RE: Covered Call OptionsMack10 I haven't sold as you correctly identified any of the stock ...so hence no loss! And I have sold only Covered Calls which if you look into it... are so safe as to be allowed in an RRSP account.
Here is a brief lesson... I own 6500 shares of BMO and 4500 shares of CM my average cost to own CM is 66.59 I sold 24 contracts(2400 shares) of the 4500 shares I hold for the JAN68 Call option for a premium of 7640.05 after commissions... which I get immediately no waiting put into my bank account. Now Jan 16, 2009 rolls around and the stock has gone back up to say for example 69.00...they take my 2400 shares for 68.00 pocket the 1.00 difference and I pocket 1.41 the difference namely $3384.00.
OR...
Jan 16, 2009 comes around and the stock price is 67.50 and they don't take my stock I still get to keep it...and guess what... I get to sell another Covered Call option again if I want to!!!
Now MACK10 you speak of a down side where is it ???
And while I hold the stock I can collect a Dividend!!! Now if the stock drops while I am waiting ...so what I have already pre-sold it... I am Hedged by the value of the premium I have earned. months prior. And I really never wanted to sell it in the first place.
NOW...
Guess what , I sold only 24 contracts or 2400 shares of CM to get that first premium of 7640.05.
I then sold 20 more contracts for the JAN70 Covered CALL and I got immediately no waiting again 5465.05 put into my account.
So lets put the wheels in motion again JAN 16, 2009 comes by and they assign my shares take them because the stock price is over 70.00 I net 3.41 a share for a profit of 6820.00. OR if the stock price isn't over 70.00 I get to keep my shares and again I can sell another Covered Call option...if I like.
Now where is a down side... ? IF the stock goes crazy and goes to say 80.00 I still only can make the contract price of 70.00...or I can BUY back the contracts to close the contract I originally sold and keep my shares which depending on the premium price might be worth it.
And if the stock takes a nose dive and I feel the need to sell (bad idea in any case) all you do is buy back ( by this time a much cheaper call option) to close the first and you still would make money on the difference in the price of the contracts.
I am not trying to give a lesson on options trading but I thought I should let MACK10 know the whole story as he was saying I am not showing the whole picture.
Remember a loss can only happen if you sell for a loss... if you wait cycles out... you will make a profit ...and while you wait ...earn a DIVIDEND and a CALL PREMIUM it's that simple!
So... I say again what is the down side???
P.S. I am about to sell some Covered Call options on my BMO too as soon as I get the right price.
Cheers everyone have great weekend