Increasing Returns with Covered Calls
Not that you asked, but stocks trading flat can have reasonable returns
Even during bull or bear markets there are some assets that trade flat, which is simply a price that is not fluctuating much. In the JNPR stock chart above, from 2015 through the end of 2019, the stock stayed between $21.24 and $32.23, with an average of $26.35. People who bought at the low and sold at the high did well. The stock traded flat, though, mostly from $24 to $28.
This expanded view continues the chart through July 2, 2021. The red arrow is pointing to August 3, 2015, when the stock was bought at $28.35 with the specific intention of selling it on September 4, 2015 at $29.5 via a covered call. A covered call is summarized as
To execute this, an investor holding a long position in an asset then writes (sells) call options on that same asset to generate an income stream — Investopedia
While buying 500 shares at $28.35 per, and selling at $29.50 is not a large gain, coupled with the option premium, the target was a 5% gain in one month. While this pales to riskier investments, this type of option investment is generally considered safe, to the point of the IRS permitting it in certain retirement accounts.
A quick win was the goal, and the wanted results were:
- $575, from increase in stock price
- $139, from option premium
- a total of $714 gain against $14,175 investment is a 5% gain in one month
The wanted results was 5% in a month, or the rough equivalent of 80% in a year. (To factcheck that math, it is 5% compounded growth for 12 months: 1.05¹² = 79.58.) No one is mad at a 80% annualized return rate.
But that is not what happened. The stock was not above the strike price of $29.50 on the expiration date of September 4th. The covered call expired without the shares being sold (or called)
Next Steps
After the covered call options expired there were three paths to take
- sell the shares
- hold the shares
- hold the shares and sell a covered call against the shares
The third path was taken.
This time a higher strike price was selected, and an expiration date further out. Those were $30 per share, expiring on January 15, 2016. The options premium from that covered call was $214.18.
Those shares were not called away for those options either. The cycle repeated itself again. And again. And again.
In total, with the same 500 shares, there have been 24 covered calls sold with the premiums totaling $4,143.49. A table of the transactions is at the end.
The premiums have returned 29% of the original purchase price. It’s almost like a dividend paying stock.
And JNPR is a dividend paying stock.
JNPR pays a quarterly dividend, increasing from 10¢ per share to 20¢ per share from 2015 through July 2021. In total, $1,840 has been paid in dividends.
Results
While the goal was a 5% return in a month, the return in the last six years is 5.44% compounded year-over year. We know this from the Compound Annual Growth Rate calculation covered here:
For JNPR the CAGR is:
While the JNPR stock is valued $675 lower (Start Value minus Share Value) compared to the purchase price, the Option Premium has helped keep this investment paying off.
Wrap Up
Investing is making a best decision of how to increase the value of your money. Sometimes those decisions go askew. A loss is certainly acceptable even if not desired. However, when the stock is trading flat, there gains are possible.
The return of 5.44% is not awesome, given the growth of standard indexes like the S&P500 in the same time. The initial goal was not met, so pivoting to repeating covered calls has not just preserved the original investment but has returned nearly 30% of the initial purchase.
Table of Covered Call Transactions
This article is not a tutorial on Covered Calls. Noting that, one item to call out is that in the 24 Covered Calls, only three times was the strike price below the stock purchase price. This is used to help minimum any losses, if it came to that.
Too long, don’t read …
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.
