Tuesday, April 29, 2008

Sold Call Options on BWLD

Sold a couple of May covered call options on BWLD. From a realised gain perspective it's a certain win - I bought the stock at less than $25 and I received $2 per option. So if the stock is called I make a gain on the options and the stock and if the options expire worthless I just make a gain on the options. From a true economic perspective, though, I lose notionally if the stock expires above $27 or below $23. But even that isn't so clear cut, as maybe I would have sold anyway before the stock reached $27 if I hadn't sold the options (in the case where the stock is destined to keep rallying) and yesterday the stock was above $25 and I could have just sold then which will have been better than selling the option at expiration prices less than $2 below yesterday's price ($24 and below - assuming the stock is destined to fall). Sometimes, working out what the opportunity cost is is not so clear cut. Taken to the extreme, the opportunity cost of making any investment is not investing in the best performing asset available. But would you have really invested in that other asset?

The model is very unclear here about direction. I am guesstimating that a steeper downtrend will start around the FOMC announcement on Wednesday before the next leg of the rally gets underway. Towards the bottom of any downtrend I'll start implementing my put selling strategy.

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