Practical Example of Covered Call Writing
In May 2003 BHP was channelling. This is a step-by-step walkthrough of a covered call writing strategy that was conducted using margin lending.
9th May 2003: Buy 10,530 BHP shares (10 contracts) at $8.55 - $90,031
at 75% margin means committing $22,112.50 brokerage (0.14%) - $126.53
22nd May – Wrote Covered Call
Sell $9.02 May Call Option @ $0.35 - received; $3,685.50, brokerage; $63.50
2nd June – Wrote Covered Call (last one expired worthless)
Sell $9.02 June Call Option @ $0.11 - received; $1,158.30, brokerage; $66.20
13th June – Buy Put contract for Insurance purchase
Buy $9.02 July Put option @ $0.22 - Cost; $2,316.60, brokerage; $66.20
24th June – extend the covered call
Buy back $9.02 June Call Option @ $0.02 - Cost; $210.60, brokerage; $66.20
Sell $9.02 July Call Option @ $0.17 - received; $1,790.10, brokerage $66.20
(cont.)
25th June – change Put contract strike price (insurance)
Sell $9.02 July Put option @ $0.35 - received $3685.50, brokerage $66.20
Buy $8.54 July Put options @ $0.13 - Cost $1,368.90, brokerage $66.20
3rd July – Buy back the Covered Call
Buy $9.02 July Call Option @ $0.025 - Cost; $263.30, brokerage $66.20
22nd July – sold 10,053 BHP shares @ $9.22 – received $97,086.60
brokerage $135.90
31st May – Interest charged for May; $191.58
30th June – interest charged for June $205.41
31st July – Interest charged for June $65.77
So a sum total profit of $12,029.28 was received from committing an initial margin of $22,112.50
