The following is an excerpt from Dan Keen's Covered Call Writing: A Low-Risk Cash Flow Money Machine
Price Range – Stocks above $20 are generally not going to give us the best return on our investment, since we have to invest much more money and premium prices will not necessarily be any higher. For example, buying 100 shares of a stock that costs $10 a share then writing a covered call paying a premium of $1 per share, would give you a 10% return on investment (100 shares cost $1,000: 100 shares pays $100 premium).
(Profit / Cost) x 100 = % Return
($100 / $1,000) x 100 = 10%
But an expensive stock will not necessarily pay any higher premium. Buying 100 shares of a high priced stock, say $50 a share, which also pays a premium of $1 per share, would only yield 2% return.
(Profit / Cost) x 100 = % Return
($100 / $5,000) x 100 = 2%
Why risk the extra money to make the same dollar amount profit and a lower return on investment? Unless, it’s a stock that you want to hold long term, such as Coca Cola or IBM, it doesn’t make sense to write covered calls on high priced stocks. Of course, the option writer must always be prepared to give up the stock if called out.
