Covered Calls for Fun & Income

March 31, 2009

New Position – PRU

I was monitoring the CallWriter “ITM Calls” Real Time ListTM this morning and saw several high return/high downside protection plays. Remember, I am still not sure what type of market we are in right now and I used the ITM Calls lists to protect my behind.

I snapped up Prudential Insurance (PRU) about 11 AM today. It met 4 of my entry criteria and gave a nice return and great downside protection. The APR 15 Call had an IV of 168%! These are the type of trades that CallWriter looks for.

Now I know this is a company in the financial sector, but the Insurance Companies industry hasn’t been as hard hit as the banks. A few weeks ago I did a play on Lincoln National that was a success, so I didn’t hesitate to do it again.

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

PRU 19.10

PRUDZ 5.00

APR/15

14.10

6.38%

26.17%

I use Interactive Brokers to trade. Not only are their fees the lowest I have seen, but their OptionTrader panel makes it easy to set a limit and wait for your price. I just create a tab for the stock, and then select Option Spread, select Buy-Write from the drop down and select the month and strike and hit OK. The OptionTrader panel then gives me the net debit and credit for the trade. Click on the Ask price and the order is created. Select the number of contracts and the limit price. In the case of PRU this morning, the Ask was jumping between 14.15 and 14.23. I selected 14.10 and sent the order. I walked away and when I got back around 2:00 PM, I saw that my order executed at 11:03 AM for the price I wanted. Isn’t that sweet?

I have enough cash for two more plays this month (remember no more than 10% of accounts balance on any one trade, plus 10% in reserve – see my Trading Plan). Picking may be limited since I shouldn’t buy any more in the Insurance industry.

– Jeff

“Happiness is nothing more than good health and a bad memory.” Albert Schweitzer (1875 – 1965)

Covered Call Weather Report – March 31, 2009

Filed under: Covered Calls — Tags: , , , , — Jeff @ 6:54 AM

Partly cloudy with moderating temperatures.

Today I am feeling like a new-born lamb taking its first steps – a bit shaky. With that in mind, I will be looking at Covered Calls that are deep ITM, such as the example blow (from CallWriter Real Time Lists ™. I will be busy again this morning with personal matters (no, no plumbing projects today) and won’t be able to look until around noon – which is my preferred time anyway. The great thing about Covered Calls is that you don’t really have to time the market.

I haven’t tried this strategy yet, but you should check out the new page that I just put up called “CallWriter SuperPut Strategy Explained“. I plan to paper trade this strategy for a few months and I will report back the results in a future post.

BTO Stock

STO Option

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

PNC 26.92

PZHDX 6.00

APR/22.50

20.92

7.55%

22.9%

– Jeff

“Take calculated risks. That is quite different from being rash.” George S. Patton (1885 – 1945)

March 30, 2009

Covered Call Weather Report – March 30, 2009

Filed under: Covered Calls — Tags: , , , — Jeff @ 6:25 AM

2345_thunderstorm_chasing_a_scared_boy_running_homeThunderstorms, some possibly severe.

I didn’t really think this would happen – GM & Chrysler bankrupt? That is scary! I wouldn’t touch this market today with a 10 foot poll! Unless, of course, you are going short and can catch it early enough. However, the one truth about the market is: prices will go up and prices will go down.

With that though in mind, I am sure there could be opportunities today, but I won’t even look until after the mid-day doldrums.

– Jeff

“Nothing endures but change.” Heraclitus (540 BC – 480 BC), from Diogenes Laertius, Lives of Eminent Philosophers

March 27, 2009

Covered Call Weather Report – March 27th, 2009

Filed under: Covered Calls — Tags: , , , , — Jeff @ 6:53 AM

Mostly clear and warmer.

Front Month (current month) Covered Call Writers arm your weapons!

Well the market has had a nice run-up this week. Optimism abounds. The talking heads are claiming the bottom is past and we are on our way up. Only time will tell.

This morning I was cruising through the lists at Call Writer and was particularly intrigued by the Under $10 list and In The Money Calls list. Both of these lists are providing huge downside protection (% of Downside protection = total call premium ÷ stock cost). This number is the one that I will be focusing on – looking for Covered Calls that meet my Trade Plan entry criteria and will give me at least 10% downside protection. In fact, the Under $10 list not only provides large downside protection but also Called Returns of 10% or more!

Will I enter any today? Maybe, but not until later in the day (I have personal business to take care of in the morning – it’s a small plumbing project at my daughter’s house). Mostly I will be focused on entry next week for current month Covered Calls.

