More PRPH Shares and Covered Call Income
Not too many days ago I shared that I bought shares of PRPH. It is very rare indeed that one of my investments shoots up in a short period of time. In fact, as an investor, I prefer a more steady upward trajectory. However, there are times when an investment far exceeds my short-term expectations.
I often encourage investors to go slowly when adding shares to a position. It is better to watch the stock climb and buy more than to watch it steadily falling and then add more. However, depending on the overall market, each strategy has a place and I use both.
In the case of PRPH, I bought my first 1,000 shares on August 9. I paid $10.80 per share for that investment. On August 11 I added another 500 shares at $11.06 per share. At this point, given the rise of the shares above $12.00, I start to look at the feasibility of trading covered call options. However, because I would like to keep my initial 1,500 shares, I was willing to pay $12.65 per share to buy another 500 shares, bringing my total investment to $22,655. Those 2,000 shares are worth $25,560 based on the closing price today. That is an excellent short-term potential profit. However, it isn’t a profit until I sell. I had a better idea.
Covered Call Trade for Income
After I bought the 500 additional shares, I offered them to options traders for $14.70 per share if someone would pay me $0.65 per share today. The contract expires October 21, so there is some probability that my 500 shares could reach that price. However, I received $321.59 for the five contracts (100 shares each) after commissions and fees. If the 500 shares are sold, I will receive $14.70 for the 500 shares, or $7,350. My cost for the 500 shares was $6,325.
Therefore, my total potential gain in about 2.5 months would be $1,346.59. Bear in mind, that the remaining 1,500 shares would now be worth $22,050 if they are trading at or above $14.70 per share on October 21.
Let’s pretend the PRPH shares rise to $16.50 per share. The buyer of my options contract will be pleased because their cost basis would be $15.35. This is the $14.70 per share they will pay me (if the shares rise to at least $14.70) and their initial payment of $0.65 per share. So they could buy the shares at $14.70 and sell them for $16.50, making a decent profit with minimal invested capital.
At that point I could sell another set of covered call options, continue to hold the shares, or sell them. This is a powerful way to add cash to an account for future trades. In fact, I could buy 25 shares of PRPH with the cash I received from the sale of today’s options contracts.
I own 2,000 shares of ASRT as a long-term investment. PRPH may be a short-term investment if the price shoots up and then levels off.