Monday, March 7, 2022

Defensive use of Call Option on QCOM

Underlying Security Symbol: QCOM


May I reinforce my investing philosophy, I am an income investor.  I see stocks as chunks of money that I expect to create the income I live on.   In 1991 when I earned my securities licenses, I thought of myself as a bond girl.  And it was a terrific long bull market in bonds.  And I sold into those gains.  I don't own many bonds because I can't live off such paltry interest rates and there is little room for capital gains.  

Therefore, I must use equities to create income and just living off of dividends is dicey as well.  Covered call income makes up the difference.  

Not only do I use covered calls to supplement my income, I also use covered calls defensively.  And today's trades are an example.

I have quite a bit of Qualcomm and I have made a lot of money from the calls and from the capital gains of shares that have been taken and from the dividends.  Qualcomm is weak today but still above my cost basis on a lot that I bought in January, 2021 at $151.60.

I had a $200 call with a March 18, 2022 expiration.  I received $2.81 for selling that call in January, 2022. The call is worthless because QCOM is trading at $153.07.  

It's okay with me if I lose these QCOM shares. I would be trimming my position and raising capital to use for another call.  This is the defensive part of the trade. Of course, no one is going to pay me $200 for a stock trading at $153.07.  I could just let the call expire in 12 days or I could work it for more income.

If I work it for more income, I wanted a call with a lot of income.  QCOM just might surge to $160. Not unreasonable to hope for my shares being bought from me at $160.  A call buyer is willing to pay about $3.35 for a March 18, 2022 $160 call.  Here is the simple yield on that trade.






Just on this call alone, I received more income than a whole year of QCOM dividends.

I don't want to add more shares to get that juicy call premium so I bought back the $200 call for 9 cents and then sold the $160 call for $3.35.  If QCOM continues to slide, I could be underwater but I do get paid a dividend of 1.78% while I wait for the market to come back and allow me to sell more QCOM calls. 

Here is the total picture 










The key to this defensive strategy is to keep the expiration date short.  In this case 12 days. 

MM  MoneyMadam

Data from and Marketxls

1 comment:

MoneyMadam said...

March 27 update on the 3/18 $160 call. I bought back the call and it cost me 4 cents or $4.00 for 1 contract. I then sold another $160 call with an expiration date of 4/14/2022 and received $3.05 for that call. MM