Net's Covered Call

[netwrangler]

It looks like I will be 'assigned' this May [5/17] on several of my current covered call positions. This will give me some cash that I need to reallocate.

This gave me an idea:
How about asking the OTF members to help select a Covered Call [CC] position for me — and then posting the status of this position on the OTF.
We are talking about real money here.
The CC position I take will be real, and you can watch.

So...

Here are the criteria for a good CC position:
You are 'mildly bullish' on the underlying stock.
The PPS [price per share] is above $10. Sorry if this is a disappointment.
There is an active market for the options of this stock.
The bid/ask spread is 'reasonable'.

So, what tickles your fancy?
What stock offers us the best covered call position come May 19th?

Well, I have to make a real time decision.
Give me your best advice.
We shall see how that works out.

[peter518]

I suggest two candidates for your reference:

V & ANR

Good luck!

Peter

[Albert0373]

I suggest two candidates for your reference:

V & ANR

Good luck!

Peter

I love ANR, solid company that has been doing VERY WELL this past year.

I brought it up a while back...

http://www.onlinetradersforum.com/showthread.php?t=11622

http://i26.tinypic.com/ot1yqc.png

[BetonBeer]

Do you write them for the current month or a few months out??

I think WFR might be a good pick. Jun 70 @ 2.80 or 75 @ 1.50.

Maybe AAPL, SHLD

[netwrangler]

Do you write them for the current month or a few months out??

I think WFR might be a good pick. Jun 70 @ 2.80 or 75 @ 1.50.

Maybe AAPL, SHLD
I'll get the money on May 19th. That's the Monday following the close of May options. I'll be looking to establish the covered call position that week, and will look first at JUN calls.

In general, I believe the shorter options work in favor of the writer and the longer options work for the buyer. That's just a statement about premium as a percent of stock price. Obviously, the longer the term, the greater chance of a stock price movement - and that applies either up or down.

Of course, with covered calls, you don't really want a very volatile stock. Slow and steady is much better than a roller coaster — and up is still better than down by a whole bunch.

[wallstreetsedge]

Do you write them for the current month or a few months out??

I think WFR might be a good pick. Jun 70 @ 2.80 or 75 @ 1.50.

Maybe AAPL, SHLD

imo.. spot month is best, also i prefer more volatile stocks but rather than use out the money or at the money, id usually go in the money by 1-2 strikes which normally racks up to a good 4% premium. as net said, its usually something that youre mildly bullish on...

there are always solars, gas, aapl, rimm, goog, bidu, qid, qld, cc, yhoo

[Keventerprises]

It looks like I will be 'assigned' this May [5/17] on several of my current covered call positions. This will give me some cash that I need to reallocate.

This gave me an idea:
How about asking the OTF members to help select a Covered Call [CC] position for me — and then posting the status of this position on the OTF.
We are talking about real money here.
The CC position I take will be real, and you can watch.

So...

Here are the criteria for a good CC position:
You are 'mildly bullish' on the underlying stock.
The PPS [price per share] is above $10. Sorry if this is a disappointment.
There is an active market for the options of this stock.
The bid/ask spread is 'reasonable'.

So, what tickles your fancy?
What stock offers us the best covered call position come May 19th?

Well, I have to make a real time decision.
Give me your best advice.
We shall see how that works out.

I'm very glad this thread was created! I wish I found it earlier as I have recently become very interested in Covered Calls.

I'm looking at JASO June 25 Calls for $2.20 which is instant money since the stock is at $24.95 today. I haven't had much experience, insight or luck with in the money stocks, but this seems to be an instant discount rather than even money...any thoughts, advice or experience on this would be appreciated!

Also looking at:
SINA Jun 55 for $3.10 on a $54.50 PPS
GTXI Jun 17.50 for $1.85 on a 15.04 PPS
CRME Jun 10 for $$1.10 on a $9.01 PPS

Today I bought SOLF for $21.38 and sold the Jun 25 Calls later in the day for $2.60 on the way up. I also have open positions in SOL w/SOLFF Jun 30 calls for $1.39, and BNI w/BNIFA Jun 105 Calls for $5.20.

I'm really glad to have this thread available, and look forward to putting our heads together and contributing good CC candidates! The worst thing I know of that can happen on a CC is the PPS dropping substantially. Any input, experience or warnings on these or other Stocks is greatly appreciated!

