Stop Rooting Against Your Stocks

Selling covered calls on shares you own can accomplish a few important objectives: Reduce risk (by the per share amount of the call premium) Provide immediate income Set a reasonable exit point days, weeks or months in advance Provide the discipline necessary to stick with positions you might otherwise trade out of prematurely The hardest part about living with covered calls is knowing that you might miss upside that exceeds your maximum net exit price. The maximum exit price on any stock that has calls written against it is always equal to the strike price selected, plus any per share premium collected upfront when the calls were sold. Here are some examples of calls I sold on Ruth's Hospitality after buying the shares at $4.01 per share. The Aug. 21 $10 calls were sold for just 20 cents with a short time to go before expiration. My maximum exit price by next month is $10.20 (the $10 strike plus the premium collected). The November $10 calls, also written recently, brought in 80-cents a share. Maximum sales price on those 500 shares would be $10.80. The November $15 calls were sold much earlier, when the stock was a bit higher. I collected $2.15 per share for those five covered calls, or $1,025 up front. My maximum exit price was thus $17.15. The lower priced calls replaced previously sold call options, which expired worthless on May 15, 2020. The table below details my cost, RUTH's price as of Wednesday at 10 a.m., and my maximum profit levels if the shares do get called away. Getting those maximum gains requires that the underlying shares reach, or exceed, the strike prices employed. Despite knowing that fact intellectually, most traders start rooting against their stocks when they get close to hitting those strike prices. The pain of seeing upside they might end up missing appears to outweigh the joy of selling for the best possible outcome under the circumstances. Anyone who's been investing for any length of time has had many stocks they sold, which went on to go higher. Ironically, that doesn't seem to bother them nearly as much, because they don't have to see those shares on their brokerage statements afterward. I think it's because with covered calls, the underlying shares still appear on your monthly reports, until the calls expire or get exercised. My Sept. 18, 2020, expiration date covered calls on Charles Schwab at $43 and $49 strike prices don't have that problem. I hoped the shares might be reaching those levels by then. Instead, SCHW vacillated between $30 and $41, and was still trading for about $35 this morning. That netted me a quick $540 rebate on this 200-share position. Better still, I'll be thrilled if the shares do get called away in under six months. My net sales price would be $47.70. I collected decent money for those calls. The 10 contracts at the $43 mark brought in $2,750. The $49 strike calls delivered an additional $1,500. Barring a big move higher over the next 58-days both sets of calls will expire worthless. If that transpires I'll have made $4,250 ($2,750 + $1,500) and still keep my 2,000 shares, allowing me to repeat the process by selling up to 20 new covered calls. While it great to make money for nothing, I would much prefer to have to feel bad by seeing SCHW exceed even the higher strike price by Sept 18. In that case, my capital gains would match the 39.8% and 54.4% shown in the table above. It's always better, from a return standpoint, to see covered calls exercised rather than expired. I love selling calls for all the reasons stated at the start of this article. My recent purchase of Ryman Hospitality Properties in the low $32s offered me the chance to sell Jan. 15, 2021 $45 calls for $2.70 per share. That netted me a quick $540 rebate on this 200-share position. Better still, I'll be thrilled if the shares do get called away in under six months. My net sales price would be $47.70. That's almost 48% above my purchase price. Growing my money at that rate would translate into 96% annualized. Focusing on the upside, risk reduction and income generation makes covered call writing into a very attractive portfolio management tool. There's never a good reason to root against shares you hold from going higher.

Stop Rooting Against Your Stocks

The hardest part about living with covered calls is knowing that you might miss upside that exceeds your maximum net exit price -- but here are the pluses.

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