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American International Group, Inc. Message Board

  • yenom_dam yenom_dam Sep 9, 2013 3:45 PM Flag

    Covered Calls-Continued

    Who Is the Covered Call Strategy Right For?

    Long-term investors often use covered call strategies as a way to generate extra income from a portfolio of stocks without taking on much risk. By writing covered calls, these investors receive upfront premium payments and do not risk selling their stock at prices they don’t agree to beforehand. The strategy effectively enables them to generate a virtual “dividend” on their stock, with the example above showing how a 1.6% “yield” could be realized in a month.
    Other investors use covered calls as a way to prudently sell stock in a top-heavy market. For example, if an investor believes that the market may be overvalued and overdue for a fall, he or she may sell an in-the-money covered call option to lock in a selling price and receive a little more than would be possible selling outright into the open market. The contracts in this case serve more as a way to exit a stock position than generate long-term extra income.
    Right now, with AIG about to take out the previous 52 week high of $49.50, you could wait to see if it does with nice volume. If it "weakly" gets to the number, you can SELL some out of the money Covered Calls for Oct, Nov or January. I would pick a Call that you don't think it will reach so you can keep the premium and keep the stock. If you think the stock has peaked, then sell "In the money calls" to lock in that profit. So you can keep the higher premium and still keep the stock.. If it goes higher, you can repurchase the Call (you lose a little bit) or you can let it get called away. You need to define your risk & your reward. You get a really nice premium on selling those $50 Calls for Jan and collect $2.50 per share so 1 contract - 100 shares = $250 x 10 contracts = $2500. You would get to keep this if stock trades below $52.50. If it trades above, you get $50 a share + the $2.50. So $52.50. If it trades at $50, you keep the stock and the premium. If you think we get to $55 or $60, then sell those calls.

    Sentiment: Strong Buy

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    • I agree that you should sell cc no more than 60 days out. #0 is better. Yes the premium is less but the flexibility is better and you can write them again when they expire . I write most of mine 30 days out one stike out of the money. This strategy has served me well.

    • I sold eight covered calls today, January 2015 with strike price 60, premium $2.65. That's a long way out, but I like getting some income now, and of course we will see if the stock hits 60 in the next 16 months (if yes, my effective selling price is $62.65). One person's strategy, there are others as noted in the previous post

      • 1 Reply to gladysz
      • There is nothing wrong with Selling LEAPs because if you get another $11 increase in stock price, you will still be $2.65 ahead. However, IMOP, AIG gets to $70 by Jan 2015. You might have been better off selling the Jan 14 50 for $2.65 which gives you protection to $52.65 or you sell the $52.50 for $1.63 or the $55 for .94. My reasoning is that your projection only gives AIG a 20% increase in 16 months. Since the stock is up 40% this year, it stands to reason that it will do at least half of that next year. This is why I don't sell the covered calls so far out. I am not being critical because I love selling the covered calls but I don't like going out so far. You could end up paying over $5.00 to buy them back when the stock hits $60 by June 2014. I own 65 $40 Calls for Jan 2014 that I bought 8 months ago but I sold half my postion 5 $50 Covered Calls for Jan 2014. When I get close to January, I will buy them back if they get close .

        Sentiment: Strong Buy

    • I am pretty sure if I buy a $50 call from you I can call your stock at $50. So if it is 51.50 I could call. I lose 2.50 on the call make 1.50 assuming I sold immediately so net loss is a 1.00 conversely you made 1.00 and can still buy back in and be up slightly.

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