Monday, March 5, 2012

Harvesting option premium in CSCO

Frequent readers will recall CCI has a small, one-lot position in Cisco (CSCO)  via the Jan 13 $10 Calls (LEAPS).   The intent has been to try to generate income against this leveraged position via selling calls against it. This position was described in more detail at a post done on Feb 9 that can be found here.

Cisco has pulled back more than 3%  in the last week or two.  Seems like that is just the normal churn of the marketplace.  However this pullback and the normal time decay in the option market meant that the April $21 covered calls had fallen to just $.10.   That is not a whole lot of  premium left to harvest over the 6 weeks until expiration so CCI covered the April $21 calls today.  

Overall, this cycle of covered calls generated a  $.21/share. That is a very modest 1% gain of the stock price and a slightly less modest 2.5% gain when calculated against the reduced capital requirement of the LEAPS.  Of course,  that is 5% or 12.5% return on an annualized basis and consistent with the goal for this position of generating income via option premium. 

As a big bonus the LEAP itself is up a very, very  nice 14%.   However, with over $8/share of cash stashed around the globe and what seems like a stable business CCI continues to believe this stock is a good candidate for this type of strategy.   Hence CCI plans to hold the Jan $10 call for awhile.  If CSCO rallies back towards $20 look for CCI to reestablish a covered call against this LEAP  and if it falls towards $19 CCI may add a second lot to the portfolio.

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