Playing the market using covered calls
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Tags: RSS
I have had a plan for a while to buy long dated puts on the general market should it rally to the 1000 range on the S&P (on news that is not game changing). Since we are getting close and I don’t believe that any of the actions lately have really solved the problem, I am going to create 2 open orders to buy 1 put contract. I am probably looking to buy mid-late 2009 puts in the 70-85 strike range. I am placing a $1000-$1500 bet that the market will re-test the lows or break through. This amount of money is less than 5% of my current portfolio size so its not a big hit should it expire worthless.
My main reason for not thinking that the market has bottomed is that the fed moves have not really done anything to help the people with underwater on their mortgage. Sure the person buying their house can get a good rate but the person selling will not get enough to cover their mortgage at a higher rate. And since their credit is now in the toilet, they won’t be able to refinance either.
The other reason is that I don’t think Obama’s stimulus plan will work to the degree that he is hoping. I don’t see the tens of thousands of white collar workers from AT&T, MS, BAC, GS that are getting laid off trying the blue collar construction worker route for quite some time. Thats a lot of pride to swallow.
I would really like to see the VIX hit 40 again as the premiums would be that much smaller but I am going to place the orders tomorrow and will update my posistions as they are filled.
I believe that I will not get taken out of my 200 shares of UYG at $7.00 this month. Knowing that I will be holding these for a while, I placed another order to buy 200 more shares of uyg at $4.00. Should I get taken out, I will look to re-establish a position (maybe in XLF as it is not leveraged)/
In addition to my 3 IRA accounts, I have a non-retirement account at Zecco. In this account, I have enough funds to purchase 100 shares but not enough to purchase 200 shares of SSO. I am making bi-weekly deposits to the account. Until I get enough money for a second 100 shares, I am scaling in very small (4-5 shares at a time). This is possible because of Zecco’s 10 free trades a month. Since my orders are all stop limit buy orders, I check this daily. If I get a big move up in a short time, I will take my profits on the “extra” shares. This is the only place that income could be generated from a non-covered call strategy. So far it has worked as I bought 4 shares last Friday at $22 and sold them Tuesday at $27.40.
I also have stop/limit buy orders all the way down to $14.50 (I think). $14.50 is where I would expect it to go should the DOW go to 6500ish. The lower it goes, the more money I am putting to work. Once I get enough shares for a covered call, I will use my average cost basis as my cost basis going forward.
I’ve recently joined a yahoo group that discusses the covered call strategy. Our most recent discussion was about how to calculate returns for a position. They way I currently do it was very different than the way the majority of the people in the discussion did it. The easiest way to explain it is to show you an example.
Buy 100 XYZ at $20.
Sell first month call at the $15 strike for $6.
Sell second month call at the $15 strike for $3.
My old return would have been:
(15 - (20 - 6 - 3)) / (20 - 6 - 3) = 36%
- This means that each subsequent call would keep reducing my cost basis.
The groups’ standard way:
((15 + 6 + 3) - 20) / 20 = 20%
- Selling a call never reduces cost basis.
The groups’ standard way of calculating return is fine if the initial transaction was never intended to be a CC and you just sold an OTM call to generate extra income. The problem I have with this is that it doesn’t really show the real capital at risk in a CC transaction.
My new way:
((15 + 3) - (20 - 6) / (20 - 6) = 28.5%
- Only the call sold in tandem with buying the underlying stock reduces the cost basis. My reasoning is that I wouldn’t have done the transaction if I couldn’t get protection down to a certain point (reducing my risk). After that, its just like holding any other stock position and selling any calls in months 2 -> n is just extra income.
I have not changed the way I am calculating annual yield as I still think basing it on the months per year instead of days is better since a CC stock is locked up for 1 month at a time.
Today I opened a position in USO. I’ve been looking to get into oil around $40. I don’t believe we will get to $20-$25 oil. If that happens production will stop so much that supply will deminish. I tried to establish a position in DIG yesterday which would benefit from a drop as well as a rise in oil prices but decided to not expose myself to another leverage ETF. I have enough of that with all my SSO positions. The details:
Buy: 100 @ $35 ($7.00 commission)
Initial Investment: $3507
Sold: $32 strike @ $4.20 ( $8.51 commission)
Net Investment: $3095.51
Expected Return: 2.88%
I am ok with holding this etf for a while. I think there will be good premiums on this one because of its very oversold nature. People will be expecting a rally and I think the time value on this one will be pretty good.
Tags: USO
Today I attempted to open a position in DIG. I purchased 100 shares near the end of the day at 27.87. I was trying to sell the $23 strike for $5.70 which would have yielded 2.34% or 31% annually. My purhcase was on the little bump around 2:55 CST time. My option never was taken by a bidder and my order expired at the end of the day.
This left me in a pickle. Either I could sell my DIG in the after-hours market for a loss or wait for morning and try and sell my call. I ultimately sold my DIG after hours for $27.50 or a $0.37 / share loss plus commissions. I figured that this was the best course of action since I wouldn’t be at risk of some market moving news. If I still like the DIG position in the morning, I can try to establish my position again.
Tags: DIG
Today I opened a 300 share position in M. This position came to about 9% of my overall portfolio before the selling of the options. With my low portfolio size, I believe that positions should be around 10-15% of the portfolio before selling the option.
Buy: 300 @ $8.7475 ($7.00 commission)
Initial Investment: $2631.25
Sold: $7.50 strike @ $1.45 ( $10.76 commission)
Net Investment: $2207.01
Expected Dividend: $0.1325 / share
Expected Return: 2.92% (1.13% if called before dividend)
Selling this call will not put me below the 52 week low of around $5. Should this position stay with me, I think I can sell options for decent premiums. Retail expectations are really low and should anything positive come out of the holiday season, retail could get a big boost. If the option expires worthless, I will have a net investment in M at around $7.29. I have not made up my mind on whether I will sell the Jan option before or after Christmas and the first retail comps start to come in.
Tags: M
On 12/3 I opened another 100 share position in ALL
Buy: 100 @ $22.195 ($7.00 commission)
Initial Investment: $2226.50
Sold: $17.50 strike @ $5.60 ( $8.26 commission)
Net Investment: $1674.76
Expected Return: 3.55%
Selling this call will put me into the position in at 16.90 should the option expire worthless. As before, this level is below the 52 week low level by almost a dollar. Also, the market has acted decent after the sell-off on Monday. Friday’s unemployment number will be important as I believe that could give the direction of the market for the rest of the month.
Tags: ALL
On 11/26 I opened a 100 share position in ALL
Buy: 100 @ $22.90 ($7.00 commission)
Initial Investment: $2297
Sold: $17.50 strike @ $6.60 ( $8.26 commission)
Net Investment: $1645.26
Expected Return: 5.39%
Selling this call will put me into the position in at 16.61 should the option expire worthless. This level is below the 52 week low level. I feel there is a decent chance of this getting called away.
Tags: ALL
