Covered Calls for Fun & Income

May 13, 2009

Friday Expiration

Not too surprisingly, not all my open positions are ITM or making me rich. On the other hand, not one of them is killing me either. Overall this is a good thing. Of the 8 positions that are expiring this Friday, 3 are ITM (AFL, CROX, TXT) and 5 are OTM (F, URBN, SOHU, HOLX, GERN). Is this a concern? Well, I would like the see the numbers reversed, but we do have 3 more days of action before Friday.

The big disappointment is Ford (F). When they announced they were offering another 300 million shares, it immediately diluted all existing shares – so I took a hit on that one. Overall, though, I know this will turn profitable as I sell more Calls against it.

There is a temptation to roll one or all of the OTM positions to next month, but that would violate my rules and it wouldn’t really make any sense. Although it would bring in premium this week, it would also incur additional trading fees that would dilute the overall credit. Besides, the market knows that Covered Call traders roll during this period, and will capitalize on this at our expense. Better to wait until next week – and probably later in the week – as prices make some pretty strange moves early in the week.

I also like to watch the stock price action for a few days. There have been times, enough of them to be valid statistically, that the stock has made a move up and hit the strike price of the previous Call. At that point, I will just sell the stock and move on to new opportunities (see JAVA as an extremely sweet example of this on my Closed 2009 page).

Stay tuned, as this could be a very interesting and exciting expiration.

– Jeff

“Experience is the name everyone gives to their mistakes.” Oscar Wilde (1854 – 1900)

May 9, 2009

Trading Plan Update

Filed under: Covered Calls — Tags: , , , , , — Jeff @ 12:38 PM

This is a quick post to let you know I updated my Trading Plan – for those of you interested.

I added a new section called Managing and Exiting Trades, which will be of interest and helps me while monitoring trades or making decisions if the position finished OTM.

I also made some other minor updates, especially in the Entry Methodology section.

The best way to read it is to download it using the link on the right (from box.net – 200905 Trading Plan). Trust me, it’s much easier to read that way.

I am also making another download available for those of you who use Interactive Brokers (open-cc-monitor.xls). It’s an Excel spreadsheet that uses IB’s real-time data to update stock and option prices. With it, you can watch your stock and short Call prices and get instant updates on the current value of your position. The only data you will have to enter is in the columns highlighted yellow. The most important data is in columns K through Q.

I also added columns for you to calculate two additional scenarios for rolling out and/or up.

In order to use it, you will need to download and install the Excel plug in from Cyberxpert using this link. Just follow the installation directions. The spreadsheet is already set up.

– Jeff

May 6, 2009

Volatility – HV vs IV

Have you been watching CROX? My gosh! It’s on fire! I entered this on 4/28 and paid 2.21 for the stock and sold the MAY 2.00 Call for 0.41. As of this moment, the stock is at 3.89, a 76% increase! Thinking that I should close this early, as I have in the past when other stocks made similar moves, I ran the numbers. To my surprise, it didn’t work out well at all. I would have to buy back the Call for 2.01 for a net debit of 1.60 and sell the stock for a net gain of 1.68 – I would only make 8¢! Why?

A closer look reveal the Bid/Ask spread on the MAY 2.00 Call is 1.60/2.01 – a rather large spread which was not there when I entered this Buy-Write (I wish I had recorded the actual numbers). But the most obvious indicator is the Implied Volatility (I have posted about this in the past – see April 18th post).

Remember, I want to stay away from Covered Calls that have a Historic Volatility on the stock that is less than the Implied Volatility on the option I am targeting. In this case, as of this writing, the stock HV is 175% (high enough as it is) and the MAY 2 Call is 421% – well over double the HV! That’s why I can’t close this early.

If we express the HV/IV relationship as a ratio, in this case we would get 1:2.4 – definitely a trade I would pass on if I were to do it today. I look for ratios of less than 1:1, more something like 1:0.75 (where HV=120 and IV=90 for example).

When I am looking to enter a trade, one of my several stops on the CallWriter Research Page is the H. Volatility link. Here I can quickly compare the 10, 20 & 30 day Historical Volatility and the Implied Volatility of the near the money options. If they are out of line (greater than 1:1) the potential trade is rejected immediately.

– Jeff

“I have opinions of my own — strong opinions — but I don’t always agree with them.” George Bush (1924 – )

May 5, 2009

Is This Sustainable?

There have been some rumblings in the Just Covered Call Yahoo Group about the Bull Run that the market is in right now regarding a pullback. I am a follower of the S&P 500 index and it has just blown past a resistance point of 877 and closed at 907 yesterday. Breaking resistance soundly is a good indication that 877 will become the new support. There is another, weaker resistance at 943 and then the big one at 1,000 – which is a huge psychological barrier. Right now I am thinking the market will continue to rise overall, but that there will be a pullback or pullbacks and that we should not panic.

I still had some cash sitting around yesterday, so I jumped on 2 trades for May. I had several on a list that I compiled over the weekend, but they all gapped up big time on Monday and I don’t really like chasing stocks that do that.

