Covered call writing calculations include initial and final computations. Since our trades incorporate both long stock and short option positions, it can become confusing when determining final capital gains (losses). In July 2019, Ralph shared with me a covered call trade he executed with Guidewire Software, Inc. (NYSE: GWRE). He sold an out-of-the-money (OTM) strike and was evaluating final outcomes under various circumstances.
*** Calculations do not include trading commissions
Ralph’s trade with GWRE
- 7/22/2019: Buy GWRE at $102.22
- 7/22/2019: Sell 1 x $105.00 8/16/2019 call at $1.13
Ralph astutely calculated his final returns as $391.00 if share price moved up to or beyond the $105.00 strike. This included the $113.00 for the option sale and $$278.00 from share appreciation up to the strike price. This represents a 3.8% 1-month return (1.1% + 2.7%). Let’s confirm this by using the multiple tab of the Ellman Calculator:
GWRP Initial Calculations
Final results if share price moves above the $105.00 strike and shares are sold at expiration
In this case, the final returns are the maximum return as established in the initial trade set-up, 3.8% as shown in the screenshot above. Since the stock shares are sold, this return is realized.
Final results if share price moves up to $104.00 and the option expires worthless at expiration
Realized profit on the option side is $113.00. Unrealized profit on the stock side is $178.00. If shares are sold, the stock profit would also be realized.
What if share value moves below the $102.22 purchase price?
The spreadsheet shows the breakeven at $101.09. Overall profit or loss will depend on that threshold.
Discussion
Covered call writing calculations have several components. There are initial and final calculations as well as realized versus unrealized capital gains (losses). The initial trade set-up must incorporate our initial time-value return goal range (2% – 4%, in my case). From there, our positions are managed to ensure the highest possible returns.
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Dear Alan,
Thank you for your information video on “Covered call option writing” I like the video and I’m writing to you to say “Thank you”
I’m looking forward to seeing your videos in the future too.
Regards,
Sandeep
Upcoming events
1. February 6th – 9th 2020 Orlando Money Show
3- Hour Masters Class Saturday February 8th 1:45 – 4:45 PM
BOOTH 306
2. Tuesday March 10, 2020 Long Island Stock Traders Meetup Group
7 PM – 9 PM
Plainview- Old Bethpage Public Library
Covered Call Writing Blue-Chip Stocks to Create a Free Portfolio of Large Tech Companies
New events added this week
1. Options Industry Council (OIC) Webinar: April 8th 4:30 PM ET
2. Las Vegas Money Show: May 11th – 13th
***********************************************************************************************************************
Market tone data is now located on page 1 of our premium member stock reports and page 8 of our mid-week ETF reports.
*********************************************************************************************************************