Covered Calls, Dividends & Passive Income

So my June 19 Microsoft Call (.msfqb) expired out of the money (i.e. the closing price was below the strike price). MSFT closed at $28.55 my option strike price was $29.00. I was hoping to get called out. The stock did get above $29 for a short period of time, but just couldn’t hold on. I wanted to free up the cash to write other covered calls with higher premiums.

Since I didn’t get called out I decided to just sell the stock. The premiums on the July calls were terrible and I saw better opportunities out there. So on June 23^rd I sold 200 shares at $28.03 for net proceeds after commission of $5,600. When I calculated my final take on the sale I actually needed up losing ($149) on the stock since my average costs basis was $28.70. Oh well, I off set that with the $128 I earned on the call for a net loss of ($21.85). A small price to pay given the money I freed-up bought me 2 July 18 Steel Dynamics (STLD) Calls.

I am very bullish on steel. Why, because steel is used in everything. People are talking about the global commodities, infrastructure and energy boom. How will we get more oil? Through new rigs and infrastructure, which are made with steel. People are investing in heavy equipment made by CAT and Deere Co.; they are all made out of steel. I’ll write more on the sectors & stock I like in a later post.

So I have been watching STLD for a while, but already had Nucor and Worthington. The Street.com rates the stock an A+. All of its fundamental and technical indicators (PE, volume, moving average, etc) are strong, but the big thing for me was the premium. The premium on the July 18 $40 calls was $2.25. This means that for 200 shares I would receive $450. Not too bad!!

Since I didn’t own the 200 shares of STLD I had to do what is called a “Buy / Write”, which means I buy a position in the stock and then write the Call, all in the same transaction. Like writing the Call on my MSFT; thought my ShareBuilder® account I can do this all in one transaction. Here is how the transaction went down:

1. I selected to execute a “Buy / Write” on the options trading screen. I bought 200 shares of STLD at $40.02 (200 * $40.02 = $8013.95) w/ commission. Then simultaneously sold a July $40 call for $2.25 (200 * $2.25 = $450) less commission. So I netted $438.05. That a 7.62% return for the month or a 91.42% APR for the year.

My only regret is I should have investigated the “in-the-money” calls on this stock a little more. An “in-the-money” Call is one where the current stock prices is above the strike price of the Call. For example, if I had sold a July $35 when the current stock price was $40.02 it would have been “in-the-money” by $5.02. I would have had more downside protection in case the stock started to fall. Oh well. I’m happy making $400+ on this call and I don’t think the stock is going to lose too much value if any.