Monday, June 6, 2011

Covered Call on SLV ETF

Today I will use a covered call strategy on the Silver ETF (Exchange Traded Fund) weekly options. The trade will be conducted in a Virtual account.  I am going to use this as an "Educational Example". I will document the results and create a an E-book/Report called How to Treat Stocks Like Rental Property.

Let's take it step by step.

Step 1.
Log in to your Virtual account, and choose the stock that you would like to use the covered call strategy on. In this case, the stock will be the Silver EFT (Ticker symbol: SLV). For a better view of the pictures below, just click on them.

Step 2.
Buy 100 shares of SLV and Sell 1 contract. By purchasing 100 shares of the stock, you now have the ability to rent the stock out. When you sell the contract or option it is like the buyer of a property renting out the property.

Step 3.
Collect the premium/rental and wait for 1 week. One of two scenarios will occur. Scenario A: the stock will be above the price you rented the stock out at, and you will be paid the price of the stock that you rented the stock out at plus the premium/rental (AKA->being assigned or called away).  Or, Scenario B: The stock will be below the price you rented the stock out at. If scenario B occur you will be able to keep the stock and keep the premium/rental (AKA->being unassigned or uncalled).  

If you want to see an example please look at the article on Covered Calls.

In this Educational example, I purchased 100 shares of SLV at 35.86 per share plus a 10 dollar commission for a total of 3585.95. Next I rented out a 1 week contract for some to purchase this stock from me at 36 dollars. I received 68 dollars minus a commission of 14.98 for a rental income of 53.02.

If Scenario A occurs, I will receive 3600 dollars in my account and keep the 53.02 dollars in my account in 1 week. If Scenario B occurs, I will keep the stock, the rental, and re-rent the stock out the following week. What's going to happen?  Let's follow the trade and check for the results in 1 week (06-13-11)