My First Call Option

My AMD trade was against my rules and I am losing because of it, but I have decided to try out the ability to sell calls with this position.

Basically I bought in at 9.34. I then sold the Jan 18th calls at $10 for $.47. What this means is I give someone the option of buying my shares on Jan 18th for $10, and they pay me $.47 per share for that privilege. What this does is bring my share purchase price down $.47 to $8.87. If the stock trades above $10 on exp day then I make $1.13 per share, but I lose any money above $10. Actually I dont really lose that money, but I lost the potential to have made that money. If the price is below $10 on exp day, then I keep the $.47 and my shares.

The drawbacks here are 2 things. I've essentially locked my shares until they expire (or until I buy the calls back) and I do not protect myself from any downside drops in the stock price.

But the way I look at it is like this: I was only looking for a small gain in the stock, so if the stock trades above $10 on exp day, then chances are that I would have sold it anyway and not made that potential gain. Also, I do not plan to sell this at a loss, as I believe this stock will not go too much lower.

So basically I am giving out a loan to somebody on these shares. At 9.34 a share, a .47 option results in %5 for 40 days. That is actually very good. This seems very simple, but at least I have made the trade, thus forcing me to start understanding this technique. I need to understand what portion of the amount is the time value, and what portion is the implicit value (I think this is all time value since the option is currently out of the money). Also I need to undestand the time decay to get an idea of how much the time value will decrease.

Lets see how this works out.