Here is a good example of the difficulty of being human. This particular series of trades actually brought me to another important realization regarding the covered calls investing portfolio. I sold a call on the position on Nov. 23 which would have resulted in an extremely low return if called away, about 2% annualized. The next day the stock rose about 2.5% as a result of some comments made by Jim Cramer on his show. I took the emotional route, and bought back the call in the expectation that this rise would continue, but instead the stock began to fall, and I had simply lost $40 due to my actions. What I have come to realize as a result of this is regarding the reasoning behind selling calls which are either a few months out, or are very much out-of-the-money but very low premiums. The example would be the following:
Let's say you buy a stock at $40 and sell a $40 call for $1, which makes your cost basis $39. At expiration the stock is $35. A $40 call is $0.20, and a $37.50 call is $1. Now the normal response (at least for me), would be to sell the $40 call for $0.20. Except, an important thing to consider would be if you compare your options vs. establishing a new position if you were to simply exit the position, if you sell a $37.50 option, that would give you a 10% return. That kind of return is something that you would most likely not be able to find if you tried to create a new position.
The profit/loss info is below:
10/7/2009 -- Bought 100 FLR @ 47.07
10/7/2009 -- Sold To Open 1 FLR November $50 Call @ 1.70
11/20/2009 -- Call Expired
11/23/2009 -- Sold To Open 1 FLR December $45 Call @ 0.7
11/25/2009 -- Bought To Close 1 FLR December $45 Call @ 1.15
The important purchase metrics are below for insight into possible profit and loss (these all include commissions):
Cost Basis: $4582.00
Potential Gain: N/A
Potential Annualized Gain If Called At Expiration: N/A
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