How call selling can make income

By
A A A

Options volume surged in three little-traded stocks yesterday as an investor used the derivatives to generate an income stream.

About 5,800 November 19 calls were purchased in CB Richard Ellis Group for $0.35 against existing open interest. At the same time, a block of more than 9,000 December 19 calls was sold for $0.80 and $0.85. Total options volume in the real-estate management company was 34 times greater than average.

CBG The trade was probably the work of an investor who's been selling calls against a long position in the shares to earn income. Yesterday's transaction netted about $0.50. If the trader pulls that off every month, the strategy will earn about 30 percent from writing calls even if the underlying stock doesn't appreciate 1 cent.

The risk to this covered call is that losses will occur if CBG experiences a sharp correction because the investor owns the stock. (See our Education section)

Shares rose 0.32 percent to $18.97 yesterday and are up 13 percent in the last three months.

A similar option trade occurred in Rent-A-Center, which climbed 1.38 percent to $27.15. This time, the investor made just $0.15, closing out a position in 2,629 November 25s for $2.70 and selling a new block for $2.85. The contracts were deeper in the money, so there is less risk of downside than the CBG trade.

Perhaps the most interesting move occurred in Kimco Realty, which owns more than 900 shopping centers and strip malls across North and South America. The investor rolled a short position in the November 15 calls to the December 15 strike for a net $0.15.

The company also pays an annual dividend of $0.72, so he or she could earn total income of about $2.50 a year even if stock falls more than $1 to $15.

Based on its closing price of $16.23 yesterday, that's an annualized return of about 15 percent--pretty attractive in a market where Treasuries are yielding less than one-fifth of that.

(Chart courtesy of tradeMONSTER)




The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.


This article appears in: Investing , Options

Referenced Stocks: CBG , KIM , RCII

optionMONSTER

optionMONSTER

More from optionMONSTER:

Related Videos

Stocks

Referenced

100%
100%
100%

Most Active by Volume

65,244,940
  • $7.01 ▲ 4.32%
59,694,359
  • $6.64 ▲ 5.73%
56,099,896
  • $101.32 ▲ 1.34%
56,021,182
  • $7.565 ▼ 0.20%
54,909,199
  • $24.57 ▲ 0.33%
54,670,302
  • $17.02 ▲ 1.79%
51,880,555
  • $17.83 ▲ 55.18%
43,738,434
  • $18.175 ▼ 3.58%
As of 12/17/2014, 02:43 PM


Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com