Today I decided to get back into position trading via covered calls. I used to have so much fun doing that. I first got into it many years ago after stumbling upon Wade Cook’s book “Wall Street Money Machine” in, of all places, a Christian bookstore in Hershey, Pennsylvania! The store was going out of business, and I picked up Cook’s book for a couple of bucks.
So here was my big trade, today! I bought 400 shares of the J.M. Smucker Company (ticker SJM) for $120.94 each. I subsequently sold 4 call option contracts against the shares for $2.55 at a strike price of $120 and expiration of 3/15. That netted me a premium of $1,020.
Let’s see what happens! Will SJM close above $120 on 3/15 and thus my shares will be called away? That would cut my take by 94 cents per share, but I’d still walk away with $1.61 per share profit for a total of $644. Will SJM close below $120 and thus my shares would not be called away? I’d walk away with my $1,020 premium and still hold the underlying asset.
The question in the latter scenario would be, by how much would SJM be below 120? The ideal scenario would be something just shy of $120. If there’s no new relevant news to persuade otherwise, I likely would sell calls against the position, again. If the price were to sink significantly below 120, I could choose to sell calls or just sit on the position for a while. I wouldn’t have a problem holding SJM. SJM isn’t going out of business and pays a nice dividend. If that’s my worst case scenario, I’m okay with that. I’ll just eat some Uncrustables and ride it out.
With Love,
P. Gustav Mueller, author of The Present