Covered Call Play with AMD

In my search to find different and new (to me) ways of making money, I came across something called a "Covered Call".  I will provide my play with AMD as an example rather than rehashing the concept of a Covered Call.  You can read/learn about it here: http://en.wikipedia.org/wiki/Covered_call


Today Oct 6, 2011 I purchased 300 shares of AMD @ $4.75 with intent on writing a covered call (Scenario A).  Here are the various possible scenarios:


Scenario A - Going Long with AMD and Writing a Covered Call

• Buy 300 shares of AMD @ 4.75
• Sell Nov $5.00 Call Options for $.40
• Instantly realize a profit of 300 * $.40 = $120 before fees

A couple of possible outcomes:

1. AMD hits $5.00 or higher on or before Nov 19, 2011 and the Option is executed

My shares of AMD is called away at $5.00 (aka sold at $5.00) so I realize a profit of $.25 * 300 = $75.  Add this to the Call Option that I sold for $120, my total gain is $75 + $120 = $195 before fees.  That is an approximate gain of 13.68% before fees, in a little less than two months. Not bad.

2. AMD stays under $5.00 up until Nov 19, 2011

I get to keep the 300 shares of AMD and the $120 from selling the Call.

Scenario B - Going Long with AMD

• Buy 300 shares of AMD @ 4.75 with hopes of it appreciating; let's say to $5.00 in the various examples
• $5.00 - $4.75 = $.25 profit per share
• 300 * $.25 =  $75.00 before fees ~ 5.26% profit
• Or I can hold until a higher price is achieved

Summary:

By going with a Covered Call, you can view it as buying insurance at the cost of limiting your gains.  In this example, my gains will be capped at 13.68% and I can sell AMD at $4.35 to break even (not accounting for taxes nor fees).

I plan on providing an update on or after Nov 19, 2011. Good Luck!

Update 11/21/2011:
AMD closed at $5.47 on Friday 11/18/2011 and that means the Call Options I sold were in the money.  Since the options were in the money, they were 'called' away and they sold for $5.00; just as outlined in Scenario A1.  I realized a profit of $195 before fees for a gain on 13.68% and after fees, the realized profit was $151.35 for a gain of 10.55%; not bad for holding a stock for about 6 weeks.  I'm off to a good start in the world of writing options. A nice little Christmas present for myself or for a loved one.


As an encore, I purchased on S (Sprint) on 10/13/2011 and sold Jan 2012 $3.00 options for $.42.  I'm also looking to other stocks and perhaps large cap dividend paying ones.  Until next time.