A Lesson In The Value of Covered Call Options Final

READ PART ONE
READ PART TWO


One thing about the stock market is that it's okay to change your mind. And that's what I decided to do with Cypress Semiconductor in this month's options play.

Yesterday I sold 13 covered call options contracts with a March 20th expiration and a strike price of $15. The deal for me was a couple-fold. One, on Monday the premium for this call was 50 cents at the start of the trading day, or $50 per contract. As the stock pulled back yesterday that premium gave up 10 cents, or $10 per contract.

I got a little twitchy.

The $16 call for March 20th, the one I would have preferred to have sold, was only about 15 cents or $15 per contract.

Boring.

In January I collected $143 in dividends, and when I sold the first set of contracts on January 21st I collected a premium of $564 after expenses. The March 20th calls gave me a premium of $499 after expenses. Total collected is $1,206.

Based on my cost basis of $12.83 per share, with premiums and dividends collected this puts my total profit at $4,027 if the stock reaches $15 or better by March 20th and I am forced to sell my shares. I am still selling my shares at roughly a 24% gain and I am quite happy with that. I'd be happy to keep my shares as well, of course, and get to play it again in April, but I am inclined to believe that I will be forced to sell.

...and there happen to be a couple other companies on my radar I'd like to put the money from Cypress into.

I still believe that Cypress Semiconductor is a $17 stock, however. And I still like the company. Therefore, if my calls are called and I am forced to sell, I can then start to take a look at selling cash-secured put contracts to either simply collect premiums with no intent to buy shares, or to buy shares at a discount to what I think the future value is.

There is still money in Cypress Semiconductor no matter what happens is the point, and from a technical standpoint whether or not I own the shares,  I can still make money on it. So really, it's win win.

And of course the intention is to make money on wherever my proceeds from the sale of Cypress go.

So there you have it. A lesson in the value of selling covered calls on underlying shares you own to boost your overall profits from a stock. The dividends and options in the event that I'd be forced to sell, put my total per share amount collected to $15.92. So even if it only reaches say, $15.75 and I am forced to sell at $15, I am still getting 17 cents more per share than the market price at the time of the sale.

A Lesson In The Value of Covered Call Options

I am going to give you a real time example of how stock options, done right, can make you a significant alternative income. For those of us who invest in the stock market, we call this generating cash on underlying investments that you wish to own, do not wish to sell, but that you wish to continue to earn from.

When I have talked about stock options in the past, I always stress that I do not buy stock options. I sell stock options. Why do I do this? It is simply a matter of this being my strategy. I buy stocks because I believe they are worth more than the price that they are currently trading for.

Pretty simple right?

Therefore I do not wish to sell the stock of a company that I feel is going to continue to make inroads, continue to advance, and continue to provide a great income opportunity over time. You sell your losers. You do not sell your winners. But when you have winners, you make the most out of them. You get every penny out of them that you can. You do not worry about what the rest of the markets are doing, or what the rest of the markets are thinking. You do your homework, you decide a valuation, and you proceed from there. And you keep in mind that everyone invested in a company has a different idea about what the company is doing, what it is going to do, and so this helps to create a vast market of individual investors willing to do all sorts of things depending on where they want to be with the stock.

You will not always be right, but that's okay. That is part of the game.

I said you have to do your homework, and repeat this here because if the idea is that if you do not wish to sell your stock, but want to continue to generate income on your stock, you need to have a good idea where you think the share price is realistically going to go.

I won't get into the math of that. You'll have to figure that out on your own. But there are tons of websites that can provide you valuable information on how to valuate a stock.

I currently own 1,300 shares of Cypress Semiconductor, and that's already great because it is a stock that pays you while you wait. My quarterly dividends on this stock are $143. Even if the stock does nothing at all, I'll earn $572 in a year just because I happen to own it. My cost basis per share is $12.83, and as of the close of today's trading, ($14.95) I am already up $2.12 per share, or have an on paper profit of $2,756.

I have no intention of selling my shares. I think the stock is worth about $17 per share.

But herein lies a part of the fun of this. I do believe I own a $17 stock. I do not believe that my $17 stock is going to trade at $17 within the next 30 days. I made this decision in January. In fact, in January I did not believe the stock would trade much above even $15 within the next 30 days, and moreover, I did not believe that the stock would close trading at $15 or higher 30 days from January.

It did go past $15 briefly. But as I suspected, it did not stick, and the stock took a significant down turn after pushing past $15. The stock broke resistance and people took profits. It's that simple.

Why is this important?

