I know that options are not used by Saul and I don’t intend to discuss any technical aspects of option trading. But more than a few posters on this board do use options and selling covered calls is probably the most common vehicle used. This post is about my psychological experience with selling Aug 19 calls, $35 strike. I sold these for $1.20 on July 6 when the stock price was $35 +/- a few pennies. My mindset on the 6th was that I was getting 3.75% for 6 weeks and I thought that having my shares called away for 9% gain in 6 weeks would also be (probably) a good thing (13% if including the $1.20 premium).
However, LGIH immediately began climbing in that very session and a within an hour the options were trading at $1.60. As the weeks passed, LGIH edged ever closer to $35 and for a few days it closed above $35. On those days it traded above my $36.20 breakeven price.
Fortunately (I guess), my internet connection at the house has been down for two weeks so I haven’t been able to follow LGIH during market hours (9:30 p.m. to 4 a.m. here). Getting to town only every couple of days saved a bit of torment.
I’m not sure if this is a case of “all’s well that ends well”, but I am happy with Friday’s $34.21 closing price and I pocketed the $1.20/share. Question I have to answer now is, what about September? The premium is 3.2% for just 4 weeks for the same $35 strike . I think I’d rather just root for LGIH to go up on good news. Just my personal experience.
KC (LGIH is 8% holding)
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I think I’d rather just root for LGIH to go up on good news. Just my personal experience.
Hi KC, Yes, it’s hard emotionally to have to root against one of your favorite stocks because you have sold an option. I’d rather just root for my base position to go up too.
Saul
This post is about my psychological experience with selling Aug 19 calls, $35 strike. I sold these for $1.20 on July 6 when the stock price was $35 +/- a few pennies. My mindset on the 6th was that I was getting 3.75% for 6 weeks and I thought that having my shares called away for 9% gain in 6 weeks would also be (probably) a good thing (13% if including the $1.20 premium).
Oforfive, I’m replying to your post only because even experts get their option calculations wrong. Some years ago I read a book about creating an income stream with covered calls. For some reason the author also added in selling (cash secured naked) puts and he didn’t do his homework on puts. When he calculated the return on the puts he only took into account the cashflow which is correct for calls but not for puts, he forgot about the invisible “cash secured” part which, being money at risk, needs to be added to the formula. Even if the puts expire worthless and you “get back” the security, since there is a time lapse between selling the puts and their expiration, there is a time cost of the money put at risk which lowers your true yield. Even though I no longer sell puts, my spreadsheets still have a column for this concept. Since this deposit is covered by margin it remains hidden to the unwary eye.
Your math has a similar problem. If your cost of LGIH was “$35 +/- a few pennies” then you wouldn’t get 9% at a strike price of $35. If at $35 your gain is 9% then your cost must be closer to $32.11 and your purchase date older than July 6. By July 6 you had a non-realized capital gain of 9%. At expiration you would get an additional gain of $1.20 or 3.75%. But you shouldn’t double count the 9% capital gains.
If the stock was already at $35, selling a call with a strike price of $35 was a willingness to sell the stock. That being the case, there should not be any mental anguish if it gets sold. This last has to do with your mental preparation for the trade. I figure out the two possible outcomes, getting assigned or not. I have to like both to make the trade. There is a little mental devil ready to torment you if the stock takes off or if the stock tanks violently but you have to get used to ignoring the little monster. If you can’t, don’t trade options. 
Denny Schlesinger
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Captain,
You are correct, but it wasn’t my math that was wrong, it was the price I stated. It was trading at $32 +/- at the opening on July 6. Must be my attention deficiency … And, you are also correct, don’t sell calls if you can’t bear losing the shares. If LGIH is high conviction LTBH for me, I probably shouldn’t be writing covered calls.
KC