Busy busy July

Hey everyone,
Things have been moving fast in July. I cashed out of Big Lots finally a few weeks ago. Because of the way it moved, there was minimal gain. In the next few days we went into Nike Inc., and didn't do too well.

Nonetheless, we are now into a LEAPS covered write on Dean Foods (DF). For those who are curious what this is, let me explain. A typical covered call involves buying the stock, then selling (AKA writing) the front month call option.

Example:
XYZ stock sells for $10/share. You buy 100 shares, totaling $1000.

Next, you find the front month call option, first one OTM (Out The Money), which in this case would be $12.50 strike. Lets say you are only a couple weeks out from expiration, and therefore the cost of this option is $0.50/contract.

Therefore, selling 100 contracts would yield a profit of $50. $50/$1000=5% ROI/Month.

Not bad. But remember this play is designed for flat or mildly bullish stock. It should be obvious that if the stock value decreases, your core value in stock goes down. And if we see a very bullish move, you lose on profit.

The LEAPS covered write is similar, replacing the stock with the LEAPS (Long Term Equity Anticipation Securities). The benefit here is you spend about 25% of what you would spend buying stock outright. Given our example, lets look how this pans out.

Stock is $10. Therefor, 25% of this is $2.50. 100 contracts=$250.

Selling front month options (per our previous example): $12.50 strike @ $0.50/contract=$50

$50/$250=20% ROI/Month.

The downfall to this play, is our risk graph curves down from profit to losses if the stock price rises too high. This occurs due to a number of reasons, such as delta values, time decays, ect.

The point here is seeing how powerful some plays are. Right now our play is in action. Assuming things swing our way, we will see a $0.80 return per contract.

Until next time.