If you haven't been following this series of posts, so far we've we've defined the strategy, delved into volatility and assignment, and finally prepared a plan in case your stock goes down instead of up. Today's tip explains two different kinds of return, "static" and "if-called". As you'll see, understanding the difference can help you figure out with greater accuracy if writing the call makes sense in your overall investment strategy.
(By the way, today's image is of static electricity -- if you can think of a way to illustrate "if-called", I'm all ears to hear it!)
Tip 4: Compare 'static' versus 'if-called' returns.
You can earn income on your long stock positions with covered calls above and beyond any dividends the stock may pay. 'Static' and 'if-called' returns helps you figure out if selling the call makes sense to your investment strategy.
Static return on a covered call assumes the stock won't move at all -- so you, as the writer, can keep the entire premium as income. If-called return factors in possible assignment -- in other words, what's your return on the trade if are assigned and sell the stock at the strike price and you add in the premium received? These numbers are important to make sure you are achieving your investing goals by implementing this strategy.
TradeKing clients can find 'static' and 'if-called' returns under Options Chains in the Quotes + Research menu. Once in the chain page just choose "Covered Calls" in the Chain Type field.
We'll round off this series next time with a final tip: explaining the benefits and risks of buy-writes. Stay tuned!
Regards,
Brian (OG)
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.
