Lesson 2: selling covered calls to "sell high"

In Lesson 1, as an application of my sell puts, then calls strategy, I presented the selling of the November $140 cash secured put against FDX (Fedex) in my effort to "buy low." FDX was trading at $140.11 then & I thought it might drop below $140, forcing on me the obligation to buy FDX at the $140 strike price.  I wouldn't have minded doing so because FDX had been over $200 recently, & to boot, I received a $5.60 premium for selling that put.  The $140 strike price - $5.60 = $134.40 net cost represented quite a discount to the $140.11 market price. 

A few days later, FDX dropped as low as $138.38, but a premature assignment forcing me to buy FDX at $140 never occurred.  Since then, FDX has gone-through-the roof.  Today, it traded at $164.66.  My experience since October 2 exhibits one of the compromises of selling puts:  in a strong market, the put seller's gain is limited to the premium received.  The $5.60 represented 4%; 33% annualized.  That's superb, but had I simply bought FDX instead of selling puts, my position would have been up over $24 today!  That $140 put that I sold expires on November 15, & unless FDX tanks to under $140, my sold put will expire worthless, we say.  The $5.60 (plus the money market fund interest on my $14,000 reserved cash) is my only gain.

This brings me to Lesson 2.  Last week, FDX traded at $155.  Chasing the lost opportunity above, let's presume I bought 100 shares of FDX then, at $155.  With FDX at $164.66 today, my reward on last week's buy is handsome.  FDX is up over $8 today, but my fear is that it will pull back.  Yet, I know that it may continue driving upward.  Should I sell FDX?  Should I hold & earn the $0.65 quarterly dividend (1.58% current yield)?  When I'm thinking about selling my stock, I generally think about selling a covered call against it to help me "sell high." So let's review FDX's call option chain when it traded earlier today while FDX was at $164.66:       
              



I'm going to selling the $165 covered call against my FDX shares.  It expires on December 20, 2019, 46 days from now.  I'll receive the $6.75 BID from the call buyer as my premium for selling this call.  Since I own only 100 shares of FDX, I'll sell only one of the December $165 calls against my position.  One call (generally) controls 100 shares, so my total premium = $675.  This $675 settles into my money market CORE tomorrow.  It's non-forfeitable.  I can use it for living expenses, to buy more securities, or to collect money market fund interest on it.  But (like the premium received from selling the FDX put on October 2), this $6.75 is not free.  I now have an obligation to sell my 100 shares of FDX at exactly the $165 strike price, if FDX is higher than $165 over the next 46 days.  If FDX goes back up to over $200, all I get is the $165 strike price; one of the compromises of selling covered calls.  However, I would be "selling high:"  $165 + $6.75 = $171.75; higher than today's $164.66! 

If FDX stays below $165, my covered call expires worthless on December 20 & all I will have earned is today's $6.75 premium; I would not be obliged to sell my FDX shares.  After the December 20 expiration, I can then sell another covered call against FDX, perhaps a call that expires in January, or later in 2020. 

While owning FDX, I'm eligible for its 65 cent premium, paid every 90 days.  Some investors consider the premium received by selling covered calls a nice complement to the stock's dividend.  Today's $6.75/$164.66 = what I call a 4.1% premium yield over 46 days; over 32% annualized.  If I were to guess that today's $164.66 price had a good chance of exceeding $170, I might sell the $170 call instead, & settle for the smaller $4.50 premium. 

By the way, if I sold this December $165 (or $170) call, since I already own the FDX shares, the option is called a "covered" call because if I'm assigned by obligation to sell 100 shares of FDX, my obligation is "covered" by the 100 FDX shares in the account.  If I sold the call without having the 100 FDX shares in my account, the option is called a "naked" call, & a margin agreement would be required in my account to facilitate the potential for borrowing.