Lehman Covered Call - Update

So that was an interest two weeks for the Lehman stock as my covered call wasn’t executed….As you may recall, I entered into a covered call paper trade for 2,000 shares of Lehman (LEH). When I entered this trade, the stock was trading at $32.29 and I sold call options at $25 for a margin of safety. In the last two weeks, that margin of safety quickly disappeared due to a few items:

- Raised new capital at a diluted price

- Warned of a $2.8 Billion quarterly loss

- Downgraded by Merrill Lynch

With all of this volatility, the stock closed on Friday 06.20.2008 at $24.20, $0.80 below my $25 target. So what do I do now is my next question. I basically have three options:

#1. Sell the 2,000 shares in the open market at $24.20. This will still result in a $320 profit (not counting any transaction or taxes). Even though this trade didn’t go as planned, it still outpaced the S&P 500 performance of -3.1% over the same period.

#2. Hold the stock and hope it increases to $25 or beyond. Since that is a 3.3% increase from the closing price, I am not a big fan of this option due to the volatility of the market, the financial industry, and the stock.

#3. Sell another set of call options. Looking at the next month’s call options, I would probably setup a similar strategy as the previous one and look to sell deep in the money call options. The call options at the $17.50 strike price are trading at $7.55, resulting in a total price of $25.05. At the $17.50 price, this creates a 27.7% safety margin from the last price.

Weighing all of the pros and cons of each scenario, I select to go with Option #3, selling another covered call. I know some of you are saying that I should take the $320 gain from Option #1 and call it a day, but with the new raised capital I feel like the risk/reward balance is in my favor with option #3.

So these new options will be expiring on 07.18.2008, please be sure to check back or subscribe to see if this second attempt will prove to be successful.

Author disclosure: At the time of posting, I am neither long nor short LEH. This trade is a “paper” trade and is being used for educational purposes.