From the June 01, 2012 issue of Futures Magazine • Subscribe!

The hit-and-run covered call

Options Strategy

A good list will show you the stock, several available option expiration months, the strikes for each month, the covered call’s potential percent return and various Greek values. From these, you cull the stock/option combination that meets your criteria.  

On April 16, 2012 you could have bought cloud computing company VMware (VMW) for $109 and sold the out-of-the-money April $110 call against it for $3.10.  That’s a return of 2.8% for a four-day investment. But VMW was scheduled to announce first-quarter earnings after the close on April 17, eliminating it from our criteria as the potential volatility was, of course, largely responsible for the rich premium.

A better opportunity was biopharmaceutical company Gilead (GILD). On April 16, it could be bought for $46.50 and the April $47 call sold against it for $1.45. The return was a very nice 3.10% (4.20% if the option finishes in-the-money and the stock is called away), and there was no announcement of earnings. GILD unexpectedly announced a successful test of their new Hepatitis C drug at 5:15 a.m. on April 18, and the GILD stock price jumped $7.00. 

It is possible to find very-short-term options with relatively low risk and good payouts to execute a hit-and-run covered call. You just have to get your hands on a compendium of high-potential stock/option combinations and do your homework.  

Todd Lofton is a past member and floor trader on the Chicago Board of Trade, author of “Getting Started in Futures” (Wiley, 1986) and “Getting Started in Exchange-Traded Funds” (Wiley, 2008). He was a founding publisher and editor of Commodities, now Futures.

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