How much rent could I get from selling a covered call on RIMM for December?

Question

I want to understand the profits that can be made from doing this.

Answer 1

The first answer gave a lot of good and accurate information, but it had one sentence to which I take strong exception. He said "Any of the Wade B. Cook series books are reader-friendly and will give you great insight into options."

Here is some more information about Wade Cook.

http://en.wikipedia.org/wiki/Wade_Cook

http://invest-faq.com/cbc/warn-cook.html

If that's not enough to keep you away from Wade Cook, do a google search on "wade cook" (including the quotation marks) and you can find over 40,000 more reasons to avoid him.

Now, on to your question:

You need to understand that the amount of profit you can make depends on the strike price you choose for the covered call; it also depends on whether you are looking at just the call or the combination of the stock and the call.

If you consider only the call option, the most you could possibly make from the call is the amount of the premium you receive from selling the call. You will get the highest premium from the call with the lowest strike price, in this case a $97.15 per share premium for a call with a $26.63 strike price. To make that much on the call the price of the stock would have to drop to below $26.63 per share at the close on December 21, something that is extremely unlikely.

If you want to determine the most it would be possible to make onf the combination of the stock and the call option, you would have to look at the call with the highest strike price, in this case that would be the $180 strike price with a premium of $1.49. With the stock at $123.90 as of today's close, that would mean it would be possible to make a profit of $57.59 per share ($180.00 + $1.49 - $123.90) but only if the stock closed over $180.00 on December 21, something which is also fairly unlikely.

All my calculation are based on today's closing quotation's which I obtained from

http://www.cboe.com/DelayedQuote/QuoteTable.aspx

The first answer gave you a more realistic return possibility, but since you asked how much you "could" make my response was based on that question.

You can learn more about covered calls at

http://www.cboe.com/Strategies/EquityOptions/CoveredCalls/Part1.aspx

and more about options in general at

http://www.cboe.com/LearnCenter/default.aspx

all for free.

Answer 2

There are many, many books on trading in options that are available at your local library. Any of the Wade B. Cook series books are reader-friendly and will give you great insight into options.

As to your question - how many shares do you own? Calls and Puts trade lots of 100, so if you have 500 shares of RIMM, you can trade up to 5 calls (or puts) that control 500 shares.

RIMM is trading today at $122ish. The December Calls on a strike price of $123.38 are running around $12.20. Using the example of 500 shares, you could sell 5 Covered Calls of the Dec RIMM at a $123.38 strike price for $6100. Here's the math:
5 calls X $12.20 X 100ea = $6100

But here's the catch: Let's say that by the 3rd Friday in December - the 21st, because all options expire on the 3rd Friday of the month - the price of a share of RIMM is $122. In this case, because you can purchase it cheaper on the market, you will probably keep your shares of RIMM and the $6100. So you just pocketed $6100. Not bad.

BUT...let's say the price of a share of RIMM is $130. Well, then, someone can now buy your shares at $123.38 instead of market value of $130, and so you are forced to sell your shares at the $123.38 strike price. You have forgone the profit difference: $130 - $123,38, but remember, you were paid $6100 for that difference.

You will need to know your cost basis on your shares of RIMM to ensure you end up selling at a profit. You never know what will happen in the market.

Answer 3

First it's clear to me that you sholdn't even own stock...get "rent" for an option? It's called an option premium. You can go to Y! Finance and look up the value of RIMM Calls at various times and STRIKE prices (they're called option stings). You want to be sure that the STRIKE price + option premium result in profit for you or lock in profit from gains you've already seen. Educate yourself on the markets like the other person said...Pick up some books on investing and option strategies. PEACE!

Answer 4

You really don't understand the basics given that you've asked this question in several different ways.

I don't know what you mean by "rent". Are you talking about theta, which is the second derivative of the option valuation equation and is equal to the theoretical change in value of an option for a single day passing?