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.

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)

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April 6, 2009

New Position – Lincoln National Corp (LNC)

Well the market opened slightly down and continued in that direction this morning. This type of action is attractive to me since it means I can get stock cheaper with a lower strike, giving me a better chance that they will finish ITM come the 17th.

Again, I am looking for good downside protection, so I focused on CallWriter’s ITM and S&P 500 lists this morning. I had been seeing LNC on several lists last week, but I didn’t think it was the right time. But, today I noticed that the price is holding at support, around 6.40 and I had owned a Covered Call on this back in March that worked out well. Plus the APR 5 had an IV of 230%!

The only hesitation was the though in the back of my mind that I was being seduced by this stock because I had done well previously with it. I quickly dismissed that be re-evaluating my entry criteria and decided to pull the trigger.

That’s it for April unless one of my other April CC’s shows me good return on an early close, like PRU or USO. They are both getting close to the early close return. Stay tuned. If I should close those early, I will use those proceeds for more APR CC’s.

By the way, I updated the In Play page – I hope it’s easier to understand. The way I had it before was an administrative nightmare!

Date

BTO Stock & Price

STO Option & Price

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

4/6/09

LNC 6.49

LNCDA 1.80

APR/5

4.70

6.6%

27.25%

– Jeff

“I have hardly ever known a mathematician who was capable of reasoning.” Plato (427 BC – 347 BC)

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

APR/7

6.58

6.55%

19.08%

– 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

APR/15

14.10

6.38%

26.17%

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 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

March 23, 2009

Monday After Update

First, some housecleaning items. I have slightly modified my Trade Plan to make it a bit easier to understand. I also noticed that there have been a lot of views, so since I always intended to share this will all my readers, I have added the capability for you to download a Word version for your own use. Look for the file download in the box box at the lower right.

Wow! Big day, huh? All major averages up over 6.5%. You won’t see many days like this. A word of caution, this would have been a very bad day to enter new Covered Call positions as buy/writes. Being the skeptic that I am, I expect a pull back soon. It’s a good day, however, to sell calls on stocks that you would have wanted to sell some Calls on.

Thanks to the Obama administration, the toxic asset announcement gave a very nice boost to LNC this morning. I entered a Limit order for 8.25 just after the market opened. The order executed shortly thereafter. Remember, my original goal was for it to be called at 7.50, so the 8.25 was just extra money in my pocket. My original return would have been 5.33% if it had expired ITM last Friday. Since it didn’t and the stock had a nice pop this morning, I increased my gain to 12.23% – more than double my goal. For those of you looking up this symbol, you will see that it closed at 9.47 today. Since I am very happy with a +100% gain in my return, I cannot look back and say “shoulda – woulda – coulda” and lament over not capturing the total gain. Remember, bulls make money, bears make money, pigs get slaughtered.

I had two stocks with Calls that expired OTM on Friday, X and UAUA. This was a very good day to write Calls against them.

X – my cost basis was 21.39. I sold to open APR 22.50 Calls for 1.60 and lowered my cost basis to 19.79. If the stock is above 22.50 on April 17th, the gain would be 13.69% (not including fees). This more than doubles the original gain.

UAUA – this stock has not been doing well lately. It’s funny (not), I was reading the 10 Commandments of Covered Call trading at the Call Writer site this morning. The one that stood out was #8 where John Brasher says “Don’t let the fact that you’ve noticed a stock on the lists a few times, or even profitably traded a stock before, seduce your judgment. Treat every stock to the same analysis on every trade, even the “good” ones. Good dogs do bad things, and so do stocks.” Well, I have had very good success with UAUA in the past, and I did let that seduce me. Looking back at when I entered this trade, it was in violation of many of my rules in my Trade Plan. So now I am scrambling to recover and will probably end up holding this much longer than I really want to. Yes, this is another confession. To get to the point, my cost basis was 6.49 and I sold APR 5.00 Calls this morning and now my new cost basis is 5.99. Stay tuned on this one, since I may have a month or two yet to get into positive territory with this stock.

Holly Cow! This was a long post!

