The Investment Road to Freedom

March 10th, 2012 at 4:57 pm

New Buy – Covered Call on AMD

Friday saw me make my second purchase of March as I added 100 shares of Advanced Micro Devices (AMD) at $7.64 a share for a total of $772.95 including commissions. I then sold a covered call contract against the stock with a strike price of $8 to expire the 3rd Friday in July. A covered call contract contains 100 shares and I received $0.61 per share so after commissions my account was credited $46.02.

I paid $772.95 for my shares but received $46.02 making the break even price $7.27! The stock closed at $7.58 on Friday. So why do Covered Calls? AMD does not offer a dividend but writing a CC creates a nice steady income. If you do a Covered Call on a dividend paying stock then you are increasing the income even more. So what happens if my AMD shares stay at the same price or stays below the strike price when the expiration date comes around in July? I will not only keep my 100 shares but I keep the premium I received for writing the call ($46.02). If this happens my return will be a impressive 6% and I can then write another call, further increasing my income.

Now come the expiration date if my AMD shares are at or over the strike price of $8, then my stock will be called away from me and I will have to sell at $8 per share – even if the price at that time is higher. Again I keep the premium received ($46.02) giving me a 6% return but I also get the profit as the stock goes from $7.64 to $8 but not any higher. This will give me an additional 4.7% making my total return 10.7%.

Now I work in IT so I am familiar with AMD. They have long been in the shadow of Intel and are never going to claim that number 1 spot. But with a new CEO at the helm and the recent acquisition of SeaMicro, a small company with a highly regarded technology that allows servers to operate more efficiently while consuming less power, I think they are moving in the right direction.

 

 

 

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