Covered Calls for Fun & Income

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)


BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection


URBN 20.02

URQED   1.07






F  5.84

FEI   0.30






UAUA 8.04

UALFA   0.45 #5





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

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 2, 2009

New Entry – Sun Microsystems

For the last several days, JAVA has been popping up on the NASDAQ 100 list at CallWriter. Now I know the stock gapped up on the announcement that IBM wanted to buy them. I was skeptical and wanted to wait for some further indication on what the price was going to do. Well, it came back down, bounced on its rising 20 EMA and headed back up again.

Other aspects that attracted me to this stock are the IV on the 7 Call at 145%, HUGE downside protection of 19.08% and the seer volume/open interest on the options. It also met 5 of my entry criteria and only 15 days to expiration.

As mentioned previously, I now have enough cash for one more position. Based on my allocation, the cost basis will have to be lower that $50. I will probably wait until Tuesday or Wednesday to make that trade, knowing that the shorter the holding time, the lower the risk.

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

JAVA 8.12

SUQDH 1.55





– Jeff

“A child of five would understand this. Send someone to fetch a child of five.” Groucho Marx (1895-1977)

March 31, 2009

New Position – PRU

I was monitoring the CallWriter “ITM Calls” Real Time ListTM this morning and saw several high return/high downside protection plays. Remember, I am still not sure what type of market we are in right now and I used the ITM Calls lists to protect my behind.

I snapped up Prudential Insurance (PRU) about 11 AM today. It met 4 of my entry criteria and gave a nice return and great downside protection. The APR 15 Call had an IV of 168%! These are the type of trades that CallWriter looks for.

Now I know this is a company in the financial sector, but the Insurance Companies industry hasn’t been as hard hit as the banks. A few weeks ago I did a play on Lincoln National that was a success, so I didn’t hesitate to do it again.

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

PRU 19.10

PRUDZ 5.00





I use Interactive Brokers to trade. Not only are their fees the lowest I have seen, but their OptionTrader panel makes it easy to set a limit and wait for your price. I just create a tab for the stock, and then select Option Spread, select Buy-Write from the drop down and select the month and strike and hit OK. The OptionTrader panel then gives me the net debit and credit for the trade. Click on the Ask price and the order is created. Select the number of contracts and the limit price. In the case of PRU this morning, the Ask was jumping between 14.15 and 14.23. I selected 14.10 and sent the order. I walked away and when I got back around 2:00 PM, I saw that my order executed at 11:03 AM for the price I wanted. Isn’t that sweet?

I have enough cash for two more plays this month (remember no more than 10% of accounts balance on any one trade, plus 10% in reserve – see my Trading Plan). Picking may be limited since I shouldn’t buy any more in the Insurance industry.

– Jeff

“Happiness is nothing more than good health and a bad memory.” Albert Schweitzer (1875 – 1965)

March 17, 2009

Will this be it for March?

I just couldn’t resist. I am seeing options with Implied Volatility of over 150%! This, of course, provides huge premiums. The two Covered Calls that I entered today had very high IV on their March options. These were identified off of the Call Writer Current Month S&P 500 and $10-$20 Stocks lists. They did not provide the highest returns of all the trades listed, but they were the highest return plays that met my criteria. The only area of concern is the limited downside protection these provide, but since I (hope) to only hold these for 4 days, I didn’t let it play to heavily into my decision. Were these good plays? I guess we’ll know Friday at 4 PM.

BTO Stock

STO Option

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

CLF 12.66

CLFCQ 0.71

MAR 12.50




AFL 15.24

AFLCC 0.99

MAR 15




By the way, it took me no more than 20 minutes to look at all the Call Writer lists, skim over the top ten and narrow them down to the 4 or 5 that looked good. After all that, these two made the cut.

Another undocumented guideline that I use is not to rush into a trade. I tend to avoid the first hour of the market open, and enter Limit Orders at lunch time (Eastern Time) or early PM just below the market price, and I almost always get that price – almost.

Will I do any more Covered Calls with a March expiration? Well, it all depends on what the market does and the Call Writer lists look like tomorrow. I do have some cash left that will allow me to do one more play for March.


“A judge is a law student who marks his own examination papers.”

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