E Facebook: An Interesting Covered-Call Writing Candidate

When investors hear about covered-call writing for the first time and the opportunity to generate instant cash flows into their brokerage account, they get super excited about it. However, most retail investors continue to make huge mistakes with this strategy supposing it's a free lunch. Every strategy has its advantages and limitations, no doubt about that, but in the end, it's all about understanding and mastering those aspects to use them in your favor. To learn more about the basics of covered-call writing, you can go to my website where I provide coaching videos for premium members.

In this article, I'll discuss a defensive setup with Facebook (FB), as this stock can be a very compelling vehicle for covered-call writing if you stick to your own targeted monthly return and risk tolerance. In my case, I'd be happy with a consistent initial one-month return of 2%-4% like I highlighted in my portfolio review of January.

Option Selection

Assessing the Options Chain (expiration date is March 15, 2019)

First of all, let's take a look at Facebook's options chain and assess time value returns, downside risk protection, and breakeven levels.

(Source: Seeking Alpha)

Let's see how these numbers play out. Therefore, I need to feed the options chain into the following table:

(Source: Author's work)

It’s important to note that even in-the-money contracts generate annualized time value returns of more than 25% as a result of reasonably high volatility.

For instance, the $160 calls generate a maximum profit of 1.94% with total downside risk protection of 4.3%. This makes a lot of sense for defensive investors feeling the chart technicals are mixed or when the market is volatile. No matter into which direction the price is heading, you still capture that one-month maximized return of 1.94% unless shares drop below $160. Your breakeven level is a comfortable $156.90. On the other side of the spectrum, bullish investors can choose the out of the money calls with a strike price of $170. Selecting this strike allows you to generate a maximum profit of 5.00%, of which 1.31% is time value.

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Barry Hochhauser 1 year ago Member's comment

Nice idea!