’s much less stressful when theta is working for you. On that note, you should read a bit about the greeks (If you haven’t already) as they help to give you a better idea of options price movements. Just be careful, options can get very addicting. If you are really savvy, you can sell and buy back covered calls playing on the implied volatility of some of the high flyers around earnings time… if you own a lot of stock of course. You also have the option of buying your call back if the stock takes a dive, which still allows you to net a partial premium. I really like TD’s platform, atlhough there are some less expensive brokerages out there. At least you can claim the commission fees come… Read more »

Adam
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Adam

* One more note for the daring investors – You can enable Options Trading within a TFSA. You should however, be aware that any money lost on options trading will affect your contribution room. i.e $10,000 lost = $10,000 reduced contribution room until the next year, when the government decides how much to allow everyone.

I have sold covered calls, bought calls/puts with no issue. Selling naked calls/puts and selling any option for which the underlying is not already in the TFSA is not allowed, or at least I have not tried. I believe there is a trading classification system that rates what one is able to do with options, I am not however familiar with the exact rating for a TFSA.

Just a nice way to avoid some taxes…

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Ahmet Okyay
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Ahmet Okyay

What are the brokerage fees like? I am with CIBC Investor’s Edge right now, and the cost of writing a covered call seems prohibitive.

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