A Lesson In The Value of Covered Call Options 2

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The simple truth is that I took a bit of a risk. When I sold the options contracts the stock was trading only within about 60 cents of the strike price. Being that the stock pushed early on past $15, and closed very close to $15 by the end of the expiration of the covered call options contracts I sold with a $15 strike price, this could have forced me to sell my shares and that would have been the end of it. I still would have enjoyed a profit of $2.17 per share for a profit of $2,821, plus the premiums on contracts sold and dividends received, but now I would be out of the stock, and forced to decide whether or not reinvesting considering my $17 valuation would be as lucrative as being in the stock for just $12.83 per share.

My short term thoughts on that are that it would not be likely that I would reinvest. I was convinced that the stock would not trade higher than $15 by the expiration date of the contracts I sold. A less than $2 profit on future shares purchased would simply not be in line with what I expect out of a stock.

The key here is, though, that no matter where I think the stock will go, and no matter where the stock was when I sold the contracts, I did not believe I was wrong that the stock would not trade higher than $15 by February 20th. Selling the contracts to someone who believed I was wrong is also key. He paid me for the right to buy my shares at $15 because he was convinced the stock would be worth more by February 20th.

Again, this is where a little bit of technical analysis helps, and something you will have to discover on your own. To go into the reasons WHY I was so convinced of this is simply too involved to try to explain here.

What did I sell?

In January, based on my opinion that Cypress Semiconductor (CY) would not close higher than $15 by February 20th, I (wrote) sold 13 covered call options contracts for Cypress Semiconductor (CY) with a $15 strike price and with an expiration date of February 20th. I collected approximately $585 in premiums for this. After expenses I received a total of $564.

Again, I fully intended that these contracts would expire worthless, that the stock would not trade above $15 per share, and that I would get to keep both the premiums paid to me AND keep my stock to boot.

Moreover, now that those contracts indeed expired worthless since we only reached $14.95 per share at the expiration, I now get to decide to sell more contracts for March to collect more premiums.

Remember that I think that the stock is worth $17. But resistance is around $15.48 based on the recent high. That is approximately 52 cents shy of $16. It closed on February 20th at $14.95. That is 53 cents short of the high and $1.05 short of $16. Will it push higher in March past $15? I think it will. But, how much higher will it go past the $15.48 high before experiencing a bit of a pull back due to profit taking? I think it will not see $16 by the March 20th expiration date of the next options cycle. I also expect that seeing a new high of $16 or more 30 days from now is unlikely. We are going to push a bit higher, but breaking the high by 52 cents just seems to me a bit of stretch unless some major news comes our way. I do not anticipate that.

Again, based on analysis I will not get into here, I think the stock will see a NEW high through March, but the trading range will be from $14.95 to $15.75 per share.

With that in mind, selling covered call options contracts with a March 20th expiration date and with a $16 strike price is a safe bet. Based on what I see now I do not believe that Cypress Semiconductor will close above $16 by March 20th. It is highly likely that the stock will close lower, and I will again get to collect my premiums for the contracts (written) sold, AND will continue to be able to hold my stock and receive dividends without being forced to sell my shares.

At this time I have not yet made a decision, but I told you I would provide you a real time example of what I am doing here. When I pull the trigger on a March 20th covered call options contract I will let you know how that went.


...to be continued
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