Covered call option
Sunday, 03 May 2009 19:37

The Trading Simulator can be used for computing the ROI and the value through time of a covered call option: a share combined with a sold right to buy this share for a certain price.

Suppose you buy 100 shares for \$ 10 per share on 2009-04-05. Then write a call option on these shares, on the same day, with an excercise price of \$ 11. The call option is valid for a full year. In these times with high volatility someone buys your 1000 options for \$ 1.4 each.

On 2009-10-10 the share price has surged to \$ 11. You decide to buy back the option, for \$ 1.35: the loss in expectation value has compensated the price increase of the underlying share.

On 2010-02-23 the share price has increased even more and you decide to sell the share for \$ 12.

These data can be imported into the calculator by cutting and pasting the text from the field below into the field in tab HTML Input and then clicking the button Load into Calculator.

From this simulation it turns out that the cash balance becomes negative when you buy back the options. So we need to add a debit interest rate with the button Add Interest Rate.

In this example the initial balance is \$ 880. The initial balance can also set to 0. In that case you need to set the buy date one day before the start date.

This example also shows input and results for transaction costs and hidden trading costs because of the spread. These costs are high compared to the profit achieved.