I decided to take a partial return covered call trade on Realty Income stock I already hold in my portfolio. If you follow my blog for some time, you may know that I distinguish between the two covered call trades: a total return and partial return.

Total Return Covered Call

The total return covered call is a trade also called “buy-write” where you buy a stock (usually 100 shares or multiples of 100) and at the same time you sell a call option contract. Your expectation is to get called away at expiration and collect a defined gain on the stock plus premium. You have a gain on the stock and on the option contract.

Partial Return Covered Call

On the other hand, the partial return covered call is a contract, where you sell a covered call against a position you already hold in your account to generate income. Your goal is to collect premium only and keep the stock at expiration. Thus you do not want your stock to be called away at expiration.

This is why I like selling total return covered calls over partial returns because I do not want my core portfolio holdings to be called away.

However, I wanted to give it a try and see the outcome.

Realty Income Partial Return Covered Call

Today, I sold 1 covered call contract against the my core holding and there will be three outcomes:

1. The stock ends below the strike price of the option at expiration and the option will expire worthless.
   If that happens, I will keep the stock and consider selling another covered call contract.
2. The stock ends up above the strike price and option will get exercised at expiration.
   If that happens, I will either roll the covered call higher and further away in time, close the contract, or let the stock being assigned and immediately repurchase it back.
3. I can get early assignment and the stock gets called away prior to expiration.
   This typically happens when options get In-the-Money (ITM) or deep in the money and the premium cost to buy the contract back is lower than the dividend payout. In this particular trade the premium is worth almost 9 times more than the dividend payout, so early assignment is very unlikely. If that however happens, I will lose the dividend, but overall gain would be significantly higher so I can immediately repurchase the stock and still make good money.

And here is the trade details:

07/29/2013 14:30:51 Sold 1 O Aug 17 2013 45.0 Call @ 0.41

If the stock stays flat and the option expires worthless I’ll keep the premium and realize 0.7% gain or 13.21% annualized gain.
If I get called away I will realize 8% return ($331.21 net gain) or 374.5% annualized return.

How do you trade covered calls? Do you trade them at all? If you trade covered calls, do you trade them against stocks you already own or do you trade buy-write, total return trades?