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)

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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 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

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 26, 2009

New Position – AKAM

With only three weeks to go before expiration (it’s early this month, May 15th), it was time to make some commitments and get serious about entering some trades. Earnings are presenting a challenge, but I really don’t want to sit on the sidelines, so I will have to take some calculated risks and be very selective on my choices. This means I may have to give up a few percent in returns, but that’s OK with me. So on Friday I entered a Buy-Write on AKAM (details in the Open Position table below).

Akamai Technologies is leading its industry, healthy financially, plenty of cash; really the only negative on this play is earnings on 4/29. Since all indications are bullish for this stock, I didn’t want it to run away from me. If earnings are good and the stock gaps up or moves up smartly, it may present an opportunity for an early exit for me. Otherwise I feel confident that it will finish ITM on 4/15.

This play appeared on the CallWriter NASDAQ 100 list. I still feel that the NASDAQ is outperforming most other indexes and there are several good choices on that list, but returns aren’t what they have been the list 2-3 months because volatility is decreasing. Don’t get me wrong, this is all OK with me. Even though the premiums are not what they were, the probability of a Covered Call on a good company finishing ITM is much higher under these conditions.

I still have not done anything with USO. I am hoping that it moves above 30 and I can sell the stock without writing any new Calls against it.

– Jeff

“The income tax has made more liars out of the American people than golf has.” Will Rogers (1879 – 1935)

Date

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

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 23, 2009

Time to Start Shopping

I really hate earnings season for several reasons. First of all it plays havoc with prices and things get really crazy. Second, it prevents me from having open season on Covered Calls. I am averse to opening a new position with the company’s earnings announcement a few days or weeks away. That won’t stop me if many of the other criteria I use to enter a trade look good – but it sure makes me hesitate and think twice. Maybe that’s a good thing?

I spent part of yesterday prospecting for profitable positions. I can tell that volatility is beginning to drop (premiums are decreasing), and you can too by looking at the VIX (CBOE Market Volatility Index), which is currently at 38. Historically it has oscillated from 10 to 30 which generally speaking is an indication of a stable market and economy. Since September of last year, it has moved up and even peaked as high as 89 in October 2008. Of course this means huge premiums on options, but is also means huge risk on the underlying. Me? I prefer the VIX to hang out around 20-35 for the best balance of premium and risk, but you ultimately work with what you have rather than sit on the sidelines and wring your hands.

I have been surfing the Call Writer lists and found the greatest returns (and the greatest risk) on the stock in the Under $10 and $10-$20 lists. So here are some potential positions that I am considering right now – this is not investing advice 🙂

AKAM MAY 20 – relatively stable stock in a recent up-trend and wasn’t hurt too badly by the March bottom. Meets several entry criteria and earnings are 4/29. Nice return of 6.7% as of now.

GMXR May 10 – sort of a risky play but price is bouncing at support and Stochastic is heading up. Earnings are scheduled for 5/5 so I might put this on the shelf until then. Return 17.1%.

RVBD May 15 – I never heard of this company (you should check it out) and it is acting like a Dot Com type of play, so it’s purely speculative for me. This stock totally ignored the March bottom and is currently in a consolidation phase. Their earnings are scheduled for today, but I will not make any decision until tomorrow. This one should be very interesting to watch. Return 11%.

That’s the short list for now. I still have USO to think about, but I won’t make any decision now unless it makes a big move up.

I mentioned Apple Computer on the last post and it did report good earnings and is up nicely this morning – again.

I also mentioned that I was seriously thinking of moving my blog from Word Press Hosting to self hosted version. I have done some testing and it ‘seems’ simple enough. My concern is the URL change for the faithful. I think there are some workarounds for that and I will be checking them out.

Be patient and chose your plays wisely.

– Jeff

“Technology is dominated by two types of people: those who understand what they do not manage and those who manage what they do not understand” Putt’s Law

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