Friday, June 24, 2016

Option Trade - Royal Bank

    From time to time, I like to sell covered calls on stocks.  A covered call involves owning the shares first then selling a call option to be paid a premium up front.  Usually you sell an out of the money call option.  The investor or trader gets paid up front for be obligated to sell 100 shares of stock XYZ at the strike price on or prior to expiration day.
    On Jun 20, I wrote a cover call for Royal Bank with an $80.00 strike price and an expiration date of Jul 15, 2016.  I received a premium of $50.05 after commissions.


Scenario #1:  Option Not Assigned

Strike Price : $80.00
Option premium received :  $50.05 after commissions
days to expiration : 25

Return  for 25 days= $50.05/$8000
                               =  0.626%

For 25 days, I am getting a return of 0.626%.  The interest on my high interest savings account is 0.80% per year.  So, I definitely do not mind a return of 0.626% for 25 days.

Return Annualized = 0.626%/25*365
                               = 9.140%

Scenario #2: Option Assigned 

If the option gets assigned, then I get to sell my shares for a greater capital gain as the option premium received is added to the proceeds of sale for calculating taxes.

Disclosure: Long RY

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.

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