Analyzing a 3-Income Covered Call Writing Trade: A Real-Life Example with Ready Capital Corp. (NYSE: RC) – February 27, 2023
Covered call writing with out-of-the-money (OTM) strikes provides the opportunity for 2 incomes streams, 1 from option premium and the other from share appreciation from current market value up to the OTM strike. Many of our eligible securities also generate quarterly dividends and trades can be established with 3-income stream potential. Such a trade was shared with me by Graham, using RC as the underlying stock.
Graham’s trades
- 6/21/2022: Buy 2000 x RC at $12.08
- 6/21/2022: STO 20 x 7/15/2022 $12.50 (OTM) calls at $0.15
- 7/15/2022: RC trading at $12.40 and the $12.50 calls expire OTM and worthless (no exercise)
- 7/29/2022: A $0.42 per-share dividend is captured, and shares are sold at $13.91
Price chart of RC showing the 3-income streams
Final calculations for the 3 income streams per-share
- Stock credit: $1.83 ($13.91 – $12.08)
- Option credit: $0.15
- Dividend credit: $0.42
- Total net 3-income credit: $2.40
- % 39-day return: 19.87% ($2.40/$12.08)
- Annualized return: 186%
Discussion
Covered call writing is a low-risk cash-generating option-selling strategy. It can be crafted as a 1-income (ITM calls), 2-income (OTM calls) or 3-income (add dividends) potential strategy. This RC example was a winner in every way. When trades turn against us, we have our exit strategy arsenal to mitigate.
Author: Alan Ellman