Covered Calls for Fun & Income

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.


BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection


UAUA 8.04

UALEA 0.40 #4






USO 27.65




GERN 7.94

GQDEU 0.44 #3





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 18, 2009

Expiration Week and IV

I usually don’t consider rolling short calls up/out until the last few days before expiration. Thursday I was analyzing my options when it struck me that some of the rolls to the next expiration month would result in very small net credit or even a net debit! I have never experience this before – after all time value should count for something. Then I noticed something rather disturbing: the Implied Volatility (IV) for the options of the 3 positions that I wanted to roll was extraordinarily high!

In particular, let’s discuss EXM – again!

I am pretty far underwater on this stock – my cost basis is much higher than the strike price of my short Call. That being the case, I wanted to roll my APR 5.00 to the MAY 5.00. Normally this results in a net credit, but not in this case. It actually would have cost me money to do this roll out. Then I noticed the IV of the APR 5.00 was over 350% and the MAY 5.00 was around 125%. The IV of the Puts was relatively normal in comparison.

Now IV does play a part in the Black-Sholes formula for option pricing (I don’t claim to understand the formula) but how much? Apparently quite a bit! This volatility means something!

So, what should I do? The stock has had a nice run up since its low of 3.00 on March 3rd and closed Wednesday at 6.78. High IV means that the market is anticipating an event for EXM and it could be soon. I didn’t want to roll any further out than the next month – it’s just too risky.

Now we are all very small players, the big guys control all the cards. Somebody knows something. What I read into the IV on the Calls was that EXM may make a significant move in a bullish direction very soon. I checked everywhere I could think of for any news that might give me a hint, but there just wasn’t anything out there. However, I was backed into a corner and didn’t want to get called out on the rest of my positions in EXM, so I made a decision – I bought back all those calls Thursday afternoon for 1.95!

This cost me a chunk of money (one reason why I keep at least 10% of my account in cash) but now I don’t have to worry about early assignments. As of Friday, the stock is at 7.54, so I already made back 0.76 of the 1.95 I paid for those Calls. What I will do is watch for the right time to either sell the stock outright if it rises above my Cost Basis or write another set of Calls against it if it gets weak and goes flat or pulls back again.

My lesson learned is this – for positions that are deep ITM, I will not longer wait until the last few days prior to expiration to roll up/out positions that I either want to keep or are too far underwater and ITM. Of course the best position to be in is to be profitable and ITM and have your shares called away.

Monday night I will post my results for APR expiration.

– Jeff

“The wise are instructed by reason; ordinary minds by experience; the stupid, by necessity; and brutes by instinct.” Cicero (106 BC – 43 BC)

April 17, 2009

You’ve Been Assigned!

These are words that should be music to a Covered Call writer, but I had a situation this week where it was more like a very sour note – or chalk on the old chalkboard. Let me tell you about it.

Back in March I wrote a post titled “Confession – EXM“. I won’t recap that here except to say that I am seriously underwater on that stock. This month I had written APR 5.00 Calls against it even though my cost basis was over $10.00 on average. I also do not include it in any of my normal posts or open positions because it is not representative of the Covered Call method I use in my Trading Plan – sort of left over from a previous life. The problem is it is still part of my account and any activity related to it will affect my earnings.

Much to my dismay, EXM has been steadily increasing over the last few weeks and broke above 5.00 on 4/2. Now I have ‘heard’ that you are usually not called early unless there is an ex-dividend date coming up, or the Wall Street insiders know something. Since EXM suspended their dividend in January (it was a big reason for buying so much of this stock last year), I suspect (hope) that something good is going to happen.

On Monday, 4/13, I had a portion of my EXM Covered Calls assigned while the stock was priced around 6.80. This was a bit of a surprise for me and as a result I took a rather significant loss – to be posted for this month. I immediately began to fret over my remaining stash. Because of Implied Volatility on the options, rolling out to an MAY 5.00 would have actually resulted in a net debit (I will post more detail on IV as it relates to options this weekend). What to do? I considered all options and decided that I would buy back the rest of the short APR 5’s based on the bullish indications I was seeing in the options market (this, of course, is another hit to my accounts). That is all that I have to back up this decision, as there is no news (public, anyway) that indicates anything special is in the works for EXM.

As I write this post, EXM is up 4% for the day, and I hope it just keep going. I need it to pass 10.33 in order to start making up for the hit I took this month. It may take a while, but I need to be patient on this one. I took a beating and it will take time to heal.

I will post the results of April expiration on Monday – that is when I officially know exactly what happened with my positions.

– Jeff

“Mistakes are the portals of discovery.” James Joyce (1882 – 1941)

April 14, 2009

Countdown and Ramblings…

Four days to April expiration, some might say there are three days. I always get confused when counting days! Does today count as one? Do we count Friday, since that is the expiration date? I always liked the way that I learned it in the Army – 3 days and a wake up!

At this time I am not fretting over any of my positions. For the most part they are in pretty good shape. There are a few that I am underwater on that are ITM, but I will just roll them on Thursday or Friday. The rest will expire either ITM or OTM – duh!

If you are anxious to jump into new Covered Calls next week, remember to keep in mind that this is the beginning of earnings season. Personally, I will probably not open any new buy-writes next week – not only because of earnings, but also (as mentioned previously) I want to take maximum advantage of time decay. I say let the buyer pay for it!

