As a reminder, I have a Covered Call on Yelp (YELP) expiring today. I own 5000 shares at $37.80 and I have 50 contracts of the $38 Calls. As I write YELP is at $38.50 and is up $.80 on a down day. It looks to me like today the stock will close above my Strike Price of $38. If this happens, I’ll be assigned on my 5000 shares, which is what I’m hoping for. With the thought of my Covered Call coming to an end today with the expiration of my Call and the assignment (selling) of my stock, I just sold another Call on Yelp to expire next Friday. I sold 30 contracts of the Yelp $39 Calls. At the moment this Call is Naked. If the stock drops below $38 I won’t get assigned today and my Call will become a Covered Call. If the stock stays above $38 at close today, I’ll get assigned and watch closely next week. At the moment, I’ll give this trade a Risk Factor of 5 because it’s a Naked Call, it’s only $.50 Out-of-the-Money and it’s a hot stock. Here’s the sell order:
Sell to Open 30 YELP 8/26/16 $39 C @ $.55 (+$1650)
We still have a few hours until close but if Yelp closes In-the-Money, my 50 contract Covered Call will be a great trade. I’ll make $.20 ($1000) on the stock sale and $.40 ($2000) on the option premium, for a total of $3000. This is the type of trade I look for! Yes, 5000 shares at $37.80 cost $189,000 but for a 4 day investment with a $3000 gain, that’s a Rate of Return of 1.5%. However, I trade on margin so I only laid out half the money so the return is 3% in less than a week. I hope the stock stays above $38 to bring this trade to an end.
Please remember, it’s not the amount of contracts you do or shares of stock, it’s the Rate of Return!
Steve
The Options Coach