Today, an unknown party purchased a call option that gives them the right to purchase 100 shares of TDS for $17.50 per share, on or before February 17, 2023. The call cost them $55 ($0.55 per share). Who sold them this contract and collected the $55?
I did.
And I didn’t even have a contract to sell. Hey, that’s how it works; in investing, you can sell something you don’t have.
But I do have the shares, so I have it covered.
Now, I mentioned in a previous post, the idea behind selling this covered call was to provide a little protection from a further drop in the value of TDS and to increase my income as well. I received the $55 in my account instantaneously once the order executed. That’s three quarter’s worth of dividends that I now have just three days into my ownership of the stock.
Here’s the best part. There’s a 75% chance that the option expires worthless to the purchaser. If that happens, I keep the shares – making that $55 premium free money. TDS would have to rise 18% from where it is right now at $14.82 to get to $17.50, and up 21.8% to $18.05 before this transaction ‘costs’ me anything. At that point, I would have been better off not selling this covered call. Let’s not forget, TDS would have to make this climb in just 142 days.
If a couple of weeks prior to expiry, there is an opportunity to roll out the call for another worthy credit, I will do so. If not, I am fine letting go of TDS at $17.50.
For sake of completeness, I’ve added an ‘Option Prem’ column to the Performance page and dropped in the $55 premium (net of commissions) associated with the TDS covered call.