Trades – My First Option Contract – Intel Corporation (INTC) Covered Call

I will be the first to admit it; I am a rookie at options trading. No doubt about it! But learning is the name of the game. I have learned a tremendous amount by reading the options trading posts by All About Interest, Passive Income Pursuit, and Brick by Brick Investing. My foundation for investing won’t be changing at this point. I am focused on long-term dividend and passive income growth. With that, I think selling options can be a successful way to provide additional gains on your investment, or provide a discounted cost basis on a stock you would like to own as a long-term hold.

One could reasonably equate learning about options trading to learning how to ride a bike. However, much like learning to ride a bike, until you get on and start pedaling, you won’t actually figure out how to ride. But unlike being foolish and learning to ride without a helmet, I plan on being conservative, utilizing money and equities I am comfortable with adding the additional option risk.

Intel Corporation – Covered Call

Just before the end of 2012, I sold my first covered call. With an expiration date of February 16, 2013, I sold a $22 call for $0.26 per share, resulting in a net premium of $16.29 with trading costs of $9.71. (HOLY SMOKES! Watch your expenses and how they factor into any trade. I have switched my options trading account to another brokerage as a result of this.)!

My expectation for Intel was that they would remain flat, to down, given the end of year “fiscal cliff” and uncertainty with their revenues, thus justifying my option. My cost basis for the shares is $21.22 per share.

Possible outcomes:

INTC trades for less than $22: I will keep the stock and the option premium. Given a 52 day window on the option, repeating this transaction for the entire year would have net me a whopping 5.3% return and will reduce my overall cost basis of my 130 shares of INTC to $21.09.

INTC trades for more than $22: My shares will get called away; I will keep the option premium and the capital gains. Given a cost basis of $21.22, I will net a return of $94.29, based on the capital gains and option premium. This transaction would result in an annualized 31.1% gain.

In hindsight, this wasn’t the best trade, but a learning experience nevertheless. While no one can predict the future, it appears that the first outcome will likely occur, and my option will expire. As of February 8th, with five trading days left in the option period, INTC closed at $21.00. Going forward, I will be making transactions less on gut calls, and with more analysis to ensure that my total return is worth the risk regardless of the outcome.

What lessons did you first learn while trading options?

Full Disclosure: Long and Short INTC

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  1. Congrats for taking the plunge on your first options trade. By selling the call you risked upside potential in order to squeak out a small profit. At least you learned something and it didn’t cost you money this time. My fees ate into a lot of my options profit last year, over 15%. That’s why this year I’m trying to trade options with higher premiums. I typically only like to sell puts but if I’m willing to trim or lose shares of a company I will sell a call. I look forward to seeing more of your trades.

    • writing2reality says:

      Thanks AAI! Certainly wasn’t my best performance, but I was able to get the feet wet! I have a couple more posts in the pipeline for my most recent two trades, both puts, as well as a brokerage cost comparison. There are some significant dollars to be kept, or lost, just by changing your broker. As far as selling future calls, I will be willing to do so provided that net premium and strike price are something that will “limit” my gains in a better manner than the above transaction.

  2. I know I stumbled my way into options. But with a just a bit of practice and looking at where something went wrong you can make pretty quick improvement. I prefer to just sell puts, although if I’m looking to pare down a position then I have no problem selling calls. I really need to open up another account for my options. The big thing I struggle with right now is when to close out a position. For example the recent KO put that I sold I could have bought back and captured 43% of the premium in about 12% of the days giving a total gain of 1.58% annualized to 41%. I ended up deciding to hold off, although closing out the put would have freed up that $3750 to use for other purchases or puts.

    I need to open up an options account with another brokerage because like you said if you’re selling 1 or 2 option contracts the commission/fees eats up a lot of the profits.

    And thanks for the mention. Congrats on your first option and I’ll be looking forward to see what else you’ve dabbled in.

    • writing2reality says:

      Stumbling would be the best way to describe the first go of it! :) And yes, knowing when to pull the plug, on any investment, is really the hardest decision. How much of a gain is the right gain to lock in? Me? I have no idea!

      As far as the expenses go, I have a post coming out on Wednesday morning that will lay some of those costs out nicely, and do a simple brokerage comparison.

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