Covered calls have been what I’ve been wondering about all day today. Should I do them or not? If anyone ever reads this blog now or in the future, tell me what you think in the comments section. I’ll do my best to explain it in a few steps.
Regular Stock I pay $5 for a stock.
It goes up to $6. I get $1 profit! YAY!
It stays at $5. I don’t gain or lose anything. OK.
It goes down to $4. I lose $1! BOO!
Options I pay $0.25 for an option with Strike Price $5.
Note: Option is right but not obligation to buy at Strike Price
Stock goes up to $6. I get $0.75 profit! YAY!
Stock stays at $5. I lost $0.25! BOO!
Stock goes down to $4. I lost $0.25! BOO! (But not too bad)
Covered Call I pay $5 for stock and sell option with stike $6 for $.15.
Buy a stock, and sell an option to someone else
Stock goes up to $6. I get $1.15 profit! YAY!
Stock stays at $5. I get $.15 profit! YAY!
Stock goes down to $4. I lose $.85. BOO! (But better than straight stocks).
OK, this all sounds good, and somehow the Covered call looks like it has a pretty good advantage. I thought so too when I first looked at this. You gain more if you can guess the strike price, and when you lose money, you don’t lose as much. Win, win, right? Well…. what you are doing is capping your gains. So let’s suppose this last situation…
Stock goes up to $10
Stock: Profit of $5
Option: Profit of $4.25
Covered Call: Profit of $1.15
Kind of limiting right? Oh, and you ask why are options good if these other two exists? Well, you only have to pay $.25 in my example. So you can but 20x more stock with the same amount of money in this example, hence 20x your profits! Not bad… but a dangerous game!
Well besides investing. I started to learn some facebook PHP API. Pretty cool stuff! Got my friend list to print out. And got my game board all traced out in vector graphics ready for FLASH. Now just to make the game, and maybe use a combination of PHP and flash to make this first game.
And finally on top of that, got all my camera stuff settled. I’m now getting ready to get my first SLR camera. The body came in today, and I just won a bid on the lens. I paid a total of $225 for the body, lens, extra battery, charger, and 2GB compact flash. Yeah, it’s an older camera… but still ready to take some crazy pix! And joining the SLR group under $250 is pretty amazing to me! Textures make 3D, and I will make 3D now with my amazing camera!
Phew…. well onto some reading, sleeping, game making, and winning in my life!