I found Urban Outfitters (URBN) on CallWriter’s NASDAQ 100 list around noon with a MAY 20. It has just recently broken out of a consolidation pattern, has healthy financials and has a Technical Rating of 100% Buy – a number that I have never seen before. My only point of concern is their earnings announcement the day before expiration.

My second trade was found on the S&P 100 list. About the only good news (relatively speaking) coming out of Detroit is Ford Motor Company (F), so I stepped in with a MAY 6.00. When I told my wife, she said “WHAT!?” Come on, they even outsold Toyota last month! Although their chart has some huge gaps in it, I believe the sentiment in this country is to back a US automaker and the result will be an increase in Ford’s stock price – but I have been wrong before. There is other data to back this up, however, such as a rating of 96% Buy, heavy accumulation, no earnings to worry about for May, broke 200 EMA and the HV/IV ratio is healthy.

I also rolled my underwater UAL Corporation (UAUA) from a MAY 5 to a JUN 5. The stock made a healthy bullish move yesterday and with Swine Flu now occupying less that 7/24 coverage, the airlines should get a pop. With that in mind, I didn’t want to get assigned early and take the 7.8% loss and by rolling I reduced my loss to 3.68%. Eventually I will work this one out to a gain, but it may take a while.

If you look at my Trading Plan, you will see that my allocation rule is to not put more than 10% of my account into any one trade (or industry for that matter), and to keep 10% cash in reserve for emergencies. Take a look at my In Play page and you will see that I currently have 9 Covered Calls open. That means I am fully vested right now. Unless I close one of these early, that’s it (really, honest) for this month. However, I am keeping a close eye on CROX. Did you see what they did yesterday? Up 42% on just an analyst upgrade? With earnings on May 7th, I may close this one early if the gain is close enough to my original target so I don’t have to sweat out earnings.

– Jeff

“Believe in yourself! Have faith in your abilities! Without a humble but reasonable confidence in your own powers you cannot be successful or happy.” Norman Vincent Peale (1898 – 1993)

Date

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

5/4

URBN 20.02

URQED   1.07

MAY/20

18.96

5.47%

5.35%

5/4

F  5.84

FEI   0.30

MAY/6

5.55

8.07%

5.0%

3/23/09

UAUA 8.04

UALFA   0.45 #5

JUN/5

5.19

-3.68%

N/A

May 2, 2009

New Positions and Update

I used to get on an airplane every Monday and fly to my work location, and then fly back on Friday. I had a lot of exposure to all sorts of people and frequently got ill. Now I work from home, thank God! This whole Swine Flu is getting too much exposure in my opinion. Hmm… Maybe I should start a blog on it?

So far this month my open positions are doing well – with 5 currently ITM and only 2 OTM.

Friday I took some of my cash and opened 2 new positions: one on Hologic, Inc (HOLX) and the other on SOHU.com (SOHU). Both will produce a fine return for 2 weeks of holding if they finish ITM on the 15th. My only concern is earnings on Monday for both of them, but they are currently showing some very good strength.

– Jeff

“Advertising may be described as the science of arresting the human intelligence long enough to get money from it.” Stephen Leacock (1869 – 1944)

Date

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

5/1

SOHU 56.31

UZKEK 4.00

MAY/55

52.31

5.14%

7.27%

5/1

HOLX 14.77

QHXEC 0.77

MAY/15

14.01

7.07%

5.13%

April 27, 2009

How to Use CallWriter’s Trade Management Calculator ™

I made my first personal video about a tool that I am very passionate about. CallWriter’s Trade Management Calculator TM is a very critical tool in my arsenal for managing my Covered Call prospects and open positions. It helps me immensely when I need to determine if I want to close early or roll up/out.

I did not post it directly in this blog, since I don’t want too much baggage when I migrate to my self-hosted blog. When I do I will integrate it with the blog, and make more videos too.

Here is the link – CallWriter Trade Management Calculator TM

I hope you like it – remember I am an amateur. Leave comments here, if you have any.

– Jeff

“Progress might have been all right once, but it has gone on too long.” Ogden Nash (1902 – 1971)

New Position – TXT

Textron sucked me in again! If you look at my closed trades, I lost money on this, but it was all completely my fault. I did something really stupid and wrote a Call below my cost basis last month. It ended up trapping me on a very good stock. So this time I am playing this the right way.

TXT appeared on the CallWriter $10-$20 list with very solid downside protection. Fundamentally and technically, this is a very good stock and passed 5 of my entry criteria, with the exception of the earnings date, which is in two days on 4/29. On 4/9 rumors spread regarding an acquisition and the stock has held up very well since. I am assuming a negative to neutral earnings will not have much of an effect on the price and the acquisition will take weeks or months to finalize.

With that in mind, I entered a slightly ITM Covered Call with a strike of $11 and with May expiration (see below).

