Covered call writing trades can be entered by legging-in (buy stock and then sell option) or as a buy/write trade (one net debit limit order). In the latter order, the option premium is deducted from the stock price and the broker is required to execute the trade and that price or better or the trade will not be executed.

 

Real-life example with M.D.C. Holdings, Inc. (NYSE: MDC)

On 2/13/2020, Patrick sent me information on his first covered call trade using the buy/write combination form. Here is his trade:

  • 2/13/2020: Buy MDC and sell the 3/20/2020 $45.00 call option for a net debit limit order of $43.15
  • 2/13/2020: The order was accepted and executed at the $43.15 price

 

Broker trade form showing the executed trade

MDC Buy/Write Trade Executed at $43.15

The brokerage statement shows that MDC shares were purchased at $44.33 and the $45.00 call was sold for $1.18, resulting in the $43.15 debit.

 

Initial calculations using the Ellman Calculator

MDC: Initial Calculations

The trade generates a 36-day initial time-value return of 2.7% with an additional upside potential of 1.5% if share price moves up to the $45.00 strike by contract expiration. This is a potential 4.2% return, 42.6% annualized.

 

What price should we use as the cost-basis for the stock?

When analyzing the stock portion of the trade, the brokerage statement tells us that share price was executed at $44.33. We use this figure for our management decisions. For tax purposes, our advisor may use a different stat depending on the ultimate outcome of the trade.

 

Discussion

Buy/write trades, also known as net debit limit orders are executed at one price. The brokerage statement will break down the share cost and option premium that resulted in the stated net debit limit order.

 

Investment club program board members

If you would like to schedule a private webinar with Alan and Barry, send an email to:

[email protected]

Include:

  • Contact email
  • Contact phone #
  • Club website URL
  • Put ā€œprivate webinarā€ in the header

 

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:

Hi Alan,

I want to share with you my recent stock investing experience. I am focused on monthly covered calls with a sprinkle of puts as well. I have invested $80k in my traditional IRA starting in April 2020. I have generated an income of $17,500 in 4 months. With stock appreciation too, I am right now at $112k. Between this and my Roth IRA, I am generating an income of $5k per month.

Thank you so much,

Murali

 

Upcoming event

1: Private webinar (California investment club)

Covered Call Writing with 4 Practical Applications

Saturday September 19th

9 AM ā€“ 12PM PT

 

2: Money Show Virtual Event

Master Class (2-hour)

Creating a Covered Call Writing Portfolio Start to Finish

I am invited speaker for this event. The Money Show charges a fee to attend ($139)

September 16, 2020

3:45 ā€“ 5:45 ET

For information click here

 

3: Free webinar for entire BCI community (October)

The feedback from our August 13th webinar was so positive, the BCI team decided to schedule another in the fall. I have written over 50 webinars over the years and will select one or write another based on your feedback regarding the topics you are most interested in. Send your ideas to: [email protected]. We will publish the topic, date and time in the near future.

 

Alan speaking at a Money Show event

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