The other day I wrote about covered calls and used Google as an example.
I wanted you to see that even in a “worst case” scenario when a stock drops out of the blue, covered calls can help quickly lower your cost basis and get back into the green.
Today I want to show you what might be an example of a stock where covered calls worked out perfectly.
This will be the case, especially if you are using my advice in this article about finding stocks hitting new 52 week highs or this article about how I spot trends.
Using PLTR For Covered Calls
The stock we’re going to use in this example is Palantir (PLTR).
And we’ll even use the same timeframe as our GOOG example from the previous article.
I’m assuming you’ve read that previous article and you now have some understanding of covered calls…
So in the interest of time, I’ll explain less as I go and just give you the numbers.
Round 1
You Purchase 100 shares of PLTR on October 17, 2023 for $17.75
You immediately sell a November 24 $19.50 Call for 93¢.
This lowers your cost basis to $16.82.
On November 24, PLTR closes at $19.20, so the call you sold expires worthless and you keep all the cash.
Round 2
The following week, on November 28, PLTR is trading at $19.50.
You sell a December 22 $21 Call for 55¢.
This lowers your cost basis to $16.27.
On December 22, PLTR closes at $17.41, so the call you sold expires worthless and you keep all the cash.
Round 3
The following week, on December 26, PLTR is trading at $17.50.
You sell a February 2, $19 Call @ 70¢.
This lowers your cost basis to $15.57
On February 2, PLTR closes at around $17, so the call you sold expires worthless and you keep all the cash.
Round 4
The following week on February 6, PLTR is trading at $21.
You sell a March 15, $24 Call for 68¢.
This lowers your cost basis to $14.89.
On March 15, PLTR closes at $23.49s, so the call you sold expires worthless and you keep all the cash.
Round 5
Remember, you started this in mid-October. We’re now into mid-March and you still haven’t had the stock called away from you.
And the entire time you’ve been lowering your cost basis.
March 19th (earlier this week), PLTR was trading at $23.50.
You sell the April 12, $26 Call for 45¢.
This lowers your cost basis to $14.44.
Wrapping It Up
As of right now, in this example, your cost basis on PLTR is $14.44.
Whereas if you hadn’t sold covered calls, your cost basis would be $17.75 (the original price you paid for the stock.)
This means you’ve managed to lower your cost basis by $3.31 or 18.6% just by selling covered calls!
And let’s assume you get called away on April 12th at the $26 strike price.
You will have made 80% returns ($26 – $14.44) / $14.44 = 80% returns.
That’s an incredible return, especially when you take into account how relatively safe using the covered call strategy is, compared to something like buying speculative options.
Trade well,
Jack Carter
