Covered Call Trade

Covered Call Trade: Here’s I trade that looks interesting to me. I might just put this on in my personal account. This will not be an OptionGenius trade because there is too much risk, but it is something I would consider for my personal account.

I’ve been thinking about getting into F, Ford. It seems they are in the clear in terms of not going into bankruptcy. And with Chrysler already in Bankruptcy and GM going that way soon, there is going to be only 1 US car manufacturer left. That means those that will only buy American don’t have any option other than buying a Ford.

Ford also has  large short interest so any good news will cause a short squeeze shooting the price up. At today’s price I would not mind buying some F and holding on to it long term.  And of course selling calls against it every month for income.

Covered call strategy

So the trade is to do a Covered Call on F using the June 5 Strike Call. I just got filled and it cost me $4.62 per share. If F is above $5 at expiration I will get called ( my stock will be sold for me at $5 a share) and have a profit of 38 cents per share. That would be a 8.2% gain in 35 days.

If F is below $5 on expiration then I keep the stock and write more calls against it. At this point I am ok with owning F for a while.

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  1. elou795 on May 15, 2009 at 9:39 pm

    Why don’t you just sell the 5 strike put, it’s the same as a covered call risk wise and you don’t have to tie up all that capital in buying the stock then selling the call. The put also has a higher volatility so the price is a little higher than the call. If the stock drops below 5 and you get assigned then you can sell the call next month. The trick is not to be greedy only sell enough puts as shares that you would have purchased ie. if you were to buy 1000 shares of F then only sell 10 puts because if you do get assigned you will be buying those 1000 shares. Trading a covered call and selling a naked put has the same risk profit and loss outcome.

    • Genius on May 16, 2009 at 1:16 pm

      That is actually a great idea. Either way the price is about the same. Technically it would use less capital but to be safe I would keep that much capital available in the account anyway just in case I had to buy the stock. But I do like your idea better than mine.

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