I periodically employ a conservative 'out of the money covered call' option strategy when I think I can generate some option premium income and I have a strong probability of retaining the underlying security.

On occasion I will employ a conservative ‘out of the money covered call’ option strategy if I think I can generate additional income without significant risk of having the underlying security getting called away. This strategy is best employed when you:

  • think the price of the underlying security is going to decrease in value or is going to remain below the strike price by the time the option contract expires;
  • do not want to part with the shares you currently own.

I have employed this strategy with success on several occasions with the most recent trades having been on Microsoft (MSFT) and The J.M. Smucker Company (SJM).

I wrote covered calls on MSFT on August 31 2018 with a $115 strike price. These options expire November 16th and given MSFT’s current ~$107 stock price I fully envision these options will expire worthless and I will end up retaining my MSFT shares.

In August I initiated a couple of option transactions on SJM. Those covered call contracts expired worthless so I retained the option premiums and the SJM shares.

Followers of this blog will know that I like to purchase shares with the intent of holding them for the very long-term (perpetuity?). As a result, I write out of the money option contracts. This means the price of the underlying security needs to increase to at least my strike price before I risk having my shares called away.

Since I do not want to have any shares called away I keep some liquidity in our various investment accounts. I would hate, for example, to write December 21 2018 Visa (V) covered calls with a $150 strike price when they are trading at ~$141 only to see the stock price zoom up to a level above $150; I have no intention of parting with my V shares so if V were to rise above $150 I would close out my option contracts.

Naturally, the greater the variance between the current underlying share price and the ‘strike price’ at the time the option contract is placed, the less I can expect to receive in option premium. Some investors prefer to employ a strategy where the strike price is fairly close to the price of the underlying security and thus they receive a far greater option premium. That, however, is not my modus operandi. I prefer to skim some additional income and am not looking to be an active options trader where I need to be watching my investments like a hawk.

When I placed my option trades on November 15th the current stock price of each company was well below the strike price. In my opinion, something dramatic would need to happen for the stock price of these companies to rise to the strike price of the option contracts. While this is certainly possible, I think the likelihood of this happening is slim.

I could have gone further out on the calendar to generate additional premium income (a higher time value component of the option premium) but given my conservative investment nature I am willing to forego some option premium in exchange for less time in which the stock price of the underlying securities can increase to the strike price of the option contracts.

Given my outlook on the US equities market in general and my outlook on certain companies in which I hold a position, I have decided to write the following covered calls which all expire December 21, 2018.

SJM - $125 strike price – generated $1.15/share option premium

V - $150 strike price – generated $0.81/share option premium

Becton Dickinson (BDX) - $250 strike price – generated $1.60/share option premium

Based on the number of contracts written on each underlying security, I have generated a few thousand dollars in option premium.

At the outset of 2018 I did not set any option income target. I have been debating whether I should set an option income target for 2019 but am leaning toward not setting one. My reasoning is that I look at generating option income as being more opportunistic. My success with options is heavily dependent on how accurate I am at anticipating where a particular company’s stock price will be at the expiry of an option contract.

If I were to set an option income target for 2019 I think I might find myself entering less than desirable option trades. Furthermore, I think I would find myself spending far too much time watching stock prices which is certainly not my intent. As a result, there is a very high probability I will just set a 2019 dividend income target since dividend income is more predictable.

I wish you much success on your journey to financial freedom.

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.

Disclosure: I am long MSFT, BDX, V, and SJM.

I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.