I own a fair amount of AMGN in the 80's. With its current price in the 40's do you recommend writing covered calls? I would only be interested in giving up the stock (taking a
loss) in the 70's. Any advice?
That's a tough one.
1) If you are only willing to write call options with a strike price over 70, there is essentially nothing you can do. There is a LEAPS 70 that expires in Jan 2010. With the stock near 42, you can probably get $0.90 for it. That's a very small premium for an option that expires so far in the future.
2) If you truly want to sell this stock in the 70's, you must recognize that you are looking for a 75% increase from today's price. Here is a question for you: If your goal is to make 75% over some unspecified period of time, is AMGN the stock you want to own? I have no opinion on this, but is there one (or more) stocks that you believe will perform better than AMGN in the future? If yes, then here's another question: Does it really matter whether you earn that 75% from AMGN or from another stock?
3) If you want to take a chance, the best you can do is to write covered calls with a lower strike price and just hope that the stock doesn't rise through the strike price. Of course, it it does, you will have a nice gain from today (and isn't that what investing is all about - making money from today onward?)
4) If you accept the idea of selling calls with a lower strike price, there's still a major problem. AMGN is not a volatile stock and the prices of its options are relatively tame. If you were to sell an Oct 55 call - a full 6 months in the future - the premium is less than 50 cents. Is it a worthwhile sale? It would take many, many years of selling 50 cent premiums to reduce your cost basis to an acceptable level.
Bottom line: This stock is not a good candidate for covered call writing for someone who wants to try to earn 75%. If you want to own this stock and are willing to accept that you will never recover this specific loss, then you can choose to write a lower strike call and collect some premium while waiting for a rally in the stock price. Sorry that I have nothing better to offer.
Mark D. Wolfinger
The Rookie's Guide to Options:
The Beginner's Handbook of Trading Equity Options