Covered Calls for Fun & Income

March 9, 2009

Update – USO

Filed under: Covered Calls — Tags: , , , — Jeff @ 11:59 AM

Oil was up quite a bit in pre-market, so I knew USO would gap up at the open – and it did. Not wanting to be assigned early on this, I rolled my MAR29 to the APR 30 for a net credit of 0.55. My cost basis is now 26.10.

The tool below (available as a subscriber to the Call Writer service) called Trade Management Calculator, aided me immensely in making this decision.

uso-ccc-snapshot

Let’s review what we are seeing…

The row that I labeled as “Original Purchase Data” is the actual prices and expected return for this Covered Call from my entry last Friday. The row labeled Current Data is real-time results if I were to close the position.

The “Roll to MAR 30” row shows the results at that moment if I were to roll the current MAR 29 to a MAR 30.

The “Roll to APR 30” row shows the results at that moment if I were to roll the current MAR 29 to APR 30

Since I want to be in this long term and my objective is to lower my cost basis, the right choice is the APR 30, since the MAR 30 would not have reduced my cost basis.

Jeff

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2 Comments »

  1. Jeff:
    I too have the Mar 28s. I looked at rolling on 3/9, as well. However, I wanted to see USO close above its 50-day moving average (since its high penetrated it that day) before doing so. USO ended up closing below its 50-day moving average, as well as below the top of its 2 1/2 month long downward channel. It has yet to close above either and is now also resting just below its downtrend line from its 1/6 high. With these three layers of resistance in front of it, I am still holding my March 28s. Do you use technical analysis to help with your decisions as to whether or not to roll? If so, what did you see differently? If not and if you have decided against doing so, I would be interested in why. Thanks!
    Bob

    Comment by Bob Hug — March 13, 2009 @ 4:47 PM

    • Bob,

      Thanks for your comment.

      When I entered USO my intention was to hold it for an extended time (I don’t usually do this) because I really feel bullish on oil. On 3/9 I happened to be in front of the market prior to the open and saw that oil was going to gap up. Not wanting to be assigned, I quickly set up a roll order to buy the MAR29 and sell the APR 30 for a net credit, thus bringing my cost basis down. So in summary, this Covered Call is more gut feeling than logic. If you look at my trade plan, it doesn’t fall into the methodology too well.

      Also, the thing about USO (and oil) is that the price is not really market driven. Oil futures are really controlled by just a few people – like OPEC, Russia and big futures traders, so it really doesn’t behave like normal equities. I also don’t deal with ETFs as a rule, I think they are too washed down to give me the volatility and price movement that I look for in a Covered Call.

      When I assess a trade, about 70% is technical and 30% fundamental (I don’t use any of the Greeks but rely on the Call Writer service). Because of the current volatility in the market, I look for Covered Calls off the Call Writer lists that are either trending or rising (recently only finding these in the NASDAQ 100 list). I rely heavily on Stochastics and look for strong patterns that oscillate between 20 and 80. It’s all too complicated to cover here. I plan to post a video in the near future that illustrates the process and patterns that I look for when assessing Covered Call candidates – a picture is worth a thousand words

      Jeff.

      Comment by Jeff — March 13, 2009 @ 5:23 PM


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