Covered call calc

SanMiguel

SanMiguel

I'm looking at an ITM covered call but can't figure out the profitability:

Luckin Coffee Inc. LK 42.22
2020 21-FEB call strike 41.0 1.7 mid

If I buy 100 shares and 1 contract:
100x42.2=$4220
100x41 =$4100
1 contract sold = $170

So, even if price drops to the strike then I am still $50 in profit?
However, if I leave this to get assigned then what do I make? Say price stays at 42.2? $170
Minus commissions of course
 
Buy 100 Shares = $4222 Debit
Sell Feb 41 Call = $170 Credit

$4222 - $170 = $4052 (Total Purchase Cost)
If price closes above 41 on Feb 21, you'll have profit of $4100 (sale proceeds) - $4052 (cost) = $48 (profit)

***Getting called away @ 41 will give the "sales proceeds" of $4100
 
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CC's are useless.

  • Long shares gives you equal profit and loss potential.
  • CC's takes away the profit potential, but you still have the loss potential - plus the peanuts you collect with the short calls.
 
OptionsOptionsOptions said:
CC's are useless.

  • Long shares gives you equal profit and loss potential.
  • CC's takes away the profit potential, but you still have the loss potential - plus the peanuts you collect with the short calls.
More...
I get what you're saying but I think the idea is that you have some downside protection plus you take in a small profit. Say on weekly options where the option gives you more than the expected volatility would, rinse and repeat?
 
Covered calls are a great tool, and over the long run, will outperform people who only buy stock. The idea is your limiting your maximum profit potential in exchange for guaranteed income. This guaranteed income can be used to offset a downward movement in the stock.

If the covered call is selling at a higher strike price than where the stock is trading, you cannot only make the money from the stock movement, but if it never reaches the strike price, then you also keep the profits from the call. It can be an especially good tool in highly volatile stocks that have fat premiums.
 
Covered Call = Eat like a king everyday ( week/ month etc) and shit like an emperor one day ( stock drops way below the premium received) so "rinse and repeat is fine" but it can bite you on the backside also!
Be mindful of this aspect .
There are educators and scan sellers who paint this as if this is the best thing since sliced bread ! take that with pinch of salt...
 
Covered calls don't work in a hard raging bull market. You will sell your stocks at prices that you think are good only to have to buy them back again at insane prices.
 
traider said:
Covered calls don't work in a hard raging bull market. You will sell your stocks at prices that you think are good only to have to buy them back again at insane prices.
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Been there done that with GOOGL, AAPL...

There are two ways to look at covered calls:

1. You are a pro, you trade it as a pair, first you look for stocks that fit your criteria then writing covered calls. You execute those as a pair trade. If the stocks get called away, you make max profit and are happy, move on to the next trade. :cool:

2. You are a newbie like me, who think covered calls are a way to generate income out of stocks that don't pay dividends or you want to further juice your dividend payout, you write covered calls on the long term buy-&-hold, like GOOGL, AAPL, BRK.B. They get called away and you end up buying them back at a much higher price and have to pay capital gain taxes on top. You essentially sell naked calls. :mad:

As a newbie, after a few months, I realized the mistake of #2 so I said, OK I was not going to buy my GOOGL, BRK.B back, I moved on and used the proceeds to buy GE... covered calls. Lo and behold, GE went down and my calls expired worthless but now I own GE instead of GOOGL, BRK.B. I said OK I just kept writing covered calls on GE... After a couple of years, GE went from ~$30 to ~$6. I ended up holding the bag on GE. Yes, I made some premiums but the net result was much worse than just buy-and-hold GOOGL, BRK.B... :banghead:

If you newbies want to write covered calls, do #1 and don't follow my example.
 
If you sell a covered call in the stock and it gets called away, never re-buy the stock at the inflated price. If you still want to own the stock, just sell the put on the same strike price that the covered call was on.

Here one of two things will happen, if the stock drops below the strike price you'll be able to buy the stock at the same price you sold it at, plus you still get the premium of the put, and of course you still have the premium of the previous call. So you'll make more money than someone who just held the stock,

The other option is a stock just continues to trade higher, here you won't ever get the stock back, but at least you'll get paid the watch it trade higher.
 
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