Today I sold a January, 2007 call option on Oracle at a strike price of $20. The premium was 70¢ a share. Yesterday (when I placed the limit order for the option) Oracle closed at $19.48. After commisions and fees, I recorded 2.83% income on the transaction. On an annualized basis, that's 19.18%. If the option is assigned, I'll earn 4.47%, which is at least 24.53% annualized. For me, this is a win-win.
According to this calculator, the option was worth 62¢. I don't know if that's acurate or not, but it doesn't really matter to me. Option pricing models, such as the Black-Scholes model and the binomial options model, are interesting in the acedemic sense, but relying on them for actual options trading seems speculative. The problem with generic models is that they include volatility among their inputs. But the odds of a stock reaching a certain price are also influenced by the company's intrisic value and the probability of positive or negative news, which cannot be included in a generic model.
Writing a call option amounts to a soft sell of Oracle. I think $20 is a reasonable (though maybe low) selling price, but I'm not ready to put in a limit order. I also don't see any reason for the price to jump much higher in the next two months. Oracle Openworld, when Larry Ellison announced the company's Unbreakable Linux initiative, happened in October. There aren't many big aquisition targets on the horizon. I doubt the second quarter earnings release will be significantly better than expectations. In fact, given the persistent inverted yield curve, I suspect stocks in general will be flat at best.
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