Covered Calls for Fun & Income

May 1, 2009

April Results

Filed under: Investing — Jeff @ 7:25 AM

Well, it was a pretty good month overall. I like to wait until the end of the month to get a picture of how my accounts are doing – just so I have a logical point to do results and comparisons.

For the month in my two IRA accounts, my realized gain in dollars is $4,339.62 and the realized percent gain is 5.27% based on the account balances as of market close on 4/30. Right now my monthly average for this year is 3.99%, which is right in line with my goal of a range between 3-4%.

Let’s take a look at Jeff vs S&P 500:

S&P 500

Jeff

April

10.3%

5.27%

Year to Date

-2.9%

16.14%

This certainly proves that Covered Calls miss out on the big moves at the expense of less risk and more consistent returns. But you can also see that over the long haul Covered Calls are leaving the S&P in the dust. If you want to hit home runs, you need to look for another blog. I’m more like Paul Molitor, who got on base more times than just about any other baseball player in history. Where did that name come from? Oh yeah, I used to live in Milwaukee and I have Green & Gold blood running through my veins.

A few other things happened yesterday too. Akamai (AKAM) had a real nice pop from their earnings, so I closed that Covered Call for a gain of 6.73% as opposed to the projected 8.34% if held until expiration and finished ITM. Why? One reason is I can always take that money and get another 5-7% on something else before the end of the month. Remember, the shorter the holding time, the greater the yield. Another reason is I only held it for 5 days, so factor that out to 365 days!

I also sold my USO shares yesterday. I figured oil wasn’t heading anywhere soon, so I sold them for a nice 8.77% gain. Again, I have cash to go shopping for more May plays.

I almost forgot, yesterday was the Ex-Div date for AFL, so I picked up $0.28/share on that. I could reduce my cost basis based on that, but for now I will just leave it alone.

Check out the Closed 2009 page for a recap of each month and year-to-date.

For those of you who use Interactive Brokers and want to see how to roll options up, down or out, please see my video on You Tube – use the links on the left under Video Demonstrations.

I will be busy shopping today since I am flush with cash – enough to do another 2 or 3 Covered Calls for May. How much more exciting can it get?

– Jeff

“America believes in education: the average professor earns more money in a year than a professional athlete earns in a whole week.” Evan Esar (1899 – 1995)

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3 Comments »

  1. Jeff –

    I was just reading your April update. What was your approach for closing out your AKAM position? I’ve looked at doing this, but it seems hard to time and I won’t make as much. I’ve had a number of positions where the underlying has moved well beyond the strike. If there’s a good way to close these out and move on while preserving my planned gain, I’d like to know about it. Thanks!

    Steve

    Comment by Steve — May 2, 2009 @ 12:47 AM

    • Steve,

      There are three reasons to exit early on a Covered Call and they are 1) You are at 75% of your projected gain, 2) You reduce your risk by reducing your holding time and 3) you use that capital to enter another covered call that more than makes up for the difference.

      Let me address your timing concern first. The beauty of covered calls is that they do not depend as much on timing as other trades. If a play is good, it doesn’t matter much if you do it today or tomorrow – as long as the stock doesn’t make any big moves. When you are at 75% of your goal and you have at least 2 weeks to expiration, seriously consider closing and entering another covered call on another stock, or even the same one at a higher strike.

      The way that I play the covered call game is to plan on holding these positions no more than the current month, and preferably only 3-4 weeks. Many traders believe, and I am included in that bunch, that the longer you hold, the greater the risk.

      Let’s review AKAM. It hit 75% plus on Thursday. Without much hesitation, I closed it. I waited until Friday to look for a replacement. I found it with HOLX with a MAY 15, which if it finishes ITM will yield 6.69%. If all goes according to plan, I just turned a potential 8.3% gain into a potential 13% gain, with 6.69% in my pocket!

      On 4/10 I wrote a post called “The Case for Current Month Calls”. Read that for evidence favoring shorter holding times for covered calls and proof that daily yield increases the closer you are to expiration – all because of the rapid time decay.

      Hope this helps.

      Jeff

      Comment by Jeff — May 2, 2009 @ 6:48 AM

  2. Thanks for the follow-up. This has been my first full month aggressively selling CCs as a strategy. So far, so good, but I think I picked a good month to start! I’ve appreciated your comments and feedback!

    Steve

    Comment by Steve — May 2, 2009 @ 9:19 AM


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