Friday, May 16, 2008

GE Buy-Write Trade

I followed CoryBear into this one. I opted for a slightly different trade, only because GE fell to $32 today.

My Buy-Write trade on General Electric (GE) just executed. I put in a limit at 31.45, and it just hit.

Bought GE at $32.01.
Sold GE June 32.50 Calls (GEFZ) at $0.56.

First, let me say that I think it's worth buying GE below $32. That said, let's get to some of the details. So, ignoring commissions, each 100 shares costs us $3145. The hope is to get called away at 32.50 next month. I do not believe the ex-div will be prior to the June expiration, unfortunately.

If called away, we sell 100 shares for $3250. That represents $105 gain on $3145, which is a tidy 3.34% for 5 weeks. This is roughly 40.7% annualized return.

If not called away, then I basically bought more GE at a cost basis of $31.45, which I feel is a fine price. If we aren't called away, and the price of GE hasn't dropped significantly, then we can go ahead and sell the July calls at a similar strike and price to further reduce our cost basis, and ultimately provide a nice return when shares are finally called away.

The worst thing that can happen is a GE crash, but if it did, I am more than willing to hold on to the GE shares, as I feel the price I'm getting them for ($31.45) is more than satisfactory.

That's all for now. Enjoy the weekend!

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