American and Canadian investors could sell covered calls on that company’s shares in any account. Concerning cash-covered puts, Canadians could only sell these outside tax-advantaged accounts.
Accordingly, on Monday, August 3, we bought shares of that company in our registered accounts and sold just out-of-the-money covered calls on it, expiry date August 21, the closest available. (C 21AUG20 290.00)
We got $US4.21 per share. (Results for cash-covered puts would be similar.)
Using the formula P/SP x 100 = R in which P = premium, SP = strike price and R = rate of return for the three weeks, we get $US4.21/$US290 x 100 = 1.45%.
1.45%/3=0.48% per week x 52 = 25% per year.
Using the figures from last Friday, July 31, we were counting on a return of more than 2% for the 3 weeks and not the 1.45% that we received!
This tells us that we cannot count on yesterday’s closing figures to calculate expected returns for today.
But a 25% annual return? Who would be unhappy with that? And the company?You need to login to view the rest of the content. Please Login. Not a Member? You can now sign up for a one-month free trial membership. Join Us