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Covered Call Calculator Usage Many people have asked me regarding the use of our self-developed covered call calculator. I will now illustrate with some examples on how to go about using it, and hopefully you will find it useful in your trading.
For example, we have decided to pick on the stock CISCO for our covered call writing. The stock is currently trading at $25.68. The february $25 call is trading at $1.78, about 30 days to expiration. I will key in all these data into the calculator as shown. Note, only cells in the yellow colour can be keyed in. The blue cells are locked.
From the calculator, we can see that if the stock gets called away on expiration day, we have gained a 4.28% in profit. If the call expires worthless on expiration day, we gain a 6.93% then. Under the intrinsic column, we can see that this option has an intrinsic value of $0.68 and a time value of $1.10. Remember when we trade covered call, we want a high time value compared to the intrinsic value. So for this case, we will take it. Got it?
Suppose on expiration day, the stock moves lower in price to $24.23. Our february call expires worthless. We still hold the stock. But now we will do a roll down into the next month. The march $23.50 call is trading at $1.90. The intrinisc value is $0.73 while the time value is $1.17. Thats fine. One thing here. If the intrinsic value shows a negative number, that means there is no intrinsic value for that option. Similarly for the time value. An exercise of the call in the march expiration day would yield a return of 5.84% while a non-exercise scenario would give us a return of 7.40%. Note that our cost basis under a non-exercise scenario would now be $22.00. Thats our downside protection by writing covered call!
Of course, if in march the call expires worthless again, we will do another roll down just like this. If the stock gets called away, we will start all over again using the calculator. Click here to download the FREE Covered Call Calculator. Hope things are clearer now. Do let me know if you face any other problems using our calculator and good luck in your trading. :)
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