– Jeff

“I think it is good that books still exist, but they do make me sleepy.” Frank Zappa (1940 – 1993)

Date

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

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

April 20, 2009

April Expiration Results

Normally I like to take the bad news first and then the good news – you know, so I feel better when it’s all over. But this month’s expiration contained some really good news and some not-so-bad news, so I will go with the good news first.

JAVA – As you probably know by now, today Oracle tendered an offer for Sun Microsystems for 9.50 a share. This is a wee bit better than the IBM offer @ 9.40 and it may not face any antitrust issues. But that’s not what’s important; it’s the effect it had on the price of my shares today. Friday my APR 7.50’s expired OTM with the stock at 6.69 and my cost basis at 6.58. Since today all I had were the shares, I sold them soon after the open for 9.09 and a sweet 30.93% gain on the whole deal. This didn’t involve much skill – just a lot of good luck!

X – US Steel expired ITM for a gain of 12.19% in 4 weeks (I did 2 Covered Calls on this one).

PRU – Prudential expired ITM for a 4.64% gain with a holding time of 2.3 weeks.

LNC – Lincoln National expired ITM for a 4.59% gain in 1.6 weeks.

The above are closed positions, so visit my Closed 2009 page for a recap of the year.

USO – US Oil finished OTM Friday. I won’t do anything with this except watch it this week. Of course, if it moves up above 30, I will probably sell it. If it remains flat, I may sell some MAY 29 or 30 Calls.

TXT – I let this one expire ITM for a 6.5% loss. I was in a trap with this since I rolled it on 3/16 for a strike below my cost basis. I should not have done that since the stock was showing strength with the Stochastic moving smartly up and my cost basis at 5.47, but I was greedy and thought only of the premium amount. In retrospect, holding the stock into April would have netted me an easy 100%+ gain. They say hindsight is 20/20, but it also teaches us lessons.

UAUA – UAL Corp could turn out to be a problem for me. I have been trapped before when I roll down to a strike below my cost basis, as in TXT. If I have to let this be called on May 15th, it will produce a loss of 7.79%.

GERN – For Geron Corp I was able to avoid the underwater trap by rolling this to a MAY 7.50. It cost me a debit of 0.40 to do this, but I will be able to sleep a lot better knowing I can avoid a loss at this point. This is a stock I should not have entered, since I really did not want to hold this for a long time, but here I am trying to make a small profit on it.

Date

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

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

That’s it for today. The rest of this week will be spent cruising the Call Writer lists and monitoring the market for a hint of which direction it might head. Earnings will be hot and heavy the next few weeks, so be careful if you are entering any trades at this time.

Speaking of earnings, Saturday I walked by an Apple store – it was packed with people and it sounded like there was a party in there. Their earnings are Wednesday and the stock has enjoyed a very nice bull run. I wonder what will happen?

– Jeff

“I’m a great believer in luck, and I find the harder I work the more I have of it.” Thomas Jefferson (1743 – 1826)

April 10, 2009

The Case for Current Month Calls

0409_greedisgood

The famous Mr. Gekko from the Movie “Wall Street” put it very bluntly: “Greed, for lack of a better term, is good”.

Is it?

You might want to read an article by Michael Lewis posted on this blog. Mr. Lewis is the author of Liar’s Poker published in 1989 that chronicles the greed and corruption on Wall Street and predicts its eventual collapse. Coincidentally, the movie Wall Street was release two years earlier – in 1987.

Where is all this leading and what does it have to do with Covered Calls?

When I first started writing Covered Calls, I would sell Calls several months out – as many as 6 in some cases. Why? I was attracted to the huge premium – greed. Look at the example below:

0409-caseforcurrentmonth_chain

You can see that the further out the expiration date is, the higher the premium. Seeing dollar signs, huh?

But wait! Take a closer look! Notice the monthly premium actually drops off the further out you go. Prove this by dividing the Bid price of the Call option by the number of days to expiration, as illustrated in the table below (then multiply by 100 for the total Premium/Day for each contract).

0409-caseforcurrentmonth_calcxls

Granted these numbers may be a bit skewed because April expiration is only 8 days away, but it’s quite possible that it makes for an even more powerful argument – since this example is OTM and all we are looking at is Time Value. So the April Call premium is falling at a much higher rate than the other months, as expressed as the theta in the table below.

0409-caseforcurrentmonth_analyticsxls

(The option’s theta is a measurement of the option’s time decay. The theta measures the rate at which options lose their value, specifically time value, as the expiration date draws nearer. Generally expressed as a negative number, the theta of an option reflects the amount by which the option’s value will decrease every day.)

Now I am not a mathematical wiz nor do I understand completely what I am seeing here, but the numbers speak for themselves. (I had them verified by an option professional.)

In conclusion this appears to support the strategy of only (whenever possible) writing Calls, initiating Buy-Writes and even writing Cash Secured Puts for the current month only.

I rest my case, your Honor.

Today is a Market Holiday. Enjoy your long Holiday weekend.

Thank you for visiting my blog. Please feel free to comment.

– Jeff

“We make a living by what we get; we make a life by what we give.” Sir Winston Churchill (1874 – 1965)

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

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