I purchased 100 shares of Silver Wheaton Corp (SLW) this morning for $10.56. I like the short term prospects of the company, but not the current option pricing, so I did not sell a call yet.
The price of SLW has moved up to around $10.90 so I am weighing a couple of call writing options. The March $10 call is almost up to a point where I realize a 4% return with 25 days to expiration. I would really like to sell the April $12.50 call, but would like to see a little more premium. I hope the stock continues up for a couple of days, then I will sell a call and lock in some gain.
I am finding that for me the optimum by/write combination is when the share price is just below (0-5%) a strike price. Then I look for option premium to give 4-6% per month return until expiration (1 or 2 months out). Then 3 things can happen:
- The stock rises and is called away at option expiration. I keep the option premium and make some profit on the price increase up to the strike price. Good outcome.
- The stock treads water or falls somewhat. I keep the option premium and sell another call for more option premium. Good outcome.
- The stock fall precipitously. I still own an much cheaper stock and there is now premium to sell another call at the same strike price. The losses of this outcome can easily exceed the projected profits of the 1st 2 outcomes. Thus, I need to continue fine tuning my stock picking process for buy/write opportunities.
Number 3 above is the Achilles heel of my strategy. To get the aggressive option premium returns I want I have to trade in high volatility stocks. Stay tuned and see if I can make this work.