CSCO Covered Call June 2014

Type: selling covered call
Reasoning: I’m trying to generate some additional income. CSCO pays its dividends in January, April, July, and October. They pay just over 3%, meaning that I’m generating just over $20 per quarter in dividends (with my 106 shares). My current cost basis for CSCO is $24.46. CSCO’s 6-month high was around $25.17. The strike price of the call I’m selling, which expires in August, is $25, or a 2.2% premium over my cost basis. If the stock price stays stagnant or drops, I’d collect not only the approximately $20 dividend payment in July but also get to keep the entire premium received from the covered call. I am missing out on any gains above $25, however.

The premium of $0.62 reduces my cost basis even further to 23.84, meaning that if the stock were to get called away from me at 25, I’d still walk away with a capital gain of around 4.9%. I like CSCO’s dividend growth prospects so I’d probably reinvest back in them, if they hadn’t gotten too highly valued.

This covered call sale is taking place within my Roth IRA. I have a few other stocks in there (KMI and AVA) in which I also own over 100 shares and could theoretically sell covered calls against as well. However, the premiums just haven’t quite been worth it yet. I’ll keep watching them this summer to see if anything changes.

06/20/14 STO 1 CSCO Aug16 2014 25 Call @ 0.62
Comm = 9.71
Credit: 0.62

This trade could turn out a few ways:

Max Profit $62 – $9.71 = $52.29 Max profit occurs if CSCO is less than 25 on expiration day, which is August 16. Max Profit = Net Premium Received – Commissions Paid
Max Loss unlimited Max loss occurs if CSCO drops to $0. In that case, my long stock position would lose all of its value. However, I would get to keep the premium from the covered call sale so the maximum loss is actually less than if I had not sold the call. Also, if CSCO drops a ton I could buy back the covered call for very cheap. Max loss = Premium received – Entire value of long stock – Commissions Paid
Breakeven Point 23.84 Breakeven Point = Purchase Price of Underlying – Premium Received

Please see Scott’s Options to see all my current and past option trades.

Update (8/16/2014): While earlier in the month it was looking like CSCO would get called away from me, the stock closed at under 25 last night and subsequently expired worthless. I got to keep the entire $52.29.

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