Micron Technology was one of my best performing stocks during the entire covered call options trade. I bought the stock in late March 2013 and opened a total return covered call against the position. You can see my covered call initial opening record on the “New trade – Micron Technology Inc (MU) covered call” page. Under the post you may notice that this trade sparked a lot of controversy among my readers. But I had a plan and clearly outlined what I would do in all possible trade outcomes.
It is one of the most important things every investor must have before placing an order – a plan what to do in every situation of the entire trade. Even a dividend investor must have a plan. It will be a bit simpler than if you are trading, but it still has to be a solid plan.
With covered calls you need to know what outcomes the trade can bring and have a plan how you would react. My outcomes were that
- the stock ends up above the strike price
- the stock ends up below the strike price
- the stock drops significantly below strike price
The question would be what would you do in those situation?
With Micron technology the first case happened and my covered call will execute and my 100 shares of MU will be called away from me. In other words I will be forced to sell the shares.
This was my plan for the first outcome. I want this stock to be called away. I wasn’t planning on holding Micron Technology for long term or as a long term investment. It is not a core of my portfolio.
This kind of trade in covered calls is called a total return.
The other covered call strategy is called a partial return. This strategy is used against the core investments of your portfolio. You are selling covered calls against stocks you already own in your portfolio to generate income. In my case I would be selling covered calls against my dividend growth stocks. And that is what I do not want to do. I do not want those stocks to be called away from me.
Back to Micron Technology. The chart below shows the entire trade.
You can see how greatly this stock performed. One would say I should have kept this stock as an investment instead of trading a covered call against it. The stock provided me with 46% return and thanks to my covered call trade I will only get 13.18% return. Selling now I will give up 32% of my return!
Well, as I was mentioning above having a plan, this wasn’t my plan. I wasn’t planning on holding this stock as an investment. I wanted my 13.18% (or 44.86% annualized return) and $114.22 cash this trade delivered. I do not want more from this stock at this moment. I will collect my money and move on to another trade.