– Jeff

“I’ve only been doing this fifty-four years. With a little experience, I might get better.” – Harry Caray

March 19, 2009

One more for tomorrow

Filed under: Covered Calls, Investing — Tags: , , , , , — Jeff @ 12:31 PM

US Steel Corp (X) made a rather large move this morning. As I write this it’s up 9.4%. If you look at my technical indicators, you will see that it’s at the 20 EMA and the Stochastic just crossed 20 yesterday. Historically the stock has done well in this situation, and past performance is all we really have to go with, isn’t it? Fundamentally, this is a solid stock although it’s not doing well in this economic climate. Regardless, they are still paying a dividend of $1.20/year which is an annual yield of 6.3%.

I won’t mind holding on to this for a few more weeks or months, so today I wrote a Covered Call slightly OTM for March. If it finished OTM tomorrow and the price is still inching up, I will wait to write an April call to see if the price moves above 22.50. I have done this a few times in the past and it has worked very well.

BTO Stock

STO Option

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

X 22.09

XOKCX 0.70

MAR 22.50

21.39

5.19%

3.3%

Jeff

“These days an income is something you can’t live without–or within.”

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

March 13, 2009

Friday the 13th Activity

I was watching my open positions closely this week as the market rallied. This morning I decided to close the positions that were showing me enough profit to justify this decision. As you know, we are in a very volatile environment and anytime you can take money off the table profitably, you should do it – at least that the way that I play the game.

Although none of these positions turned the profit that I would have had if they had expired ITM next Friday, I was very apprehensive about leaving them ride for another week. Monday’s always tend to scare me anyway as we never know what the week has in store for us.

So here’s what I did:

Closed ILMN – Gain if called out = 11.96% Gain with early close = 9.54%

Closed YHOO – Gain if Exp ITM = 5.91% Gain with early close = 4.46%

Closed ERTS – Gain if EXP ITM = 13.49% Gain with early close = 9.37%

These are actual gains after broker commissions.

See my Closed Positions page for any additional information.

So far this year I have only 1 realized looser, and I consider myself pretty lucky at this point. The realized gain on my account (this is not the account balance increase – just the gain for closed positions (see my confession)) is 9.27%. I base this on the realized gain against the closing balance on my account as of December 31, 2008.

I would have liked to get this info out sooner, but I never intended for this to be an alert service and it never will be. I just want to show my readers that Covered Calls can be profitable in almost any market condition.

Take a look at my new page that discusses various strategies for adjusting trades. Feel free to leave a note and tell me what you think.

Jeff

March 9, 2009

Confession – EXM

Filed under: Covered Calls — Tags: , , , , , — Jeff @ 11:25 AM

I know if I come clean with you on this I will sleep better at night 🙂

Back in May of 2008 I did a few Covered Calls on Excel Maritime Carriers (EXM). At that time they were a pretty hot stock and they paid a good dividend of .80 annually.  Shortly after that they raised their dividend to 1.80 annually. My Covered Call expired OTM , so I wrote another one – thinking the dividend would save me. Then in December of last year I did a whole bunch of Covered Calls on them when the price was in the $8-9 range – again smug in the knowledge that the dividend, now with a return of almost 20%, would protect me.

Along comes February, and Excel announces they are suspending their dividend – indefinitely. On top of that, they are adjusting charter fees down 50% in some cases. Guess what? Yup! Stock tanked and I am sitting with a whole bunch of shares.

So today I decided to do something about it when I saw the stock pop a bit. Thinking I could cut my loses a bit (rather than just selling it) I STO APR 5 Calls. My logic surrounds the huge pile of cash that I could use right now and would be willing to have them called away either at expiration or before – if the stock recovers enough.

Will the stock recover? Will the dividend return? Come April, depending on price action, should I roll or write new Calls? Oh, the suspense is killing me! I guess we will have to wait and see. For now, I can put it out of my mind for 6 more weeks and just monitor.

This is an example of why you need a trading plan (the confession part). Until I started this blog, I was not reviewing and evaluating my trades based on my already existing plan. Now that several people are watching my every move, I am much more disciplined – I think. Accumulating this stock while it was on the way down was really dumb. Assuming everything would remain the same (i.e., dividend) was naive.

I won’t track this on my In Play page because there have been several purchases at various prices and it would just clutter up the page. Besides, I came clear here for all to see. I will give you the final results once I close these (on the Summary page).

There, now I feel better. Go forth and sin no more.

Jeff

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