Investors who are interested in using options may wonder, “What's the point?”
In this segment from Motley Fool Live that first aired May 7, Motley Fool Canada analyst Jim Gillies and Fool.com editor/analyst Ellen Bowman discuss the ways covered calls give you choices in implementing your investing thesis.
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Jim Gillies: With options, it's always yes/but. It's always a yes/but.
Ellen Bowman: There's always options. Yeah. I know.
Gillies: I'm ashamed I didn't make that one first.
Bowman: I know.
Gillies: The first thing is, if you want to go to 145 [options on Apple (NASDAQ: AAPL), we go 145.
Bowman: I don't mean daring you this isn't a game of chicken. I kind of picked a number out of the blue but yeah, do it.
Gillies: Let's go 145. I need to change my screen on here, 145. Cue the jeopardy music. You want to go July? You want to go August? Let's go August because that's three months.
Bowman: Yeah, let's go August [LAUGHTER] time is all a blur now. I had to actually think about that.
Gillies: Yeah. It's actually March 378 right now. August $145 call options are going to pay you about $2.70 today. If you own 100 shares, you would sell that call. You will get paid $2.70 per share. You get paid $270. That money is yours to keep regardless. That's a done deal.
Bowman: I can go to dinner if I want to. [LAUGHTER] I'm not going to have to.
Gillies: 270 bucks you go out for a nice dinner too.
Bowman: I've never been out for years. Nobody has.
Gillies: You go pay for your nice dinner. But you now have the obligation to sell potentially your shares, and you'd have to do so at 145. Now, with the stock currently about 130 in three months, you might be perfectly happy to sell Apple's shares for 11, 12 percent higher, 145, right?
Bowman: Ideally, I would only be initiating this position if I didn't think the stock was going to skyrocket. You wouldn't want to do this with the company that you saw had higher upside if you were just going to hold on to it, you want to do it with something that's a little bit more. We were talking about which company we might use for an example, we were talking about like your Costco's or your Apple's, or your big behemoth that aren't necessarily going to. Because your thesis here is not that it's going to the moon.
Gillies: Yeah, you want one of two things to happen. Your thesis is not going to rocket it to the moon. A lot of the big growthy names that you'll see, then the play thing. They were really popular about four or five months ago and are lowest popular right now, but might be popular again in a couple of months, some of the really big growthy names. Don't do covered calls on those, throw them out.
Bowman: But you're saying Square (NYSE: SQ).
Gillies: No, I'm not saying square.
Gillies: [LAUGHTER] But like Apple, because you want one or two things to happen because in theory, when you set up a covered call, you were supposed to be willing to sell your shares at the strike price. Ellen, by doing this in theory, you are saying, yes, Tim Cook, I'm fine selling your fine company for $145 a share by the 3rd Friday of August. But in reality, let's be honest here, there is the theory and there's the reality. Reality is you probably don't want to sell. The reality is if let's say the stock goes to 150, you're probably going to go, “I'm a little bummed than I'm going to.” But the good news is if the stock doesn't rocket, going above the strike price is fine, we can work with that. What you want to avoid is the rocket. Assuming we've avoided the rocket by picking Apple as a smart, intelligent first choice tier. The next thing to realize is that you have, and I'm sorry, I'm going to make the same fun you did. You have options as August approaches.
Bowman: Yes. I do.
Gillies: You can buy back and you of course know this because you got to read about 2,800 of my reports. But it's called rolling [OVERLAPPING]
Bowman: But it's all been theoretical for me. It's all theoretical. I appreciate the refresher. I mean, can send an alert that says roll your covered calls or whatever and understand what it means. But you're explaining to me in my real life what that. August is approaching and Apple is at 150.
Gillies: In that case, you would buy back your August $145 calls, and let's say.
Bowman: I can do that any time till expiration.
Gillies: Any time till expiration. You'd probably wait until almost the expiration.
Ellen Simonson Bowman owns shares of Apple and Square. Jim Gillies owns shares of Apple and Square. The Motley Fool owns shares of and recommends Apple and Square. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.