A Look At Covered Calls - The End Of The First Cycle

This is an update of my A Look at Covered Calls - The Naked Truth project. A hypothetical portfolio of systematic covered call writing (AKA synthetic naked put writing).

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I've been very busy with my non-trading business and haven't had the time to post here as I would have liked, but I did record some adjustments in the intervening time.

But anyway, we've now come to the end of the first cycle of this project and good news, we've made a profit. I'll get to the bad news later.

FCX

FCX continued to surge higher and with the shares at around $42 I rolled the Jan39, taking a loss of $2.63, out to Jan42 and collecting $1.40 in premium. On Jan 11 we also got a $0.25 dividend which we must add to the results.

Last Thursday I closed out the January calls (as I wasn't going to be around Friday and do not want to be assigned) for $2.30, taking another loss on the short calls of 90c. Underlying was trading at $44.51.

Overall on our FCX covered call strategy we've made ~10.5%, an awesome result until we look a bit deeper.

• Had we have just held the shares, we would be 19.9% up! So the covered call strategy has cost us 9.4% at this point in time.
• We have made money on extrinsic value of the options, but lost heavily on intrinsic by the calls being rolled when in the money.
• We haven't actually made any "income", all of our profit has been due to the strong rise in the stock.

GS

GS continued to surge higher and with the shares at around $100 I rolled the Jan95, taking a loss of $2.97, out to Jan100 and collecting $2.73 in premium. 

Last Thursday I closed out the January calls for $6.25, taking another loss on the short calls of $3.52. Underlying was trading at $106.55

Overall on our GS covered call strategy we've made ~8.9%, another awesome result until again we look a bit deeper.

• Had we have just held the shares, we would be 15.2% up! So the covered call strategy has cost us 6.3% at this point in time.
• We have made money on extrinsic value of the options, but lost heavily on intrinsic by the calls being rolled when in the money.
• We haven't actually made any "income", all of our profit has been due to the strong rise in the stock.

NOV

Last Thursday I closed out the January calls for $5.50, taking a loss on the short calls of $3.14. Underlying was trading at $75.36

Overall on our NOV covered call strategy we've made ~8.2%, yet another awesome result until once again we look a bit deeper.

Same situation as the other two:

• Had we have just held the shares, we would be 16.9% up! So the covered call strategy has cost us 8.7% at this point in time.
• We have made money on extrinsic value of the options, but lost heavily on intrinsic by the calls being rolled when in the money.
• We haven't actually made any "income", all of our profit has been due to the strong rise in the stock.

These are the Feb calls I wrote for the next cycle:

• FCX Feb12 45 call for $1.52
• GS Feb12 105 call for $4.45
• NOV Feb12 75 call for $3.25

Still early days, but what we can glean from this first cycle is that covered calls cost you potential profits in strong uptrends and though still profitable, do not give you any cash income. You could just let the options expire in the money and be assigned in which case you would realize the extrinsic value of the options, but you would only realize cash from the stock to the value of the strike price.

Any way you look at it, the covered calls have cost us money so far.