Covered Calls for Fun & Income

April 28, 2009

New Positions – AFL, CROX

Filed under: Covered Calls — Tags: , , , , , , , — Jeff @ 4:23 PM

It’s a crazy market and crazy times right now. Who knows what effect the Swine Flu will have on the markets or what sort of whacked out news will come from Washington, NY, Detroit or California. How the heck can GM avoid bankruptcy while selling cars that THEY are willing to make the payments on if you lose your job? My God, what is going on? All we can do is follow the plan until it doesn’t work any more and then adjust.

The two trades I entered today taped me out for May expiration. My remaining cash is about 10% of my balance, so I will enter into a monitoring mode and watch for opportunities to possibly exit one of my positions early.

AFLAC is a very good company even though they are in the insurance industry. Their offerings are unique and don’t seem to be affected by the financial crisis as much as other insurance companies. AFL was on the CallWriter High Volatility list and I had a choice of writing a 28 Call for a higher return or the 27 Call for less risk – I chose the less risk route. Earnings are due tomorrow, but they have historically reported in-line and that is what I expect tomorrow with little effect on the price.

Crocs is a different story (CROX was found on the CallWriter Under $10 list). A real high flyer a year ago – never could understand why. Comfortable as they might be, their shoes are butt ugly! Technically they are on a solid run with some accumulation going on. Even though their earnings are on May 5th, I figure it would only take me 3 months to recover if their price drops to 1.50. From the fundamental perspective, they have a B+ financial score, earnings surprise last quarter of +28% and a technical buy rating of 88%. Since this is a relatively risky play, I am happy with the 20% downside protection.

As mentioned, that will be it for this month. Besides, my wife has kindly made an extensive ‘to-do’ list for me. Wasn’t that nice of her? Even though I probably won’t do any more trades, you know I will have plenty to say – so check back often.

– Jeff

“The English have no respect for their language, and will not teach their children to speak it.” George Bernard Shaw (1856 – 1950), Pygmalion (1916) preface


Date

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

4/28

AFL 27.99

AJOEU 2.94

MAY/27

25.06

7.74%

10.8%

4/28

CROX 2.21

CZLEN 0.41

MAY/2

1.81

8.49%

20.5%

4/27

TXT 11.29

TXYEJ 1.41

MAY/11

9.89

11.22%

12.8%

4/24

AKAM 19.41

UMUED 0.96

MAY/20

18.46

8.34%

4.9%

3/23/09

UAUA 8.04

UALEA 0.40 #4

MAY/5

5.63

-7.79%

N/A

3/9/09

USO 27.65

26.10

5.6%

3/3/09

GERN 7.94

GQDEU 0.44 #3

MAY/7.5

6.94

7.1%

N/A

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7 Comments »

  1. Could you please tell me how you calculated cost, downside, return for your AFL trade? Tks

    Comment by Steve — May 2, 2009 @ 6:38 AM

  2. Steve,

    You know what? I had the wrong option premium on this one – sorry for the confusion and thanks for flagging it.

    My actual percents include commissions costs, so they might be off by a fraction of a percent, but here are the formulas:

    Cost Basis: Underlying price – option premium (27.99-2.94=25.05)
    Downside Protection – Premium/Strike (2.94/27=10.8%)
    ITM Return – Strike-Cost Basis/Cost Basis (27-25.06/25.06=7.74%)

    I will fix this post. Again, thanks for the eagle eye.

    Jeff

    Comment by Jeff — May 2, 2009 @ 7:14 AM

  3. Thanks. The numbers looked strange. As I am a beginner, I am trying to work through numbers for educational purposes. I wonder if you have any good info sources for understanding rolls. I am still perplexed as a decision tree as to if and when to roll a position. ON the JCC group site you mentioned you have some info on rolling. Can you share the spreadsheet you use? Tks again. steve

    Comment by Steve — May 2, 2009 @ 7:34 AM

    • Steve,

      For rolling, you should check out my video on the Trade Management Calculator and look at my page on Adjusting Positions. I don’t have a spread sheet since I have access to the Trade Management Calculator – or I just sit down with a hand calculator.

      The only time I believe you should roll is if your position expired OTM or you are underwater on a trade – neither scenario is desirable but it will happen. Then you have to decide if you want to take a loss and move on, hold the stock and hope it goes up, or write another Call. It’s very difficult to quantify in this small space and the rules that I go by are flexible.

      That being said, I am not afraid to take a loss, because I know I can always more than make up for it.

      If you are new, you should seriously consider John Brasher’s Ultimate Covered Call Book, but it’s expensive. I am working with John on some ideas to reduce the cost.

      Jeff

      Comment by Jeff — May 2, 2009 @ 8:03 AM

  4. Jeff, wonder if you can help me think through your AFL position. Currently stock is 29.32 and May 27 Ask is 3.3. You are up 1.33 on the stock but down 1.90 on the option. I guess the option price has risen significantly due to volatility increase despite time decay? Correct? When you opened this position your TV was 1.95 (27-27.99 + 2.94)So if you are exercised, you will make 1.95. If you thought AFL was going to continue to rise, would you roll this fwd/up or do you in principle not do this? When do you need to be concerned about when a short call will be exercised? Is this largely a function of remaining TV?

    How do I get Brasher’s book at a cheaper price? Tks, steve

    Comment by Steve — May 2, 2009 @ 11:12 AM

    • Steve,

      I am up 1.33 on the stock and down .37 on the option for a net of +.96. If I closed it now I would gain 3.83%. Not bad for a few days, but based on the price action of the stock, I plan to hold it until expiration.

      The time value of the option is calculated as: Option Price (3.30) minus the difference between current price and strike price (2.32 or intrinsic value) which is 98 cents. The implied volatility of the option is 82%, which is not all that high these days – especially compared to the Historical Volatility of the stock, which is 121%.

      Like I mentioned before, I would not roll a profitable trade, especially to the next month. If I get exercised early, no problem – it will be for the strike price as expected – just early. Early exercise, in my experience, has been rare and usually only during the last week in the life of the call.

      If Brasher ever reduces the price of his book, I will post it in my blog.

      Jeff

      Comment by Jeff — May 2, 2009 @ 2:19 PM

  5. Jeff,

    Looks like your AFL trade is going to work out well. Be careful with CROX. I took a bath on them. My own stupidity really. Blindly followed some ‘guru’ advice and didn’t think for myself.

    Regards,
    Troy

    Comment by mounddweller — May 8, 2009 @ 11:43 AM


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