Beware of the Shiney Object When Establishing Covered Call Trades

Core Insights - The article emphasizes the importance of focusing on annualized returns rather than premium dollar amounts when establishing covered call trades, referring to the latter as a "dollar distraction" that can mislead retail investors [1][7]. Summary by Sections Covered Call Trades - Retail investors often overlook annualized returns in favor of premium dollar amounts, which can lead to poor investment decisions [1]. - The article uses NVIDIA Corp. (Nasdaq: NVDA) as a case study to illustrate this point [1]. Option Pricing and Returns - On June 4, 2025, NVDA was trading at $141.39, with various call options available, including: - The 6/6/2025 $144.00 call with a bid price of $0.72 - The 7/3/2025 $144.00 call with a bid price of $4.70 - The 6/18/2026 $144.00 call with a bid price of $27.20 [4][6]. - The article highlights how the long-dated option's premium can be enticing but may not reflect the best investment choice [4][6]. Initial Calculations - Initial calculations for the three expiration dates show: - A 3-day return of 0.51% (annualized 61.96%) for the 6/6/2025 option - A 30-day return of 3.32% (annualized 40.44%) for the 7/3/2025 option - A 380-day return of 19.24% (annualized 18.48%) for the 6/18/2026 option [6]. - The article stresses the need to focus on annualized returns rather than just the dollar amount of premiums [6]. Investment Strategy - Investors should evaluate initial percentage returns in the context of the trade's time frame, noting that a 2% return over one month is more favorable than the same return over six months [7]. - The article warns against being distracted by high premium amounts from long-dated options and encourages a focus on annualized returns [7].