The Covered Calls Farm
Planting and Harvesting Covered Calls for Fun and Profit using a Farming Strategy
This page was last updated: February 12, 2011
BIDU: Buy 100 Shares for $110 (11,000)
Write a January 2012 $110 call = Premium $2,500.
Net Cost = $8,500 ($85.00 downside)
Not a Recommendation but for example only.
Operations Manual Example - Possible Actions
Now Jan 2011 Feb 2011 March 2011 April 2011 May 2011................................................... Jan 2012
Harvest: Stock is at or above strike price when call expires in January 2012. Profit =
$2,500. Call is assigned and stock purchased for $110 or $11,000.
Decide on new buy/write with the $11,000 cash. Might be BIDU again or other position depending on meeting your buy/write requirement targets.
You received the $2,500 at the time of the buy/write and used it for other purchases or cash.
Price below Strike Price at Expiration. Smaller Profit with stock above $85.00.
Profit for call premium locked at $2,500. Stock price is below purchase price by $15.00 for a loss of $1,500 if the stock is sold. Net profit = $1,000 ($2,500 premium - $1,500 stock loss).
New Net Cost of position: $11,000 - $2,500 = $8,500.
Can now write a new call and reduce net cost. Can chose to write another $110 or other strike price. Need to decide the new expiration date.
You may consider closing the position and doing a buy/write in another stock if it is a better overall return considering quality of the position.
Star Descriptions and Action
Operations Manual Examples