How does the repurchase/close of the options work? Say I sell JAN 08 $55 calls on GME. As the expiration day approaches GME drops to $49. How much would I be able to buy the options back for if I sold them for $5?
If the stock was $49.00 there would be no need to repurchase (close) because it would be worthless and would expire that way.
If you had sold for $5.00 and the stock was (say) in the high $54's or so on the last day you would be able to close for (say) well under a 1.00. You might consider that if the thought that the stock was going to continue to rise after the expiration date and you wanted to keep it to sell it over $50.00 or to sell calls again, for a future date.
Check with your broker to make sure how they handle covered calls before making any trades. Lesson learned. My broker (zecco) did not deposit the funds from the sell into my account. Instead they treated it like a "short sale" and the funds where not deposited until I "bought" the calls back that I had sold. For this reason and others I am presently switching brokers.
The shorter the term the smaller the call premium.
I usually (GME is the exception) try to get a call premium and a dividend.
Short Term: MRK closed at 59.36. The Dec 60 will get you 1.00. The dividend in about a week will get you another .38.
Long Term: You can get 6.50 for the January 09 60 and a year's worth of dividends, thats another 1.52. Another thing on longer term is that if the stock drops you will have more time (if you wish) to re-purchase (close) the option for less than you paid for it and wait to try again at a future date.
Win some/Lose some! Hind Site always wins!
You are right, commiting to 14 months can be a problem but thats why there is a large premium. Of course you also have to take into account the interest that you would have been earning on the money if you had put it into a CD. Money is not free.
This is a very conservative way to trade, not meant for quick in and out.