Recent Option Transaction

Yesterday the markets continued their run higher bringing along Halliburton (HAL), my employer and therefore source of ESPP shares along with it.  I'm still way overweight my company's stock and with another 198 shares hitting long-term capital gains treatment on January 1, 2014 I decided to sell a long-term call to go along with it.  I'm hoping to get a chance to use this as more of a trading vehicle to try and juice the option premiums that I receive but if they get called away that's fine by me as well.  

I sold the January 18, 2014 $46 Call for $3.10 on May 14, 2013 for $3.10.  After commission and fees I received $301.26 in premium to my account.  I don't typically aim to sell this far out but it gives me a chance to buy it back on weakness on the stock and get a bit more premium to go with the larger capital appreciation from a out of the money call option.  This call can work out one of three ways.

(1) If HAL is trading below $46 on expiration, then I'll get to keep the full premium as profit.  The return is calculated as $301.26 / $4,600 = 6.55% which is annualized to a 9.60% return.

(2) If HAL is trading above $46 on expiration, then I'll be forced to sell 100 shares of HAL for $46 each.  However, I get to add the premium to the sale price so my final sale price would be $46 + $301.26 / 100 - $7.95 / 100 = $48.93.  Since I purchased these shares through the ESPP program at work and received a discount, my cost basis is $24.19.  So this would be a smooth 102% gain.  I'll also receive 3 more dividend payments $0.125 each based on their historical record dates.  This would be another $37.50 in profit.

(3) If HAL trades lower than $46 between no and expiration, I can buy to close the call option for a profit less than in case 1.

I recently devised a strategy where I'll try and maximize the option premium by trading opening and closing call option positions while waiting for the next set of shares to reach long-term capital gains treatment.  And then will sell lower strike price calls to try and get the shares called away.  Since I receive a pretty hefty 15% discount on the shares and they now hit my account every 3 months I think this strategy will be a great way to maximize option income and still diversify out of my ESPP holdings.

Currently I have 3 calls that are set to expire in July and all three are in the money by a good margin.  This is the pitfall with selling call options.  If the share price makes a big move up you can lose out on some of the upside.  I'm not too worried about that because as I mentioned these are ESPP shares and I need to diversify out of them anyways.

If all 4 of my calls are executed, my sale prices will be $41.20, $41.04, $43.13, and $48.93.  

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