Tue Jul 3, 2007: OVTI 2% Monthly In-The-Money

What are your investment plans for the second half of this year? How about a 2% return per month?

That is available from buying Omnivision Technologies Inc. (NASDAQ-OVTI) stock at its current price of $18.02 per share and selling the December 17.50 covered call options for $255 each.

Beginning covered call writers are often hesitant to sell "in-the-money" calls, which means the strike price is lower than the current stock price. They're uncomfortable with the idea of being forced to sell the stock at a lower price than they paid to buy it.

But if they're conservative investors, they are in fact concerned primarily with the total net profit. So it shouldn't really matter to them whether that comes all from the option premium income or from a combination of some excess premium ("intrinsic value") and a small loss on the stock. A profit is a profit, and a net short-term capital gain is a net short-term capital gain!

Chart of OVTI Stock

Calculate the percentage return if called away at 17.50, assuming buying 100 shares, selling one covered call and ignoring commissions:

Net investment = $1,802 - $255 = $1,547. Option income = $255. Stock loss = $1,802 - $1,750 = $52. Net income = $203. Percentage return = $203 / $1,547 = 13.1% for less than six months, or a little over 2% per month.

Of course if the stock takes a big drop you can end up holding a net loss.

Calculate the break-even point:

18.02 - 2.55 = 15.47 which is the point below which you'd end up with a net loss at expiration.

If you believe OVTI stock is a good long-term investment, you needn't be troubled if the stock isn't called away in December. You could just hold onto it, or you could sell another covered call after December options expire.

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