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 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 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 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 WordPress.com (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 8, 2009

9 Days to April Expiration

After 4 up weeks in a row, it’s no surprise that the markets have pulled back. As noted in past posts, I was focusing on Covered Calls I opened in April that had good downside protection. With 9 days to go, let’s see how they are doing.

PRU – Opened on 3/31 with an APR 15 Call and 26.19% downside protection. As of close yesterday (22.10) it is still very much ITM.

JAVA – Opened 4/2 with an APR 7 and 19.08% downside protection. As of close yesterday (6.28) it’s OTM. The deal with IBM fell through and the stock got hit hard. Its possible JAVA management may get another offer or make an announcement in the next week or so. I just need the stock to get to 7.00 to make out. I probably will not take a loss on this – I believe there will be good news coming. FYI – my Cost Basis is 6.57 on this stock.

LNC – Opened on 4/6 with an APR 5 and 27.25% downside protection. Closed yesterday at 6.89 and is still ITM.

If you look at the charts for these plays (with the exception of JAVA) you will see that they are holding their own relative to the market trend this week. We can only hope this continues for 9 more days.

– Jeff

“Courage and perseverance have a magical talisman, before which difficulties disappear and obstacles vanish into air.” John Quincy Adams (1767 – 1848)

March 15, 2009

This Cash is Burning a Hole in My Pocket

Needless to say, I have a lot of cash in my account from last Friday. Do I wait for the Monday after expiration? Do I look for April Covered Calls this week? No, I will look for deep ITM Calls for March that I can write on Monday. I have 3 prospects from the Call Writer Deep Strikes In The Money list. These 3 are attractive in that they meet 4 or more of my Trade Plan entry criteria but alas, they are all financial stocks (well, insurance anyway). Be that as it may, they do have a huge amount of downside protection (how far the stock price will have to fall to hit the cost basis) and only 5 days of holding time. None of these stocks are big news makers – at least not TARP-wise.

Stock

Exp/Strike

ITM Return

Downside

Protection

LNC

MAR 7.5

5.63%

21.55%

PRU

MAR 15

3.45%

23.28%

HIG

MAR 5

2.88%

30.67%

I don’t intend to go all-in on these (if I do at all) – I will still follow my money management rules.

Stay Tuned – Jeff

Blog at WordPress.com.