| The Yield Hunter Let's make some money and sleep well at night |
| Covered Call Writing for Income Article Continued from Page 1 3/31/2008 |
Copyrights 2006-2007 SGM Publishing |
| Update 3/31/2008 |
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Our Real World Example will use Provident Energy (PVX) a fairly large Canadian Oil and Gas Trust.as our
example. DISCLOSURE---THIS IS OUR OWN PERSONAL TRANSACTION--THUS THIS IS REAL WORLD AND
WE DO OWN THIS SECURITY.
Buy 500 shares of PVX 500 shares @ 10.60 $5,300 plus $9.99 $5,309.99
Sell 5 Calls (Sept 2008--$10 Strike) 5 @ $100.00 $500-$11.25 $488.75
By selling the $10 call we have taken any upside (capital appreciation) out of the equation---if PVX stays above
$10.00/Share the shares will be called away sometime near or at the 3rd Saturday of September.
What do we gain? We purchased the shares at $10.60/share---but by selling the $10 strike call we have a net
cost of $9.60/Share. Thus if the shares would fall by about 10% we are still even on our purchase.
Why would be do this? PVX is yielding 13.4% and we believe that it will maintain or even raise its payout thus
we want to do the best we can to lock in the 13.4% yield.
If the shares stay above $9.60/share we have our 13.4% yield locked in for the next 5 months. If the shares are
between $9.60 and $10 at option expiration we will still have the shares as they will have not been called away.
In this case we will then again sell another 5 calls against our shares.
What is the best possible outcome? The shares fall to 9.99 or 10.00 on expiration on the 3rd Saturday of
September. In this case we would realize the following
Net gain on option transaction $+488.75
Net loss on shares (500 @ .60.share) -300.00
Dividends Recd (500 Shares @ .715) +357.50
Total Gain +546.25
10.3% Return in approximately 6 months
What is the next best outcome? At any price over $10.00 on the 3rd Saturday in September the shares will
be called away. The returns will be the same as above less some small amount of commissions.
Additionally if we would like to execute the same strategy we will have to repurchase the shares incurring a
commission in the process.
What are the bad outcomes? At any price under $9.60 per share you are losing capital. If the shares were
$8.90 by September you will be break even (more or less). At a price under 8.90 you are losing money.
So the moral to the example is --- buy a company you plan to hold for the long term and use the covered call
writing premium to add to your income---and most likely over time (years) you are going to come out very good.
Partial List of Canadian Oil and Gas Trusts available with options.
Baytex Energy (BTE)
Harvest Energy Trust (HTE)
Pengrowth Trust (PGH)
PennWest Energy (PWE)
PennWest Energy (PWE)