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21

It wasn’t my bias! I was using the bias that was stated by someone else - “well out of the money so they don’t get called”. And I showed how I defined “well out of the money so they don’t get called”. What is your definition of “well out of the money so they don’t get called”?

How are you calculating CAGR here? Remember, the person already owns the Microsoft stock for many years (in your previous posts, you told them to begin their foray into covered calls by using a stock they already own). They bought it in 2010 for $23.09 a share and they hold it in a regular brokerage account for all those years and have been collecting the dividend each quarter. They REALLY don’t want to have to sell it, hence they want options that are “well out of the money so they don’t get called”. The reasons they don’t want to sell it is because the huge capital gain will mess up their AGI for the year (it’ll cause IRMAA in 2 years, and other bad tax effects), and they are over 70 years old and would normally expect to hold those shares until they die and then the basis will be stepped up for their heirs and no capital gains tax will ever be paid for these years of gains. Now the other thing to take into account is that the stock goes ex-div on 5/15, one day before your proposed option expires. That greatly increases the chances that someone might want to “swipe” the dividend on that day if the option happens to be in the money!

So, if they sell the 410, and if the option gets exercised, they have two choices:

  1. Sell the shares they hold at 410. They have a long-term capital gain of $410-$23.09 (basis) +$2 (option premium) = $388.91 and will have to pay either 15%, 20% or 23.8% of that in federal taxes. And depending on how much total capital gains they have that year, they might have to pay the state of Washington 7% as well (In this case, it is very unlikely, so let’s call the state tax zero). What’s the CAGR now?
  2. Buy new shares at the prevailing price the morning after being assigned and deliver those shares instead. Let’s say $412.23. So they buy at $412.23, sell at $410, keep the option premium of about $2, and roughly break even on the trade.

The point of this post is that it isn’t so simple, and it very strongly depends on the person making the trade and on how the shares are held (taxable, tax deferred, or tax free) and on how long the shares have been held and on personal risk tolerance and on state of residence and on age (how close are you to the nirvana of basis step up), the date of the option expiry compared to the ex-div date, etc. There are MANY things to take into account before doing such a trade.

22

Maybe that was me, let me talk to The Captain… :clown_face:

The Captain says that it’s not that easy. One has a mental model but one can only play the cards one is dealt. A traditional portfolio will try to get some income by selling covered calls, it’s icing on the cake. If you can get 5% annualized you are doing well. What I noticed is that when you have a great call selection tool you can get much better results. Consider the games in a casino, they have fairly simple rules. Dice have only six sides, a deck of cards has only 52 cards. Roulette wheels have only 73 or 74 slots. Options plays use thousands of stocks each with hundreds or thousands of options which vary with the economy, politics, and animal spirits.

The only practical way I know, mark to market. It’s not so much the number that matters but how options stacks up against each other.

Reminds me of a line from Tom Lehrer’s Boy Scouts song, “Unless you get a good percentage…”

As a non resident alien I pay no capital gains taxes. My reason for not selling is growth trumping income from options.

Absolutely agree.

The Captain

23

On 22 April, I bought RGTI at 8.52, and STO Covered Call RGTI 25Apr 8.5C.
I thought I’d do a follow up.
My goal is ‘income’ of at least 1%/week on the $ invested.

On Friday, 25Apr, Expiry for that CC (Covered Call), and RGTI market price was about 9.35, or ITM for the BUYER. I was set up for the Option to be assigned, and for the shares to be Called away.

I checked the Options chains for 02May, and found I could Roll the Option Up and Out for a net CREDIT.
I Bought to Close the 25Apr 8.5C for 0.82 debit; and Sold to Open a 02May 9C for 1.09 credit. (1.09-0.82= 0.27/share NET credit).
I rolled the option Out 1 week and UP 0.50/share. I collected a credit of 0.27/share premium. IE, about 3% again. (0.27/9= 0.03, or 3%).

I’ve now collected 0.30+0.27=0.57/share on an 8.52 investment.
This was $ gained and immediately into my account.

This 25Apr Roll moved the Strike from 8.5 to 9.0. A 0.50 gain in intrinsic value. This is ‘future’ gain… IF the shares sell for 9, I will get those monies. If the stock price drops below 9, I don’t get that.

The next expiry is 02May. I will watch during the week, and on 02May, do the next management activity.
My plan is to, again, ROLL, out and perhaps up. We’ll see how it progresses.

NOTE: the current market price RGTI is 9.37 (close of market 25Apr). Therefore, the 9C is 0.37 ITM for the BUYER.

NOTE: as was mentioned upthread, RGTI is high volatility, high RISK.

So far, this Option is working out. They don’t all work out.

FWIW
:sandwich: in hand and :bread: in the oven
ralph.

This is NOT investing advice. I’m just showing what I’m doing with one Option strategy.
Do your own Due Diligence, and all that.

For me, this strategy is to provide disposable income, WITHOUT dipping into my stock market invested $s … - it is NOT to ‘grow wealth’.

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24

I’ve managed this position several times, rolling up or down, and keeping the same expiry, or moving it ‘out’ a week at a time.

On 16 May, I let it get Assigned (the shares were Called away, sold to the Call Option BUYER), for $9/share.

I thought I’d update and close this description of the trade.

My goal was: at least 1% in gain/week.
The trade was 24 days in length. I’m gonna call it 3.5 weeks.

I bought at 8.52/share and sold at 9/share. so, 0.48/share short term capital gain.
During the 24 days of selling Covered Calls, I gained a total of 0.82/share in premiums.

Total gains was 1.30/share.
1.30/8.52*100 = 15.2% total gains. PRETAX.

Short term tax rate: 36%;
adjusting for taxes, 1.30- 0.46= 0.83/share.

and the total POST TAX gains (0.83/8.52*100) was 9.74%.
In 3.5 weeks (24 days). or 2.8% / week. Which meets my ‘at least 1%/week’ goal.

RGTI is a HIGH RISK stock. That’s why it paid 2.8%/week.
You gotta know your Risk Tolerance, and adjust your goals and expectations accordingly.

Why did I go through this ‘effort’? Cause I wanted INCOME… DISPOSABLE INCOME.

Let me describe a past interaction:
In the late 1970s, a neighbor had a millionaire boyfriend who lived in a distant city, and would visit his girlfriend by RENTING a jet and flying… spontaneously.
In a conversation about how he could ‘afford’ that, he casually mentioned that he would contact his broker, who would recommend a “penny stock that’s gonna GO UP!”. The millionaire would trade the penny stock, and make enough money to rent the plane, pay hotel bills, etc. and visit the girlfriend. IIRC, he said he’d ‘risk’ about $10,000 for the trip.
At the end of his ‘visit’, he still had his ‘basis’ and had paid the expenses of his visit.

That has always stuck in my head.
I WANTED the ability to ‘do a trade’, make some income, and then ‘dispose of the income’. Frivolously.

I bought a new phone with the income I gained from this RGTI trade.

Ok. This trade is now ‘closed’.
I hope that explaining it, was useful.

:slightly_smiling_face:
ralph

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