In a previous post I talked about a covered call position I had taken. Friday’s movements in the price of the stock and the resultant changes in the price of the call reminded me of why I usually don’t write covered calls.
As I stated previously, I wrote May calls on some shares of BJ’s Restaurants that I own with a strike price of $35. This gives the person who bought the calls the right to buy those shares from me for $35 per share between now and the third Saturday in May. In exchange, I was paid $1.30 per share, which came out to be about $1.10 per share after paying brokerage commissions.
At first things worked really well. The options went up in price on the day I made the trade, so that the price of the options went to $1.90 at one point, meaning I could have made about 50% more if I had timed it just right. The next day though the price of the stock fell and the price of the options went down bellow $1.00 per share. The stock continued to drop in price, down to about $33.32 per share, at which point the price of the options fell to about $0.40 per share.
Here’s where things get tricky. I thought about buying the options back, which probably would have cost me something like $0.50 per share, and pocketing a $0.60 per share profit. I could then wait for the stock price to increase again and write more calls if I wanted. I could also just stay where I was, hope that the stock price stays low through the end of week after next, and then keep the whole $1.10 per share. Buying the options back would expose me to a little larger loss if the stock price continued to fall as well.
I decided to hold the options and wait for them to expire. Today, sure enough, the stock shot back above $35 per share and the options went up to about $0.70 per option. (Note that the closer we get to expiration, the lower the price of the options will be for the same share price, which works in my favor). If the stock stays above $35 per share for the next couple of weeks I’ll sell the shares for $35 per share. I’d prefer to keep the shares, but it wouldn’t be a great loss if they were sold either since I’d make a decent profit.
This is one reason I don’t write covered calls often despite the potential to make some good returns. It is just so much easier to buy great stocks and hold onto them for a long period of time. You don’t need to react quickly or try to second guess what the market will do. It is much easier and less stressful.
Well,I guess I’ll see what happens….
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.