This trade setup is a Covered Call strategy on Microsoft Corporation (MSFT). Here's a breakdown of the trade:
1. Underlying Asset: The underlying asset for this trade is Microsoft Corporation (MSFT:xnas). The last traded price of MSFT was $343.77 last Friday, July 21st 2023.
2. Covered Call Strategy: The strategy involves selling a call option while owning the underlying asset. This is known as a covered call strategy. The goal is to generate income (the premium received from selling the call) while potentially selling the stock if the price rises above the strike price.
3. Option Details: The call option being sold has a strike price of $360 and expires on August 11, 2023. This means that if MSFT's price is above $360 on the expiration date, the option can be exercised, and you would have to sell your Microsoft shares for $360 each. However, if you don't want to sell your shares and the price is above the strike price as the expiration date approaches, you have the option to "roll" your position. This involves buying back the current call option and selling another one with a later expiration date, and possibly a higher strike price. This can generate additional premium income and give the stock more time to potentially increase in value.
4. Premium: The premium received from selling the call option is $620. This is the income generated from the trade, which you get to keep regardless of what happens with MSFT's price.
5. Breakeven Point: The breakeven point for this trade is $366.20. This is calculated as the strike price plus the premium received divided by the number of shares. If MSFT's price is above this level at expiration, the trade will be at its maximum profit.
6. Risk: The maximum risk in a covered call strategy is if the stock price falls significantly. However, the premium received from selling the call option provides some downside protection.
7. Calculating the yield:
The yield from the premium can be calculated as a return on the capital invested in the underlying shares. Here's how you can calculate it:
1. Capital Invested: The capital invested in the underlying shares is the price of the shares multiplied by the number of shares. In the case of 1 call contract, it's 100 shares at $343.77 each, so the capital invested is $34,377.
2. Yield: The yield is the premium received divided by the capital invested. In this case, it's $620 / $34,377 = 1.80%.
However, this is the yield for the 18-day period until the option's expiration. If you want to annualize this yield to compare it with other annual returns, you can do so as follows:
Annualized Yield: To annualize the yield, you first calculate the number of 18-day periods in a year, which is 365 / 18 = 20.28 periods. Then, you multiply the yield for one period by the number of periods in a year. So, the annualized yield is 1.80% * 20.28 = 36.50%.
So, the yield for this covered call strategy is 1.80% for the 18-day period, or 36.5% on an annualized basis.
- this is a simplified calculation and actual results can vary based on a variety of factors.
- selling covered calls can generate income, but it also caps your upside potential because you may have to sell your stock if its price rises above the strike price. It's important to be comfortable with this trade-off before implementing a covered call strategy.
- If you possess a definitive outlook on the trajectory that MSFT will take, initiating a trade before the earnings announcement could be a profitable move. This is due to the heightened implied volatility, which results in a higher premium to collect. However, if you're uncertain, it might be prudent to hold off until just after the earnings are released and then contemplate new strike levels. While you may lose some options value due to the volatility slump, if Microsoft experiences a significant "gap-up", you could find yourself in a more secure position.
This strategy can be a good fit for investors who are bullish on Microsoft in the short term and are looking to generate additional income from their investment. As always, it's important to consider your risk tolerance and investment goals before implementing any new strategy.