Fri Sep 19, 2008: Wow! 50% Return Covered Calls - AIG

Normally the highest return covered calls come with a catch -- high downside risk in the underlying stock.

Today's example is no exception. The stock of American International Group (NYSE- AIG) has already lost more than 90% of its value this year and many people expected it to go to zero. That is, until the government stepped in with an $85 billion bailout.

Now, investors are looking at the stock as a potential buy, and covered call writers are staring at an eye-popping 50% one-month potential return by selling the October 4.00 covered calls.

The breakeven point for this trade is equal to the current price of $3.85 per share minus the current income available from selling the calls at $1.29 for a net cost of $2.56 per share.

If it goes down below that, there will be a net loss.

If it's called away at 4.00 per share, the total one-month return will be 56%.

Until next time, best of luck with your option investments!