Fri Jan 25, 2008: Selling XMSR Covered Calls

With a possible merger expected soon between satellite radio competitors Sirius (NASDAQ-SIRI, 2.89) and XM (XMSR, 10.99) option premiums are higher than usual.

The XMSR February 12.50 calls, for example, can currently be sold for $105 each for a contract covering 100 shares until expiration Friday February 15th.

This would provide the option writer a 10.6% income for just three weeks, assuming the stock price stays the same.

Chart of XMSR stock

If the stock goes up and is called away at 12.50 for an additional profit, the total return (ignoring commissions) would be 25.8%.

If the stock goes down below 9.94 the covered call writer will lose more on the stock than the option income received.

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