I sold Covered Calls on Harmony (HMY) for the past three months -- the Feb 2008 12.50c, the Mar 2008 12.50c, the Apr 2008 12.50c. They all expired worthless. That means I got to keep the option premiums I received for selling those Call Options for those three months, and I still have the 100 shares of HMY that "covered" the selling of the Calls. I'll also likely sell the May 2008 12.50c in the next week or so, provided I can do so for a decent premium.
The AIM trading method has you "buy the dips" and "sell the rallies". And, it specifies specific amounts to buy or sell at specific prices.
For MY particular account holding of HMY, my next price point to sell part of my holding, 100 shares, is at $12.48. The $12.50 strike price for writing a Call is close enough.
Say that also happens to be your trigger point -- price and quantity.
If not selling a Call, the usual procedure with AIM would then be to put in a Good 'Til Canceled (GTC) Limit Order to Sell 100 shares at $12.48. So, if and when the price gets to $12.48, you are likely to get the sale made. (On rare occasions, your price may be hit but the order not filled because not enough available to fill your order, and then the price retreated.)
Now, say you sell a $12.50 Covered Call against 100 shares. You can't also put in a GTC sell order against that 100 shares. The 100 shares are already potentially "spoken for" as they are "covering" the Call option you sold.
Assuming you hold the Call to expiration -- that you don't buy it back or get called out early on your shares -- only the stock price at expiration is important to you. If the stock price is above $12.50, you will be exercised on. You keep the premium you got, the stock is taken and you get the strike price of $12.50 per share for the stock -- even if the stock price is higher -- even $20.00 or whatever. If the stock price is $12.50 or less at expiration of the option, you keep the premium you got, and you keep the stock.
Now, here is something that happened in those past months. The stock bumped up ABOVE $12.50 a couple of times. But since I had sold the Call against it, not using a GTC Limit Sell order, I still had the stock. That's because by the time the option expiration date came around, the stock price was again below $12.50.
So, you may say, I lost out when HMY went to over $13 in Janary and over $14 in March, only to retreat again. No. That is "coulda woulda" thinking. That assumes that YOU knew and that I SHOULD have known that the stock would go above $12.50 during that period.
If I had not written the Covered call, I would instead have had a GTC limit sell order in for $12.48, $12.50, whatever, and been sold out there ANYWAY. So in both cases I/you would not have participated in the bumps above $12.50. No "coulda woulda".
You are going to sell the stock, in this case for $12.50 -- either by a GTC limit order, or by having it called from you at $12.50. You may as well let someone pay you an option premium to take the stock from you at $12.50 at which price which you were going to sell anyway.
Bottom line: Take the Covered Call income, if you can. Unless you have a time machine or crystal ball.
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Trading Notes: You need a sufficiently large account -- quantity of shares -- to do this. Calculate how much to sell at the next strike price above the present stock price. The AIM calculation should tell you to sell 100 (maybe a few shares less) or more at that price. It goes without saying that you need to have those shares in your account.
If you calculate that you should sell say, 237 shares, you could sell two Calls and place a GTC Limit Sell order at that price for the extra 37 shares.
Make sure the premium you get for Writing a Call is worthwhile. If you are NOT called out, your profit is the option premium you received, less the commission you paid when you sold the Call. And you keep the stock. If you ARE called out, you have paid a commission AND will also have to pay an assignment fee. Make sure before you sell the Call in the first place, that your net proceeds for selling the Call will be worthwhile, taking into account both the commission you paid when writing the Call and the potential assignment fee you will have to pay should the buyer of your Call exercise his option to call you out on the stock. The assignment fee is the way the broker gets money from you when you are called out at assignment. They aren't getting a commission on your selling the stock, so they make sure they make some money however the stock changes hands. Hence the assignment fee.
Do NOT sell the Call Option with a Market Order. There is frequently a large bid-ask price spread. If you put in a Market Order, you will get hosed. I use Limit Orders, good for the day only. If the market is slow for the option you are interested in, the Open Interest and Volume will be small. Sometimes, as soon as you put in a Limit Order, the Market Maker will then move the bid-ask. Resist the temptation to "chase" the price. Leave your asking price in for at least a couple of hours, THEN maybe consider modifying your asking price price if you haven't yet got a fill.
If I still haven't got a fill by the end of the day, I RAISE the price I want to get (ask) and change the order to GTC so it will be in effect overnight and the next day. Doing that, sometimes you can get lucky at the opening the next day. Then, after opening, if still not filled, I will re-evaluate. Keep my asking price as is, or lower it a bit, or forget about it.
If I keep the order in effect, I'll do so for a few days. If not filled soon, probably best to forget about it. Since you are selling an out-of-the-money Call (OTM) you are selling time value only, and that is rapidly eroding, which means that day-by-day, everything else being equal, you will get less for the Call the closer to expiration the option you want to sell is.
You sure don't want to sell a Call and pay more for commission and assignment fees than the premium you would get. May as well just put see what AIM tells you to sell (possibly a lesser quantity at a lower price rather than the 100+ shares at an option strike price) and put in a GTC Limit Sell order for that.
Then, if you still have the stock after "this month's" options expiration date, on the following Monday or Tuesday, start looking at the next month's options to see if you can profitably sell one of those.
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The AIM Stock/ETF Buy/Sell Calculator Price Range Calculation Feature provides a list of quantities of stock to buy or sell at various prices. The calculations are based on Robert Lichello's AIM algorithm using your specific account parameters.
