Let's say evaluate instead of criticize :-).
From April 1st, 3M seems to be in a range between roughly 83 and 87, which means to me that if it's not called away your gain may disappear. On the other hand, if it is called away early, you would not have to be concerned and your gain would be only marginally less, so you're gambling on the stock being called early.
But what if you sold the June 85 call @ 2.50 bid? It would double the return, all other things being equal, although it's less attractive due to the time element.
So, if you want my opinion, it's overall an interesting opportunity, but for me I would probably pass on it since the reward of a quick profit is too much in the shadow of the risks (small though they are).
A more important question to me though is how these opportunities are found. Scouring stock and option tables on a regular basis is time consuming and tedious work. This is probably a silly question, but I was wondering if there were any tools to locate opportunities like these that arise out of a particular and unique combination of factors.
Lou
--- In ConservativeOptionStrategies@yahoogroups.com, Randy Harmelink <rharmelink@...> wrote:
>
> Sorry -- I'll give you a chance to criticize one of mine...
>
> A covered call on MMM.
>
> MMM is at $84.68. The May $85 call has a bid price of $0.96. It goes
> ex-dividend on 5/19 with a dividend of $0.525.
>
> If the stock does run up above $85 by Wednesday, you may get exercised early
> so the contract holder doesn't lose the value of the dividend. However, if
> they do exercise early, you get to keep the $0.96 call premium over a
> shorter time period (plus the $0.32 gain on the stock to that strike price).
>
> In such a case, I like to make sure the extrinsic value of the call is
> larger than the dividend amount.
>
> On Sun, May 16, 2010 at 8:26 PM, Louis <loupi3@...> wrote:
>
> > Randy, you are brutal :-).
> > You're right to the extent that perhaps I should have chosen a stock that
> > was a "good example."
> > But I think I was clear in saying at the very beginning that I chose AXP
> > only because I was looking at it that particular moment, solely for
> > convenience, and that my question was not whether AXP was a good choice, but
> > whether the principle I was considering had fatal flaws.
> > This exchange has helped me to think it out a bit more, but the AXP post
> > was not relevant to the original question.
> > Lou
> >
>
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