Stock Option Trading?!?
I’m probably going to pay some more “dues” for enrollment in the School of Stock Market for this, but I guess it’s part of the learning experience.
Today I sold my first covered call. So what the hell does that mean?
I currently own 100 shares of General Motors. Today it is priced at around $12.50, so my total investment is $1,250 (ps, I originally bought it for $10 per share). And today I sold a call option for October 18th with a strike price of $15.00, and after commissions I made about $50.
A call option gives the owner the “right” to buy a certain stock for the strike price on the expiration date. So in my case, I gave someone else the right to buy my shares of GM on October 18th for $15 each. By doing so, I sold my right to any profits if the stock goes above $15 to whoever bought this option from me.
If, at the end of the month, the stock is below $15, the option expires and I get to keep the $50 (a 4% return on my investment in 1 month).
In essence, I’m making a bet that the stock won’t appreciate by 20%. The only way I can lose money in this is if GM goes below $12.50 per share (which is very likely). But considering I plan on holding this stock for at least the next year or so, I at least get a little cash from the options sale in the meantime.
October 10th, 2008 at 3:47 pm
General Motors Corporation (NYSE:GM) 4.89+0.13 / +2.73% Oct 10
Bank Of America Corporation 20.87+1.24 / +6.32% Oct 10
Microsoft Corporation (NASDAQ GS:MSFT)21.50-0.80 / -3.59% Oct 10
Johnson & Johnson (NYSE:JNJ) 55.85-1.73 / -3.00% Oct 10
Just another reason to drink, right? At least JNJ and MSFT are holding in there for you, but you really should consider utilities or other stocks in the durable goods sector. Think items that everyone is still going to buy regardless of a slowdown. Like Beer, food, and soap but not service sector or non-essentails.
Later,
John