I'm awaiting my application results for the ability to write covered calls as a novice options trader. Studied a lot about it, but have never done it. With regards to GNW and any other stock which trades options, what kind of percentage do a majority of call buyers usually consider sufficient before they exercise the option to call my shares? For example, late last week, the June $5 calls were trading around $1.80 or so, which would make the breakeven point into profit $6.80. So I guess my question is, how much higher would it have to go for an experienced call buyer to say, "Yeah, I want those shares now..."? Not sure if this is a good question, but thought I'd ask out of curiosity.
If they tell me today or tomorrow that I can start writing calls against my shares, I'm wondering how solid the $7 point is as far as keeping my shares with a $5 strike price that carries a premium of $1.80-2.00 per contract.
options are taxed as capital gains in the year they are exercised, expire OR are bought BACK or SOLD to close.
they afford any investor maximum tax planning.
if for example you had 42 gnw shares and sold dec $5 call and the stock is $6 in december and you dont want the 43 stock gain to be taxed in 2009, you simply buy back the dec 45 call and sell the jan 2010 $5 call for a few cents MORE and move the share sale to jan 2010 meaning tax is due in april 2011.
if you didnt own the shares for 12 months simply do the march or june $5 calls to accomplish that tax savings.
your position is very nice and you can achieve your objectives by selling covered calls on ALL your shares by doing ONLY the dec $7.50 calls which you can get around $1.20 for which will reduce your $1.17 share cost to ZERO.
the $1.20 option premium will be treated as a short term capital gain if the options expire worthless in dec which is fine since that $1.20 is all NEW money for you.
however because of your tax concerns especially wanting the shares themself to only be sold in march 2010, you would really like gnw to be tading around $8 to $9 in decemeber so that those sold calls are actually worth around $1.
in that case you would buy them BACK and had a small gain or small loss for 2009 on the option trade and then immediately sell the MARCH $7.5 calls or march $10 calls depending on the price in december. that would keep your cost at ZERO or LOWER per share.
this will make the gnw long shares be possibly sold after they have been owned for 12 months for the low tax treatment in march or later.
you are very much in a power position.
the dec 7.50 covered calls in the meantime give you downside protection to about $5 per share in the interim as well as the return of ALL your original CAPITAL that you invested near the march low.
this is the best play for you and any other gnw longs who havent sold options on their shares yet and want to minimize taxes and also have some downside protection.
What about the intrinsic and time values? Why would anyone exercise those options for a loss of $130 under your conditions? If they spent $180 for one contract to buy 100 shares at $5 for a total investment of $680, why would $550 be attractive if it closed at $5.50? What am I missing here in the math?
i hope u understand that if u sell the June $5 call for $1.80, that they will be called when options expire at end of next week if GNW is over $5, and not 6.80.
So, if the stock closes next friday at 5.50, yours will get exercised. what you did was sell the right for someone to buy them at $5.
Remember you got paid $180 per block of 100 shares (1 contract). Now, if your cost basis was $2.75, you reduced it to .95 cents. Then, on top of that you sold them for $5, which nets you 4.05 per share profit or 400%+ ROI.
Can I send you an email with a question about how I could use covered calls on my GNW shares? I would like to limit my downside, and avoid short-term capital gains treatment (my shares are in a taxable account). If I need to limit my upside somewhat to accomplish this that's acceptable. FYI, I have xx,000 shares at avg cost of $1.17.
Ideally, I could hold my shares until next march (long-term gain), and sell at between $10-12/share. Is there a current covered call strategy that would accomplish this? What's the tax treatment of option premium received on covered calls - isn't is short-term capital gains?
I see your point and like selling call son PPS spikes. Personally I sold June $7.50s on the initially huge spike right after earnings to cash in on max volatility and time. I also did a few $5s and bought some out on the sharp dip after the earnings spike... should have bought them all back but oh well.
based on your costs of your 4500 long gnw shares these are the EXACT opening covered calls i would do in your situation.
5 june $5 calls
5 jul calls and 5 jul 7.5 calls
5 sept $5 calls
10 dec $5 calls and 15 dec $7.5 calls
you should get at least $6500 of cash back which is enough to buy 1000 free gnw shares when the stock takes a dip IF you wish.
2500 shares should be taken at $5 and 2000 shares MAY be taken at $7.50
thats $27,500 in total
your shares WILL be called at the expiry date of the option IF they are in the money.
its rare for them to be taken before the expiry date UNLESS the option has NO time premium in the price they are trading at.
you should be selling the $7.50 calls against your shares UNLESS you think it may drop closer to $5 in the next month or 2.
what options you sell really depends on what your current cost is and what profit you would be happy with if taken and how many gnw shares you want to sell options against.
"you should be selling the $7.50 calls against your shares UNLESS you think it may drop closer to $5 in the next month or 2."
This comment is exactly what I don't get about your strategy. This is 180 degeres wrong.
If you think it will drop down closer to $5 soon then you SHOULD be be selling the $7.50s NOW. Why do you say "UNLESS"? Your logic about when to sell what relative to the PPS is puzzling. The best time to write covered calls is when you think the PPS may drop.
I have a cost average around $2.75 with several thousand shares. Is it safe to say that the more conservative call-writing strategy is to offer calls at strike prices OTM for a smaller premium and build the income that way? Seems to me that the $5 strike price for June, if sold at a premium of $1.80-2.00 through a limit order would be a relatively safe play considering the recent price action of GNW. We still have yet to break $7...