I will appreciate your response to the following question
I own 1000 shares of POT. Currently the stock price is $ 160.46 I want to generate income and I don't mind if I get assigned.
Given that which is he best option
1) WRITE 10-APR 170 CALL- PREMIUM=$7.90. So Income= $7900.
2)WRITE 10-SEP 170 CALL-PREMIUM=$22.00.So Income= $22,000.
What are the pros and cons of writing SEP CALL? I thank you in advance for your help.
I'm pleased to hear that you don't mind getting assigned. Far too many covered call writers fear that possibility.
The major advantage to writing the September call is that you collect much more cash NOW. That provides greater protection against a further market
The other advantage is that implied volatilities are currently fairly high, compared with their recent history. that doesn't mean that implied volatilities wont go much, much higher. But if you want to sell some options at relatively high prices, then you can do so by selling longer-term options (such as Sep) now.
The major advantage to writing the short-term options (Apr) is that you can earn a much higher ANNUALIZED return. If you are willing to accept the risk of collecting only 8 points in downside protection vs 22 points now, then writing shorter term options provides for the possibility of making more money over time - as you write a new option every month or two until eventually assigned an exercise notice. Risk: a big decline means you will be forced to write calls with lower strike prices, and that's not going to appeal to you at the time.
To me it's always this decision: Do you want to try to earn more money over time, or are you willing to accept less income in return for additional safety? It's your call.
-- Mark D. Wolfinger The Rookie's Guide to Options: The Beginner's Handbook of Trading Equity Options