On Monday, December 15, 2008 I filled my first [tag]stock option[/tag] [tag]covered call[/tag] trade. However it was very confusing for me and when I reviewed it I didn’t understand what I was doing. The [tag]account[/tag] results were confusing and I couldn’t see how I am supposed to [tag]make money[/tag] by covered calls.

This table was what I could see the other day and I didn’t get it.

These results were confusing and I wasn’t sure whether I did everything correctly or selected a correct [tag]option trade[/tag]. When you take a look at the trade I sold one [tag]call contract[/tag] for $0.05 and its price rose to $2 which created an [tag]unrealized loss[/tag]. I somehow could not see where the income should be generated from. I dug myself more into books and was searching what I was doing wrong. Suddenly I could spot it. I didn’t have to care what my Gain/Loss results were unless I was going to buy the option contract back. I am going for the [tag]premium[/tag] and then the option shall either expire worthless, so no gain or loss as seen in the last column in the table above will be realized, or the contract will be executed with no Gain/Loss as well. In this trade, the most important is the premium. I could see I chose wrong trade. I will collect only five [tag]dollar[/tag]s on this trade while the stock is showing a loss of $172. Quite bad result! I should choose a call contract with as high premium as possible and I do not have to care what the contract is doing during its life time.

To prove that I understand this correctly I opened more new trades the other day:

Trade #1

I selected AFAM again and I bought another 100 shares at $44.98

I sold 1 call January 2009 contract  .KQAAI of AFAM at [tag]strike price[/tag] $50.00 for $3.60 (now the premium should be $360.00; much better isn’t it?)

Trade #2

For this trade I selected a [tag]cheap stock[/tag]. Since I have to buy shares prior writing the call contract, why to spend too much money? I am thinking about trading [tag]stocks[/tag] within a price range 5.00 – 10.00 dollars.

I bought 100 [tag]Citigroup[/tag] [C] shares at $7.60
I sold 1 call January 2009 contract .CAI at strike price $9.00 for $0.47 (the premium should be $47.00)

Trade #3

I wanted to check how important it would be to select the proper [tag]OTM contract[/tag] and how close I could go to ITM level. So I selected the very first OTM contract:

I bought 100 Citigroup [C] shares at $7.60
I sold 1 call January 2009 contract .CAQ at strike price $7.50 for $1.05 ( the premium should be $105.00)

If my expectations are correct I should get $517.00 gross premium. If the market rises by that time so the stocks rise above or at the strike prices, shares will be sold and I should get some profit off of the stocks as well.

I will continue playing with the option trading on this virtual account for a while and I am planning to start trading real [tag]money[/tag] at the end of February 2009.

If you want to know, how my stock option trades are doing, click hereto get regular updates.

Note: This is a [tag]virtual trade[/tag] for learning purposes.

This morning I have:
bought 100 AFAM @45.79, total [tag]market value[/tag] $4,579 and
sold 1 .KQAAJ @0.05, total market value -$5.00

I will write more about this [tag]trade[/tag] later.

If you want to know, how my stock option trades are doing, click hereto get regular updates.

As I said, I am not experienced in [tag]stock options[/tag] at all. I have never traded it, but I really want to. As many books or literature say [tag]options[/tag] can be a great [tag]source of income[/tag], among other [tag]strategies[/tag]. There are many option strategies, maybe hundreds or thousands of them. I am looking for only one: a [tag]strategy[/tag] which can provide me with a sustainable income, which I plan to reinvest back either into [tag]stock options[/tag] or [tag]stocks[/tag] themselves.
Read More