Managing A Covered Call Portfolio - Conclusion
...continued from "Part Two"
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Running Down The List Ctd.
- 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.
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