The Covered Calls Farm
Planting and Harvesting Covered Calls for Fun and Profit using a Farming Strategy
Please Note: This site does not recommend any specific investments. Please consult with a certified financial planner or brokerage to discuss specific investments. This is not a site for profit but an educational site for a specific call option strategy that is well documented but doesn't seem to be fully understood.
After the Harvest what do you plant?
One of two things are going to happen at harvest time (or earlier if you do a early harvest and receive cash proceeds):
1. The stock is assigned because the current market price is higher then the strike price of the call. Usually on the weekend after
the third Friday of each month when your call expires your account is adjusted to reflect this change. You stock is removed from the account and you receive proceeds
that equal the strike price times the number of shares, less commission. You have already received the premium earlier which is now locked for good.
2. The stock is below the strike price and the call expires worthless. The lien against the stock is removed and on Monday following the expiration weekend
you now have an unpaired stock. You have made a profit on the call but it's offset by any loss on the stock. However, you do not have to sell the stock and can write another call to
help reduce the cost of the overall position. See below.
So depending on which occurs will cause a different series of decision points:
a. Assigned: You will have cash in your account with no stock. You can decide to hold the cash, spend the cash, or buy into the same stock or another position (crop rotation).
b. Call Expires Worthless: You still own the stock and you need to decide if you want to write another call on the stock at the same, higher, or lower strike price and for how long. Or you decide to sell the stock and rotate to another crop (new buy/write).
In both a. and b. you goal is still to make your target profit. So you can follow the process you did for the selection of the position. Is the premium still on target? If not,
you can consider selling the stock and buying into a new buy/write that meets your target. This should be done carefully because depending on the quality of the stock it
might make sense to write another call on the stock and lower your overall investment which still may provide you good results.
More to come in this section......Later....
Under Construction; Enhancement ahead.
Updated: February 12, 2011