Practical example of Covered Call writing
In
May 2003 BHP was channelling. This is a step-by-step walkthrough of a
covered call writing strategy that was conducted using Margin
lending
9th
May 2003: Buy 10,530 BHP shares (10 contracts) at $8.55 -
$90,031
at
75% margin means committing $22,112.50 brokerage (0.14%) - $126.53
22nd
May – Wrote Covered Call
Sell
$9.02 May Call Option @ $0.35 - received;
$3,685.50, brokerage; $63.50
2nd
June – Wrote Covered Call (last one expired worthless)
Sell
$9.02 June Call Option @ $0.11 - received;
$1,158.30, brokerage; $66.20
13th
June – Buy Put contract for Insurance purchase
Buy
$9.02 July Put option @ $0.22 - Cost; $2,316.60,
brokerage; $66.20
24th
June – extend the covered call
Buy
back $9.02 June Call Option @ $0.02 - Cost; $210.60,
brokerage; $66.20
Sell
$9.02 July Call Option @ $0.17 - received;
$1,790.10, brokerage $66.20
(cont.)
25th
June – change Put contract strike price (insurance)
Sell
$9.02 July Put option @ $0.35 - received
$3685.50, brokerage $66.20
Buy
$8.54 July Put options @ $0.13 - Cost $1,368.90,
brokerage $66.20
3rd
July – Buy back the Covered Call
Buy
$9.02 July Call Option @ $0.025 - Cost; $263.30,
brokerage $66.20
22nd
July – sold 10,053 BHP shares @ $9.22 –
received $97,086.60
brokerage
$135.90
31st
May – Interest charged for May; $191.58
30th
June – interest charged for June $205.41
31st
July – Interest charged for June $65.77
So
a sum total profit of $12,029.28 was received from committing an
initial margin of $22,112.50