– Jeff

“If you have knowledge, let others light their candles at it.” Margaret Fuller (1810 – 1850)

March 25, 2009

Covered Call Weather Report March 25th, 2009

Filed under: Covered Calls — Tags: , , , , , , — Jeff @ 9:50 AM

Cool with a slight chance of rain.

Since I trade Covered Calls using the Call Writer methodology, I am urging caution on initiating any buy writes at this time. Myself? I am sitting on the sidelines, at least for this week.

Almost every stock on a majority of the Call Writer lists looks like the S&P Index below. Since my methodology depends heavily of technical analysis (70%), I am concerned with the Stochastic indicator which is above 80. This is not a tradable indicator according to my Trade Plan. Also note a recent breakout of the downward trend line. These are not contradictory, but may be an indication of a reversal of trend – but it’s too early to go all in.

It’s entirely possible that the trend line needs adjustment, but I need a few more days of confirmation. I would also look for a few more days of closes above the 50 SMA.

In a recent post, I mentioned that I was not planning any Covered Calls this week, since I wanted to wait until we are closer to expiration for April. The chart confirms that statement. Just luck, I guess.

– Jeff

“Don’t knock the weather. If it didn’t change once in a while, nine out of ten people couldn’t start a conversation.” Kin Hubbard (1868 – 1930)

0324-s-and-p-chart

March 23, 2009

Monday After Update

First, some housecleaning items. I have slightly modified my Trade Plan to make it a bit easier to understand. I also noticed that there have been a lot of views, so since I always intended to share this will all my readers, I have added the capability for you to download a Word version for your own use. Look for the file download in the box box at the lower right.

Wow! Big day, huh? All major averages up over 6.5%. You won’t see many days like this. A word of caution, this would have been a very bad day to enter new Covered Call positions as buy/writes. Being the skeptic that I am, I expect a pull back soon. It’s a good day, however, to sell calls on stocks that you would have wanted to sell some Calls on.

Thanks to the Obama administration, the toxic asset announcement gave a very nice boost to LNC this morning. I entered a Limit order for 8.25 just after the market opened. The order executed shortly thereafter. Remember, my original goal was for it to be called at 7.50, so the 8.25 was just extra money in my pocket. My original return would have been 5.33% if it had expired ITM last Friday. Since it didn’t and the stock had a nice pop this morning, I increased my gain to 12.23% – more than double my goal. For those of you looking up this symbol, you will see that it closed at 9.47 today. Since I am very happy with a +100% gain in my return, I cannot look back and say “shoulda – woulda – coulda” and lament over not capturing the total gain. Remember, bulls make money, bears make money, pigs get slaughtered.

I had two stocks with Calls that expired OTM on Friday, X and UAUA. This was a very good day to write Calls against them.

X – my cost basis was 21.39. I sold to open APR 22.50 Calls for 1.60 and lowered my cost basis to 19.79. If the stock is above 22.50 on April 17th, the gain would be 13.69% (not including fees). This more than doubles the original gain.

UAUA – this stock has not been doing well lately. It’s funny (not), I was reading the 10 Commandments of Covered Call trading at the Call Writer site this morning. The one that stood out was #8 where John Brasher says “Don’t let the fact that you’ve noticed a stock on the lists a few times, or even profitably traded a stock before, seduce your judgment. Treat every stock to the same analysis on every trade, even the “good” ones. Good dogs do bad things, and so do stocks.” Well, I have had very good success with UAUA in the past, and I did let that seduce me. Looking back at when I entered this trade, it was in violation of many of my rules in my Trade Plan. So now I am scrambling to recover and will probably end up holding this much longer than I really want to. Yes, this is another confession. To get to the point, my cost basis was 6.49 and I sold APR 5.00 Calls this morning and now my new cost basis is 5.99. Stay tuned on this one, since I may have a month or two yet to get into positive territory with this stock.

Holly Cow! This was a long post!

– Jeff

“I’ve only been doing this fifty-four years. With a little experience, I might get better.” – Harry Caray

March 22, 2009

March Expiration Wrap-Up

Filed under: Covered Calls — Tags: , , , , — Jeff @ 7:15 PM

I have had better months and worse months. In this market, I would consider this a pretty good month.

AFL – Expired ITM for a 4.84% gain. I entered this on 3/17 and it was held for only 4 days.

CLF – Expired ITM for a 4.25% gain. I entered this on 3/17 also.

LNC – Expired OTM. My cost basis on this is 7.12 and the stock closed at 7.31. It’s currently showing some weakness so I will monitor this on Monday before I make a decision to bail or write another call. I have experienced situations like this where the stock recovered in the week following expiration (moved above my cost basis) and I was able to sell the stock for a very nice overall profit. But, this is an insurance company after all.

