Tuesday, February 5, 2013

Recent Transaction

On Monday, I sold another call option on some of my HAL shares.  I currently own just over 565 shares and will be adding around another 75-100 shares every quarter, so I need to get some of the shares off my hands.  I now have 3 open call options on HAL, adding to my previous two that expire in April and July.  I'm taking a bit of a gamble having the 3 options open since I only have 184 shares that have hit long-term capital gains treatment already.  Although I think it's a risk worth taking since most options aren't executed early and  I'll have another 182 shares hit long-term capital gains on June 30, 2013.

In order to get my cost basis for these shares, I've assumed that the April call will be executed leaving me with 84 shares from the first group and another 16 shares from the second purchase.  This gives me a blended cost basis of $28.50 per share.  Now on to the details.  I sold a July 20, 2013 call option with a $41 strike price and received $2.77 in premium.  After commission and fees I ended up receiving $268.25 to my brokerage account.

If HAL is trading below $41 on July 20th, then I will get to keep the $268.25 which represents a 6.54% return.  This is annualized to a 14.39% return over the time that the option will be open.  The shares will then be mine to do with as I please, which I'm leaning towards selling another call option.

If HAL is trading above $41 on July 20th, then I will be forced to sell, or have called away, 100 shares of HAL.  My effective sale price will end up being the strike price plus option premium and dividends received, which works out to $41 + $2.6825 + $0.09 * 2 = $43.8625.  Since my blended cost basis will be $28.50, this will be a $15.3625 profit per share, or 53.90%.

I'm essentially betting that HAL shares won't trade higher than $43.8625 on expiration.  That's not a huge difference from it's current price but I think the two outcomes will work out nicely.  Since I'll keep receiving more HAL shares I have no problem selling some off to reinvest in DG stocks either through direct purchase or by selling puts, depending on valuations at the time.

I've updated my Option Summary page to reflect this move.

4 comments:

  1. I like the moves with HAL. You get to buy HAL at a discount, then collect premiums on the calls and protect capital gains by planning for long-term capital gains treatment. You are also creating a more diverse portfolio. All positives in my book.

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    1. AAI,

      Getting the shares at a discount is great and then getting to sell calls to collect premium is just icing on the cake. If any of the three calls expire, then depending on where HAL is trading at I'll be moving the strikes down to try and get the shares called away. As long as the strike plus premium is above the current price for a decent enough amount.

      Thanks for stopping by!

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  2. I LOVE covered calls for exactly the same reason you seem to. My problem is that the equities in my main dividend account (long term investing account) are being added to slowly so I don't have the required amount of shares. So, instead, I started doing covered calls in my IRA of stocks under $5/share.

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  3. Evan,

    Covered calls are great, especially if have a certain price in mind where you'd want to start selling. Most of my positions are less than 100 shares as well, so there's been no covered calls for them. Once they get larger I might start implementing them more.

    Thanks for stopping by!

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