Fine, we will go with covered call.

The first trade will be with Ford $2.13 today.
There are a couple of reasons for Ford(F).
Ford will go up, I believe.  Secondly, it is over $2, so you don't get hit with extra TD fees.
Today a covered call at $3 Nov 08 cost @$.17. Thats a premium of $17.00 on this trade.
By end of Nov, I see F @ $2.50.
So, my gain will be .37 on 100 shares plus $17.  About 20% I think.
Is this correct? Any pros out there?

In your messages, you probably want to reference the option symbol, so the F Nov 3 Call is "F KG"

The market is down this morning, so the current F ask is $2.08 and F KG bid is 0.11. However, volatility is very high, so it's a good time to be selling options if you're careful.

You have to consider your transaction fees, especially if you are only going with one contract.

To enter the trade, you'll pay fees of $4.95 for the stock plus $4.95 + $0.65 to open the option, for a total of $10.55. To close the position, if you have to buy back the contract, you'll have another $10.57 (adding the penny for the SEC).

So to enter at current prices, you have:

• Buy 100 shares F at ask $2.08 = $208 + 4.95 = $212.95
• Sell 1 F KG at $0.11 = -$11.00 + 4.95 + 0.65 = -$5.40
• Total cost of position = $207.55

Best return will be if F closes at $3.00 at expiration. The contract will expire worthless and you can close your position in F:

• Sell 100 shares F at bid $3.00 = $300 - 4.96 = $295.04
• Total profit = $82.09 (38.6%)

If F is above $3.00, you will be assigned, so your profit will be the same, but you would have missed out on the additional profit available from being able to sell the shares at market.

Break-even would be when the stock closes at $2.13 on expiration. At that point, the contract is worthless, and to close out the position:

• Sell 100 shares F at $2.13 = $213 - 4.96 = $208.04 (approx what you paid to enter)

If the stock closes below $2.13 at expiration, you will have a loss.

So fees just eat you up here. If you are bullish on the stock, it would be better to just take a long position and forget about the covered call. You can reduce the fees by taking a larger position.

Good answer Govols.
A long time ago I learned that broker fees eat up your % return, so I'm with you.

Our thinking is that Ford will be @2.50 in 50-60 days. When the option expires, we will buy another call at say 3.50, use our existing shares to cover it. Is this a foolish strategy? We believe Ford should be priced at @ $5, but its not going to get there any time soon. So, we wanted to ride the wave all the way up, making extra return by getting the premium off the call.

Buy 100 shares F at ask $2.08 = $208 + 4.95 = $212.95

Sell 1 F KG at $0.11 = -$11.00 + 4.95 + 0.65 = -$5.40

Total cost of position = $207.55

If F closes @2.50 on expiration, we will have to close the option for another $4.96 for total fees of $9.91.

We only got a premium of $11, so thats only $1.09 we would make off the option, we would keep the 100 shares for an unrealized profit of $42. 42+1.09=43.09 or +20.8% vs 20.2% if we are just long on F.
So it looks like this covered call option play is really just a wash and is not worth the risk. We should probably look for other, more profitable plays.  Anybody got any ideas?

Thanks Golax,
I did notice the IV, what exactly is that?
I was going to look it up in The Options Playbook, but they took it down. WTF!
I wasn't even done reading it.

Yep, your right Golax, they logged me off. Its back up.

Getting back to the IV, on a call that would mean I get a bigger premium, correct?
It looks to me that you need a premium .20 to make this worth while.

IV = Implied volatility

It's the volatility figure that makes the calcuated option value (according to the Black-Scholes model) match the current price. In other words, it's the uncertainty that the current traders are expecting with the future price of the underlying.

IV is a major factor in the price of an option. The higher the IV, the higher the price.

IV is not an expectation of the direction of the change (up or down), it's an expectation of the size of the change.

165% is very high, which means there is a lot of uncertainty. Sellers are asking for a lot of premium for options, because prices are fluctuating a lot and the seller has risk if the option goes in the money. If you're a seller, it's nice to be getting a lot of premium, but you're taking more risk for that premium.

One thing to watch is the VIX, which is a broad based measure of overall volatility in S&P 500 options. The higher the VIX, the more uncertainty there is in the overall market. Right now, the VIX is at historic highs, really unprecedented. The market is like a bucking bronco, with the Dow making 300-500 point or more daily swings.

To run the covered calls, you have to answer two questions:

1) If the market decides F is a $1 stock next month, are you still long-term bullish and happy to own it?

2) If the market decides F is a $5 stock at expiration, are you happy to have the stock called away (or buy back the contract) and forego the extra profit?

If the answer to both questions is "Yes", then go for it.

“Really, this is not a bear market. It’s a great white shark market. This is a Jaws market. Rallies are nothing more than churning chum in the water. It’s as if you were to dip your toe in and get your foot bitten off. Swim at your own risk."

-- Byron King, http://www.dailyreckoning.com/Issues/2008/DR102208.html

Wait a minute, F close @$2, it still in the hopper.
Tomorrow it will begin its accent to $5. I still like the F LG.

Want my advice on stocks like this in general?

When I started with stocks 2 years ago, I'd take spare cash of mine and would go throw it into speculative tech stocks that had lots of debt, net losses, and the prospects of high growth just around the corner. This growth was supposed to materialize 2 years ago and it's now finally starting to show up on their income statements.  If I still owned these stocks, I would have rode them down for 2 years for 50% losses or better.

If you want to take a long-term stand on ford, that's O.K. but wouldn't it be better to watch the company closely and figure out when they're on the verge of the turn-around?

The stock wont go from $2 to $5 in a day, they usually don't at least.

I'll admit Ford is much different than a speculative tech stock, it has a brand that is part of America and that's worth something even if the company goes bankrupt.  It also has 30 bil in cash which is nice but a recession will damage their balance sheet and income statement, guaranteed.

If you like low-dollar stocks here's a couple stocks I'm following...

FNSR and OPXT

I'm not saying either is a buy today, but I'll seriously consider buying up some FNSR if it hits 0.50.  I can justify this purchase based on hours of research on the company and industry, even then I think it's 50/50 whether I make a dime off of them.  I also think the stock might bounce at 0.50 to climb back up to 0.60  ;)  nice 20% gain to catch, maybe.

About OPXT, they are in the midst of purchasing another company and I got to see how that works out before I could buy it.  OPXT is the better company, in my opinion, but just as a rule it's bad to buy a stock that's just done a major aquisition.