Covered Calls for Fun & Income

April 10, 2009

The Case for Current Month Calls

0409_greedisgood

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:

0409-caseforcurrentmonth_chain

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).

0409-caseforcurrentmonth_calcxls

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.

0409-caseforcurrentmonth_analyticsxls

(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)

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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)

March 16, 2009

New Look – New Positions

Filed under: Covered Calls — Tags: , , , , , — Jeff @ 1:22 PM

If you have been here before, then you know that this is a new theme. It turns out I am writing in this blog much more than I ever expected to, and I needed something wider with a smaller font so I could fill it with my hot air. If you haven’t notice, this blog is a bit more light hearted than many other financial blogs – it’s because I have so much fun with Covered Calls.

Today I entered a position on LNC from my watch list yesterday. PRU and HIG took off to the upside pretty heavy this morning and brought the ITM expiration profit down to 1% or so. But LNC was still hanging in there at a respectable 5.33% return. Here are the details:

BTO Stock

STO Option

Option Exp/Strike

Cost Basis

ITM Return

Downside Protection

LNC 9.18

LNCCU 2.06

MAR/7.50

7.12

5.33%

28.9%

I have a position in TXT right now that expired OTM last month. Today, the price rose enough to justify writing a call against it for April. Although it puts me upside down if it expires ITM in April, I plan to roll it out or up as needed. So I sold to open an April 5.00 for 1.05 that brings my cost basis to 5.50 (see open positions for detail).

I think, therefore I am – I think.

Jeff

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 5, 2009

New Positions – ERTS & ILMN

Yesterday I opened two new positions on ERTS and ILMN. I tired to get this post up earlier but other tasks demanded my attention.

ERTS – This was on my watch list off of CallWriter for a few days now. I was waiting for the right time to strike. Technically, I was attracted by the chart, with good solid support around 14.30 and resistance around 19.15, I was waiting for STO to swing up over 20 and it did that yesterday. Since the 20 and 50 MA’s are consolidating right now, I entered with a slightly OTM call. I am not fearful of an expiration OTM since the options on this have high volatility right now – as long as support is not violated I will sell the next month’s call. As far as qualifying according to my Trade Plan, it met 5 criteria. Here are the details of the trade:

Stock=15.64   MAR 17.5=0.22   Cost Basis=15.42   Exp ITM=13.4%

ILMN – What caught my eye on this one is the strength it has been displaying since mid-December. How many stocks can you find that have a 20MA above their 200MA? It met 7 of my entry criteria from my Trade Plan and again I was waiting for STO to do it’s cross. I again entered a OTM covered call based on the continued upward trend of the price and recent resistance at 35.80 which the price could easily break through. Here are the details for this trade:

Stock=31.72   MAR 35=0.46   Cost Basis=31.26   Exp ITM=11.96%

March 3, 2009

YHOO

Well, I pulled the trigger on this one around 11 AM today. Out of all the prospects on my watch list, this one had the best ITM covered call potential. Most of the entry criteria from my Trade Plan revolved around technical indicators. My 4+ reason were: price at 20ma, price consolidating, STO moving up from 20, Financials B-, $2.2B in cash, earnings not until 4/21.

I ended up buying the stock for 12.47 and selling the MAR 12 call for 1.14, which gives me a cost basis of 11.33. I wanted to make sure I selected a strike that was well ITM because of recent market trends and volatility. If this finished ITM on 3/20, it will book 5.9%.

I have found that there are many stocks in the NASD 100 that are not following the DOW components. Of course, the poor DOW (or DOWn, as my brother puts it) has the likes of Citigroup, GM, GE, etc.

GERN – As mentioned in a previous post, I am holing some losers too. I took action on one today – GERN. I had entered this Covered Call back on 2/5 buying the stock for 7.94 and selling the FEB 7.50 call. If you look at a chart from that day, you will see that I violated almost every criteria for entry in my Trading Plan – now I am paying the price for the increased risk.

So this morning I sold a APR 5.00 call collecting a whopping 35¢ and reducing my cost basis from 6.96 to 6.61. Hey, look at it this way, if I sold the stock now I would lose 44%, whereas if it get’s called in April it will be a 24% loss. It’s a matter of keeping an eye on this one – and I will keep you posted on progress. I may still pull out a profit on this one (I have had positions that quickly rose where I bought the call back and sold the stock after it had recovered my losses).

Usually I only pick options with current month expiration. But in the case of GERN, the MAR 5.00 call was at 0.10 and the APR 5.00 call was at 0.35 – which is more than twice the MAR call. This doesn’t happen very often.

Hang in there… Jeff

Caution is the Word of the Week

I feel the need to write something but I have no idea where to go with this – and that is not a good thing.

Looking at the list on CallWriter I see MAR covered calls with ITM returns of 10-20%. Unfortunately these are all banks, shipping companies and pharma. Have they hit a bottom? That what I was wondering last month and look at where they are now.

On the other hand, I see some very promising prospects on the NASD 100 lists with ITM returns of 3-6%. Those are the stocks on my watch list.

The one characteristic that differentiates the 10%ers from the 5%ers is their 20MA on a chart. While the 10% stocks have a falling 20MA, the 5% stocks have a flat or slightly rising 20MA.

Confession – Although NVDA makes me look like a genius, I am holding a few stocks that are dropping or below my cost basis. I know, it’s not according to my trade plan. So, for not following my own advice I am paying the price (hey, that rhymes!). So I am patiently looking for opportunities to write some calls against these – hopefully soon.

Overall am I bullish or bearish? Honestly I don’t know, and that makes me very cautions.

Watch List: I added YHOO today to my current list (GRMN, MICC, MRVL, MXIM, NTAP, SPLS, SYMC) all of which meet at least 4 criteria for entry in my Trade Plan and taken from the CallWriter NASD100 list. I have not pulled the trigger on any of them yet – yesterday scared the hell out of me. But, today we may get a bounce – probably a Bear Rally.

Step Lightly – Jeff

March 2, 2009

Update 2 – NVDA

NVDA gaped down at the open today, temporarily dashing my hopes of closing this early. It has gaped down at the open before, so I waited patiently for it to come back to my limit order of 7.21. It did that at 10:08 this morning. My net gain, including commissions, is 8.78%. I held this for 5 market days so I am pleased.

Remember – don’t be afraid to close early. As a matter of fact, this week could be filled with dark and gloomy news (especially Friday with the payroll and unemployment reports) and could drag the market down even more.

Be careful out there   –   Jeff

February 25, 2009

Update – AGU

Filed under: Covered Calls, Investing — Tags: , , , , , , , , — Jeff @ 11:54 AM

Well, I have not pulled the trigger on this as of yet. Notice on the chart where the 20 & 50 MA are consolidating on price and STO is weakening. I really wanted to enter this trade a few days ago, but now I am not so sure. If I follow my trading plan, then I have to move this into the background.

agu-update-02252009

I haven’t found anything on the CallWriter lists that has excited me so far this week with the exception of NVDA. On Monday I bought the stock for 7.35 and I am waiting to sell the Call. I cannot wait any longer than 3 days, so I need to make a decision whether to proceed today. Right now (about Noon EST), I could simply bail on the stock for a decent 7+% gain – but I will hold off for a while. I have a Limit order in to sell the MAR 7.50 Call for 1.00 (if called is a 18.1% gain) which I may lower later.

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.

Jeff

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