On November 11, I decided to write a covered call in Potash Corporation of Saskatchewan (POT.TO) with a December 16, 2016 expiration day. This stock trades on both the Toronto Stock Exchange and New York Stock Exchange. When an investor or trader writes a covered call, they collect premium upfront for being the option seller. Sometimes, people refer writing a covered call to "renting shares".
Recently, POT announced a merger with their competitor Agrium Corporation. On Nov 3, both of these companies voted separately in favor of the merger. There are still a lot of hurdles to overcome before this merger happens in the future.
Summary:
Commission: $11.95
Option Assignment Fee : $24.95
# of Contracts : 2
Premium = $60
Days to Expiration: 35
Scenario #1 - Option is not assigned
Return = ($60.00 - $11.95) / (2* $25* 100)
= 0.96 %
This return is for 35 days only. This is a lot higher than most savings accounts are today.
Annualized Return = $48.05 / $5000 *(365/35)
= 10.02%
Currently, my high interest savings account pays 0.80% per year. This is so ridiculous that it is laughable.
Scenerio #2 - Option Assigned
Adjusted Cost Basis currently = $4245.85
Money out = Sell Price + Premium Collected - Option Assignment Fee
Return : (Money out - Money in ) / Money in
= ($5000 + $48.05 - $24.95 - $4245.85 ) / $4245.85
= 18.31 %
EDIT: For Scenario #2, the return would actually be higher if I included the dividends previously received.
Disclosure: Long POT
DISCLAIMER
I
am not a financial planner, financial advisor, accountant or tax
attorney. The information on this blog represents my own thoughts and
opinions and should NOT be taken as investment or business advice.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.
Every individual should do their due diligence to make their own financial decisions based on their financial situation and tolerance for risk.
Wow, great set up. You'd never lose on either scenario. Is there a scenario that you'd lose money at all?
ReplyDeleteVivianne,
DeleteThanks for dropping by. Writing a covered called allows an investor to get paid for something they are willing to do anyway. You limit profit to the upside.
The only way you lose is if your strike price is set lower than you adjusted cost basis per share.
In Scenario 1, you will receive dividends if you own them like normal. In Scenario 2, my returns would be actual higher if I included the dividends that I previously received.