I want to make a monthly income on a stock that is now showing a profit. I want the best of all worlds. I want my $17 stock. I want my dividends. I want to keep on owning it. And I want the other investors in the market who believe the stock is going to go higher sooner to want to buy the right to buy my shares at $15.

I am looking for those individuals who believe in the same valuation I do, but believe that it will reach that valuation before I think it will.

This creates a market of buyers in the options world willing to pay a premium to have the right to buy shares at $15 that they are convinced are worth significantly more. If they can buy an option to buy shares at $15 and the stock goes to $17, they reduce their gain by the amount of the premium they paid for the option, but still win since selling the shares they obtain at $17 still reaps them a good reward.

Remember, the options allow them to buy the shares at $15. In their world, they are up $2 per share minus the premium.

Guys like me love this, and take this to the bank.

The options buyer  says "I can buy the stock, or I can buy the right to buy it at a price that I think is valued less than what I think it is worth. If I buy the stock I lose more than if I buy the right to buy it. If the stock does not do what I think it will do, I am only out what I paid for the right. Not the total loss of buying the stock outright and losing the overall value of my investment."

This is where guys like me come in and make money.

I am more than willing to sell you the right to buy my shares that I have $12.83 invested in that are worth $17 for $15 before they will actually be worth $17. Why? Because I am convinced that my $17 stock will not be worth $17 in the time period you think it will be. You are willing to pay me to buy my shares for less than they are worth thinking they will meet the valuation before I think they will. Even if I am wrong, and the stock does something unpredictable, I still get my premium and sell my shares for more than I paid for them.

Enter charts and technical analysis which is way more than I will get into here, but do your research and you can learn where technical analysis can help to make short term decisions on where a stock is heading based on market sentiment...

And that word I used earlier in this text. Resistance. It is important to know what that is, and how you can decide where to set your strike prices in short term options selling.


...to be continued

READ PART TWO

Watching Cypress Semiconductor (CY)

Back on the 21st I wrote that sometimes you simply root for sideways stock movement, and what I was referring to were stock options, and in this case Cypress Semiconductor (CY) in which I sold some covered call options for with a February 20th expiration date and a strike price of $15.

What was the plan?

Sell the calls and hope for the stock to stay below $15. Then there is always the problem with Murphy's Law, in which, if it happens to be of any interest whatsoever to you, I happen to have a very intimate relationship with.

If I short a stock it goes up. If I go long a stock it goes down. And when I sell a covered call on a stock that has been in a trading range and sell the call above the trading range that I do not wish to sell, but simply wish to generate cash on, it breaks through resistance and goes higher than the strike price.

Ugh!

Not that it bothers me ultimately. I still make money on the calls I sold and I still was already in the money on the underlying stock. Still, once a stock does go in the money I like to try and generate that cash monthly.

At least for a little while anyway.

So I am watching Cypress Semiconductor and keeping my fingers crossed that a) it will drop below the $15 strike, but not go too far below the strike, and b) that in the meantime the buyer of my calls does not decide to exercise his options forcing me to sell my stock.

It is trading today so far at $15.37, which also by the way happens to be a new 52-week high.




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Sometimes You Simply Root For Sideways Stock Movement

Options in the stock market are something I enjoy using from time to time simply to generate cash. I actually really like them. Especially when a stock is trading in a range that already has you showing a profit on paper, you can generate wads of cash doing it this way.

I always sell options contracts. I never buy them. Or at least I rarely do.

Cypress Semiconductor is one such stock that has been trading rather nicely in the past month or so, and so I decided it was time to generate some additional cash and sell some contracts on the underlying stock.

I made a pretty little penny, and I want to do it again next month as well on this one. I sold covered calls with a $15 strike price for February. It is trading today at around $14.15 and the expiration is of course about 30 days away.

So I am keeping my fingers crossed that the stock continues to rise a little bit of course, but also trades a bit sideways until the calls expire. The beauty of these things is that even if the stock is at $14.99 on the day of expiration, it is unlikely I will be called. I get to keep my shares, continue to earn dividends on them, and when I go to sell March contracts hopefully I'll be close enough to the mark to sell them at a $16 strike price.

Best of all worlds.

The key for me is simply to get as much out of any stock I own as I possibly can. That's the plan for Cypress Semiconductor. There's another currently on my radar, but I don't like the market price right now for it's calls.

In due time. I am patient, and the contracts I sold for Cypress should more than allow me some time to wait to pull the trigger on the other candidate.

Photo credit: Image is from Springboard Images.