Covered Calls for Fun & Income

March 3, 2009


Well, I pulled the trigger on this one around 11 AM today. Out of all the prospects on my watch list, this one had the best ITM covered call potential. Most of the entry criteria from my Trade Plan revolved around technical indicators. My 4+ reason were: price at 20ma, price consolidating, STO moving up from 20, Financials B-, $2.2B in cash, earnings not until 4/21.

I ended up buying the stock for 12.47 and selling the MAR 12 call for 1.14, which gives me a cost basis of 11.33. I wanted to make sure I selected a strike that was well ITM because of recent market trends and volatility. If this finished ITM on 3/20, it will book 5.9%.

I have found that there are many stocks in the NASD 100 that are not following the DOW components. Of course, the poor DOW (or DOWn, as my brother puts it) has the likes of Citigroup, GM, GE, etc.

GERN – As mentioned in a previous post, I am holing some losers too. I took action on one today – GERN. I had entered this Covered Call back on 2/5 buying the stock for 7.94 and selling the FEB 7.50 call. If you look at a chart from that day, you will see that I violated almost every criteria for entry in my Trading Plan – now I am paying the price for the increased risk.

So this morning I sold a APR 5.00 call collecting a whopping 35¢ and reducing my cost basis from 6.96 to 6.61. Hey, look at it this way, if I sold the stock now I would lose 44%, whereas if it get’s called in April it will be a 24% loss. It’s a matter of keeping an eye on this one – and I will keep you posted on progress. I may still pull out a profit on this one (I have had positions that quickly rose where I bought the call back and sold the stock after it had recovered my losses).

Usually I only pick options with current month expiration. But in the case of GERN, the MAR 5.00 call was at 0.10 and the APR 5.00 call was at 0.35 – which is more than twice the MAR call. This doesn’t happen very often.

Hang in there… Jeff


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