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Ganapati bappa morayaa!

September 12th, 2010
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ganesh-chaturthi2010-01sm

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Covered calls

September 7th, 2010
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To make some measurable profit with options trading, one needs to have a little cash to play with. It is hard to get that when you mostly do periodic investments with a long term horizon. After this year’s contribution into Roth IRA, I had a few thousand dollars available and I decided to try out some options strategies. Here is one example that involves covered calls.

  • 05/28/2010 : Bought 400 shares of PFE @ $15.295 and sold 4 PFE June 19, 10 call options with strike price of $15 @ $0.595. (Cost: $5903.08)
  • 06/21/2010 : Options got assigned and 400 PFE sold @ $15. (Received: $5979.90)
  • Gain : $76.82 : 1.3% in 3 weeks.
  • 06/23/2010 : Bought 400 shares of PFE @ $14.85 and sold 4 PFE July 17, 10 call options with strike price of $15 @ $0.28. (Cost: $5851.05)
  • 07/19/2010 : Options expired worthless as PFE closed below $15.
  • 07/19/2010 : Sold 4 PFE August 21, 10 call options with strike price of $15 @ $0.25. (Received: $86.94)
  • 08/04/2010 : Options got assigned and 400 PFE sold @ $15. (Received: $5979.90)
  • Gain : $215.79 : 3.7% in less than 6 weeks.

Total gain (after all costs) in these transactions was $291.61 or ~5% in 9 weeks. In one year (52 weeks), there are five 9 week periods similar to described above. If these transactions can be repeated twice out of four remaining 9 week periods in the coming months, annual yield on this investment could be ~15%. Given that this is a Roth IRA, there is no tax bite to these gains. This is just staggering. This money could be doubled in about 5-6 years.

Just like other investments, one has to be careful about the choice of stock  to make these options trades. Otherwise, it could be easy to lose all or most of the initial capital.

Disclaimer: I am not a financial advisor. This is only my experience and should not be construed as advice. Don’t make any financial decisions depending on what you read here. I am not responsible for your losses but, wouldn’t mind sharing your gains if you make money.

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