Managing A Covered Call Portfolio - Conclusion

• Akamai Technologies is also in good shape, considering that expires in 43 days. It offers a 27.6% per annum return (column I), downside protection of 18.2% and profit protection of 11.2% (column K).

• The out-of-the-money covered call on Cognizant Technologies has more then 4 months to run. It offers a 15.2% annualized return and downside protection of 5.1%, both of which are perfectly acceptable.  Moreover, it offers a maximum profit of 14.6%.  This is how much you would make if the stock ended up at $75 or above on January 20, 2007.

• The out-of-the-money covered call in DIRECTTV is another story.  Its premium has dwindled to only $0.5 and it now offers only a 1.0% per annum return.  One might consider rolling down and out to the $17.0 strike January call that offers a per annum return of 10.1% and downside protection of 12.9%. 
  

• The Advanced Micro Devices October $19 covered call has moved sharply in-the-money and is now yielding 8.9%, with 26.6% worth of downside protection.  Although its profile is attractive, one might consider rolling this up and out to January $22.50 which yields 30.7% and offers 17.10% worth of downside protection  

• The last position in Figure 1 is Archer Daniels Midland. It offers a maximum profit of 13.4% and a slightly better than money market return of 5.5%. However, its downside protection is only 0.6%.  One probably would want to take a more defensive position with this covered call such as rolling it out to the December $40 strike at $2.80, which offers a per annum return of $30.6% and downside protection of 7.0% or the even more conservative $35 strike at $6.0 offering a 12.1% per annum return and downside protection of 15.0%.

• Note: Your decision to roll a covered call (as opposed to closing it out entirely) should depend on a combination of your current outlook for the stock, on the covered callís returns and on the downside protection that the covered call offers.  When looking at a particular covered call, you should seriously consider whether the underlying stock position is worth keeping and whether current premium levels warrant writing calls against the stock.    

About Lawrence D. Cavanagh

Lawrence D. Cavanagh is Editor (and Senior Analyst) of The Value Line Daily Options Survey. The Value Line Daily Options Survey offers evaluations and rankings on virtually the entire universe of regularly listed equity and ETF options, using the Value Line common stock ranks and proprietary volatility forecasting methodology. Before joining Value Line in 1991, Mr. Cavanagh was an options strategist for Capital Market Technologies (subsidiary of Elders Finance), helping design long-term synthetic foreign currency and gold option hedges. Before that, he was Director of Foreign Currency Options for the Chicago Board Options Exchange. Other work experience includes Dean Witter Reynolds (VP, Senior Currency Analyst), European American Bank (Director of Currency Forecasting) and the Federal Reserve Bank of New York (Assistant Economist).