UAUA – Expired OTM. My cost basis is 6.49 and the stock closed at 4.48. This stock is very volatile and the premiums on Calls are quite high. I don’t plan on taking a loss on this, but I will wait for a bounce before writing another Call, or if the bounce is good enough, selling the stock above my cost basis.

X – Expired OTM. My cost basis is 21.39 and it closed at 19.72. I entered this 1 day prior to Friday’s expiration with the intent of holding for a while. It has a nice dividend and a high amount of open interest on the options.

For April expiration, I have EXM (my problem child), GERN, TXT and USO.

This expiration didn’t leave much cash in my account so I will be less active in April unless LNC and UAUA make a big move up and I can cash out. Because of the volatility in this market, I don’t plan to look for opportunities until the week of 3/29. But, that doesn’t mean I won’t have anything to say between now and then.

– Jeff

“If all economists were laid end to end, they would not reach a conclusion.” George Bernard Shaw (1856 – 1950)

March 19, 2009

One more for tomorrow

Filed under: Covered Calls, Investing — Tags: , , , , , — Jeff @ 12:31 PM

US Steel Corp (X) made a rather large move this morning. As I write this it’s up 9.4%. If you look at my technical indicators, you will see that it’s at the 20 EMA and the Stochastic just crossed 20 yesterday. Historically the stock has done well in this situation, and past performance is all we really have to go with, isn’t it? Fundamentally, this is a solid stock although it’s not doing well in this economic climate. Regardless, they are still paying a dividend of $1.20/year which is an annual yield of 6.3%.

I won’t mind holding on to this for a few more weeks or months, so today I wrote a Covered Call slightly OTM for March. If it finished OTM tomorrow and the price is still inching up, I will wait to write an April call to see if the price moves above 22.50. I have done this a few times in the past and it has worked very well.

BTO Stock

STO Option

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

X 22.09

XOKCX 0.70

MAR 22.50

21.39

5.19%

3.3%

Jeff

“These days an income is something you can’t live without–or within.”

March 17, 2009

Will this be it for March?

I just couldn’t resist. I am seeing options with Implied Volatility of over 150%! This, of course, provides huge premiums. The two Covered Calls that I entered today had very high IV on their March options. These were identified off of the Call Writer Current Month S&P 500 and $10-$20 Stocks lists. They did not provide the highest returns of all the trades listed, but they were the highest return plays that met my criteria. The only area of concern is the limited downside protection these provide, but since I (hope) to only hold these for 4 days, I didn’t let it play to heavily into my decision. Were these good plays? I guess we’ll know Friday at 4 PM.

BTO Stock

STO Option

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

CLF 12.66

CLFCQ 0.71

MAR 12.50

11.95

4.67%

5.9%

AFL 15.24

AFLCC 0.99

MAR 15

14.25

5.26%

6.9%

By the way, it took me no more than 20 minutes to look at all the Call Writer lists, skim over the top ten and narrow them down to the 4 or 5 that looked good. After all that, these two made the cut.

Another undocumented guideline that I use is not to rush into a trade. I tend to avoid the first hour of the market open, and enter Limit Orders at lunch time (Eastern Time) or early PM just below the market price, and I almost always get that price – almost.

Will I do any more Covered Calls with a March expiration? Well, it all depends on what the market does and the Call Writer lists look like tomorrow. I do have some cash left that will allow me to do one more play for March.

Jeff

“A judge is a law student who marks his own examination papers.”

March 16, 2009

New Look – New Positions

Filed under: Covered Calls — Tags: , , , , , — Jeff @ 1:22 PM

If you have been here before, then you know that this is a new theme. It turns out I am writing in this blog much more than I ever expected to, and I needed something wider with a smaller font so I could fill it with my hot air. If you haven’t notice, this blog is a bit more light hearted than many other financial blogs – it’s because I have so much fun with Covered Calls.

Today I entered a position on LNC from my watch list yesterday. PRU and HIG took off to the upside pretty heavy this morning and brought the ITM expiration profit down to 1% or so. But LNC was still hanging in there at a respectable 5.33% return. Here are the details:

BTO Stock

STO Option

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

LNC 9.18

LNCCU 2.06

MAR/7.50

7.12

5.33%

28.9%

I have a position in TXT right now that expired OTM last month. Today, the price rose enough to justify writing a call against it for April. Although it puts me upside down if it expires ITM in April, I plan to roll it out or up as needed. So I sold to open an April 5.00 for 1.05 that brings my cost basis to 5.50 (see open positions for detail).

I think, therefore I am – I think.

Jeff

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