This Micron Covered Call Could Pay You 63% to Sit and Wait

This Micron call option can yield 63% as you sit back and wait. Acquiring a quality stock and holding it for years or even decades is a tested approach. The biggest companies have historically traded at lower prices, so if you had purchased at the beginning of the year, you would have seen a return of 240%. If you had invested three years ago, the return would have surpassed 1,400%. However, there are alternative strategies to consider.

Selling a covered call is one such approach that allows you to retain ownership of your shares while earning income. By selling a call option on 100 shares of a stock you already own, you profit from the premium if the stock remains below the strike price at expiration. The catch is that you'll be obligated to sell your shares if the stock price exceeds the strike price at expiration. It's crucial to set a strike price you're comfortable with.

Assuming you bought 100 shares of Micron at the current price of $971.66, your investment would amount to $97,166. Next, you must decide the duration of the covered call contract, which typically ranges from 30 to 45 days. With this strategy, you can earn income while maintaining flexibility. After each contract expires, you can modify the strike price or expiration date, or even both.

To illustrate, let's examine your options. From Micron's main page, click on "Covered Call" under the "Option Strategies" menu. You'll be directed to the results page for the nearest expiration date. Adjust the date to your preference; in this case, we'll select September 25, 41 days from now. Now, choose your strike price. For this trade, let's select $1,310.

The screener indicates that you can sell this $1,310-strike call for $14.20 per share or $1,420 total, with a 52% probability of profit. Currently, this call option is approximately 35% out of the money, representing roughly 35% of the potential return from the stock sale should the call be exercised. If the stock trades above $1,310 at expiration, you retain the $1,420 premium and profit from selling your 100 Micron shares at that price, netting about $33,834 for 100 shares.

Should Micron remain below $1,310 at expiration, the call expires worthless, and you retain the $1,420 with no further obligations. Furthermore, repeating this process annually could yield a return close to the yearly average of the S&P 500, all while retaining ownership of your shares. However, selling covered calls regularly may require effort and incur trading fees from some brokers.

Alternatively, you could opt for LEAPS, or Long-term Equity Anticipation Securities, which are standard contracts expiring between one and three years. This could impact the outcome of your trade.