One of the stocks that was on the Covered Call Corner list we published yesterday was Qualcomm QCOM. I thought I would take a look at live Qualcomm pricing and show you how I pick the optimum option to sell in the case of a “Bond Replacement” strategy.

So here we are. I’ve opened up Qualcomm’s option chains in Interactive Brokers. Interactive Brokers actually shows the option that is set to expire first. This one is expiring today, so we don’t want to do anything with it.

We want to look for is an option expiring anywhere from about three months to about six months from today. So let’s go up to the expiration menu and we’ll take a look for another.

I see one expiring in July – that’s about two months away. Let’s take a look at August. The August expiration is 77 days away. We can either use the August or we could look a little bit further – at the October expiration.

Between these two, I would probably be more likely to look at the August especially if we believe that the shares are undervalued so we don’t have to worry so much about the downside risk.

The next step is to take a look at what option to sell specifically. Remember that we always sell At-the-Money (ATM), and to find the ATM strike, we want to look for the Delta. That’s the strike closest to 0.5 on the call side and closest to -0.5 on the put side.

Looking at the calls we see the 57.5-strike call is has a delta of 59.1; the 60 strike call has a delta of 42.5. The 60-strike looks like it’s more heavily traded, so I would probably choose that one to receive a $1.77; remember that we would receive the bid price for selling.

On the put side we look over and we notice that the 57.5 is -41.2% delta; the 60-strike is -57.9% delta, so I would probably look again at the 60-strike option.

Sometimes, depending on where the market price of the underlying is, it could be that the ATM strike for the put is different from the ATM strike for the call; that’s the situation we found for Qualcomm yesterday, but today, it doesn’t look that way.

It looks like 60-strike is the best put option to look at and the 60-strike is trading at $3.15. So, we would sell that and get $3.15 in premium that we would only realize if the stock price was above that at expiration.

These are the steps that I take to find these prices:
1. Look for 3 to 6 months in the future (I usually tend to skew more towards the shorter term), and
2. Then look for ATM strikes.

Okay, thanks for joining me talk to you soon