I have been a bit frustrated lately with the limitations that (the free hosted version) puts on their users. I have been seriously considering hosting it myself, which would give me infinite possibilities for features. The only problem is, once I do that I will have to manage it myself. You should know that I am no web guru (I don’t know a cascading style sheet form a cascading waterfall) and my fear is that I will hose it up and crash the entire blog. Ultimately I will do it, maybe this weekend. I wanted to start adding videos and plug-ins that will, for instance, give current prices on positions. That would be cool, huh?

I recently acquired a copy of John Brasher’s The Ultimate Covered Call Book. Wow, is there a lot of good stuff in this book! Nowhere, not in any of the 20 or so books I have read on options, have I seen detailed information like this. I have been struggling with the Greeks for quite a while now, but he puts it into a form that I can understand and relates them to how they impact Covered Call writing. Repair Strategies – no one ever talks about this but he does; covering several strategies for various scenarios. He even talks about impacts on taxes – 7 pages worth! When I get done with it I will post a much more detailed review on this blog. You can find more information at CallWriter.

So, until Thursday, I will be in a watch-and-see mode. Then it’s planning for any rolls I may need to do either Thursday & Friday.

– Jeff

“Computers make it easier to do a lot of things, but most of the things they make it easier to do don’t need to be done.” Andy Rooney (1919 – )

April 10, 2009

The Case for Current Month Calls


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:


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).


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.


(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)

April 2, 2009

Covered Call Weather Report – April 2, 2009

Mostly sunny with seasonal temperatures

Pre-markets are looking good today. A-PAC and Europe markets are all up. Oil is up and Gold is down – complimentary signals for a bullish move today. But, for the life of me, I can’t imagine why, with all the bad news around these days.

Looking at a weekly chart of the S&P 500 I have these unsolicited comments: Close yesterday 811, 20 week EMA is at 855, there is resistance around 920, the Stochastic crossed 20 two weeks ago (currently at 46) and this may be the fourth up-week in a row – which hasn’t happened since October of 2007 – and that was the start of the Bear Market. So, if we want to call March a bottom (in my mind) the S&P 500 needs to break the 20 EMA and resistance at 920 and establish them as support. Four up weeks would also help – meaning this week needs to end with a gain.

April Expiration

I have been thinking about my positions that are expiring in April (heck, that’s all of them). Some are currently Near-the-Money, and if this situation sustains itself into the last few days this month, I will not hesitate to either roll them down to get called or let them expire OTM and sell the stocks on the Monday after.

For the most part, I favor rolling down for these two reasons: 1) the commission costs are minimal and 2) Monday’s after expiration (heck, any Monday for that matter) scare the hell out of me. I am always in favor of capturing gains when they are at or near my goal rather than waiting for a few tenths of a percent additional or waiting a few days and increasing my risk. Plus, and this is a BIG plus, if we are in a bull run the best way to capture that with Covered Calls is to write new ones, not roll existing positions up (I will quantify this on a new page sometime in the future).

Watch for a more detailed report as expiration nears.

March was a good month. This weekend I will report on those results and enhance my ‘Closed 2009’ page with more realistic data.

– Jeff

“Victory belongs to the most persevering.” Napoleon Bonaparte (1769 – 1821)

April 1, 2009


Pre-market this morning is showing a negative open. Europe is down, although A-PAC is mixed. First Quarter Earnings Season starts next week.

With all that in mind, I will still be looking for the best downside protection for the two positions I still have cash for, and I certainly will not pick any that have earnings on or before expiration on April 17th. Picking Covered Calls with high downside protection reduces my gains, but having 20% or more downside protection at least allows for a lowered amount of risk.

Almost every other open position is currently OTM, which means I will not have many called away this month. There are a few positions that I can roll down to a lower APR strike and still make a profit, such as US Steel (X), and I will not hesitate to do that – but I will wait until a few days prior to expiration to make that decision.

The snapshot below is a tool called Trade Management Calculator TM included with the CallWriter service. It allows me to instantly in real-time compute what-ifs on my positions. The example is for US Steel and shows the Flat and If Called calculations for rolling down those Calls. Also, using Interactive Brokers for my trades will only cost me a few dollars to do the roll.


I will be busy again today, and may just monitor and not make any entry decisions. A distraction when I am trying to make a good choice has had very negative implications to me in the past.

– Jeff

“I am not young enough to know everything.” Oscar Wilde (1854 – 1900)

February 25, 2009

Update – NVDA

Filed under: Covered Calls, Investing — Tags: , , , , , , — Jeff @ 3:00 PM

After lunch I lowered my limit on the MAR 7.50 Call to .80 and it executed at 1:03 EST.

So, now my cost basis is 6.55 and the gain, if called out on 3/20 will be 14.5%. Meanwhile I pocketed $80 for each option (I will never tell how many I have).

February 22, 2009

February 2009 Expiration – It Wasn’t Pretty

The week of expiration was one of the worst I have ever seen. All my positions finished OTM and one ATM. This is the first time this has ever happened to me. Thankfully the underlying stocks didn’t tank.

What I will do with each position is a mix of technical and fundamental analysis to determine if I want to write more calls against a stock, wait to see if the stock recovers and either write calls or sell for a gain, or close the position for a loss and move on.

One position I have is MBIA (MBI) that I had a FEB 4 Call on. Since the stock closed at 4.00 it will be interesting to see if it gets called. My broker tells me that any stock $.01 ITM will automatically be assigned, but I had one position last month that was $0.12 ITM that did not get assigned. Their explanation was there was no interest in exercising all the open calls. So a word or caution regarding that. Of course my answer to that was to sell the stock on Monday as it rose and add another 22 cents to my gain.


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