Fri Jun 1, 2007: Taser Covered Calls

The stock of Taser International Inc. (NASDAQ-TASR) closed today at $10.63 per share.

September 10.00 covered call options can be sold at the current bid price of 1.50 each, which is $150 per contract for 100 shares.

This could return an income to you of 9.5% on your net investment in a little over three months, as long as TASR stock stays at $10 or higher as of September 21, 2007 -- the third Friday of the month, which is the last trading day for stock options.

Calculate the break-even point:

10.63 - 1.50 = 9.13.

If the stock falls by $1.50 per share you'll still not have a net loss, unlike a straight stock purchaser (who doesn't sell covered calls) who would begin to incur a loss on any decline in the stock price.

The tradeoff is that if the stock goes up sharply your gain will be limited to that 9.5% while the straight stock purchaser will continue to enjoy further gains.

Another approach would be to buy the stock now, but wait for an increase in price before selling your covered calls, which you then might be able to sell for more money, or for about the same money but at a higher strike price.

Some investors might opt for a hybrid approach. For example buying 1,000 shares but selling only five calls instead of ten. In this way they get some immediate income but leave half of their position uncovered for larger upside potential.

One interesting thing about TASR stock right now is the large short position of more than 25% of outstanding shares. Will there be a short squeeze? We'll have to wait and see.

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