Looking forward to this being a great, resourceful thread.

[netwrangler]

weeell, dogies!

You gave me some great input. I'll deal with changes in my portfolio in this post, and cover suggestions and actions in subsequent posts.

Covered Call Assignments:
For sure - CVX
Probably - BNI, XLE, CSCO - these positions were well in the money on Friday, but not yet 'officially' assigned.

New Covered Call Positions:
UPL stock long and UPL JUN 90 calls short. Net entry point was 85.31 before fees.

I have been wanting to invest in UPL since last August - when I first learned about this low cost NatGas producer. That said, This entry point may be a little high. We shall see if the call premium gives me enough premium to cover the downside risk.
I'm ready to roll down from JUN 90 to JUN/JUL 85 if the pps goes south. I'm also ready to bail on the whole position if it looks like I bought on an unsustainable peak.
=====
Next week I'll look at new covered call positions from three perspectives:

Previously assigned positions - If CVX, BNI, XLE, and CSCO worked for me before, why wouldn't they work again?
Suggested candidates - I'm delighted that I have several suggested positions to analyze.
New Covered Call Screen - While chatting with Keventerprise, we came up with a new screen for covered calls. I'll pass of of the above candidates against that screen. In addition, I'll use the screen on a couple of watch lists.

This is fun!

[Keventerprises]

weeell, dogies!

You gave me some great input. I'll deal with changes in my portfolio in this post, and cover suggestions and actions in subsequent posts.

Covered Call Assignments:
For sure - CVX
Probably - BNI, XLE, CSCO - these positions were well in the money on Friday, but not yet 'officially' assigned.

New Covered Call Positions:
UPL stock long and UPL JUN 90 calls short. Net entry point was 85.31 before fees.

I have been wanting to invest in UPL since last August - when I first learned about this low cost NatGas producer. That said, This entry point may be a little high. We shall see if the call premium gives me enough premium to cover the downside risk.
I'm ready to roll down from JUN 90 to JUN/JUL 85 if the pps goes south. I'm also ready to bail on the whole position if it looks like I bought on an unsustainable peak.
=====
Next week I'll look at new covered call positions from three perspectives:

Previously assigned positions - If CVX, BNI, XLE, and CSCO worked for me before, why wouldn't they work again?
Suggested candidates - I'm delighted that I have several suggested positions to analyze.
New Covered Call Screen - While chatting with Keventerprise, we came up with a new screen for covered calls. I'll pass of of the above candidates against that screen. In addition, I'll use the screen on a couple of watch lists.

This is fun!

Yes, this is very fun!

I have tried and tried to upload the Investools screenshot/snapshot of your UPL, Netwrangler, but I cannot get the Fundamentals to transfer with the image. Any suggestions to upload an htm file would be appreciated.

Anyway, as you said, the P/E on UPL is a little high, some Institutional Investing (Acc Dist) but not alot, overall assesment looks good for UPL.

Your ANR and BEAV look good also Net.
ANR: PPS 68.43, Strike 70, Premium 4.00
BEAV: PPS 39.00, Strike 40, Premium 3.20

Here are the gems I like. Please run these through the 'Netwrangler Callculator'...:

(In order of my feeling of strength, and these are all Jun 21st Calls):

DRYS: PPS 110.78, Strike 115, Premium 8.40. Fundamentals look really good, and it looks like something I would like to own!

JASO: PPS 24.95, Strike 25, Premium 2.20. The Fundamentals look very good, and I'm really interested in JASO.

SHI: PPS 39.98, Strike 40, Premium 2.60. Fundamentals look very good except was trending down from mid October 2007 to mid March.

ELN: PPS 27.05, Strike 28, Premium 2.05. (Or Strike Price of 29 pays 1.70 so you're protected for another $1 to 29 for a sacrifice of only $.35). Even if this hits the lower Strike Price of 28 you make $3.00 and you're protected down to $25.00 if it goes south!

SINA: PPS 54.50, Strike 55, Premium 3.10. Fundamentals look very strong except it's overpriced, and the Sector is not rated well right now. The reason this is last on my list is because I don't know the patterns or status of SINA. I've seen it mentioned on the Forum, but I believe it was shorted at times too. Any thoughts on SINA?

Of mention:

CHL: PPS 86.23, Strike 90, Premium 2.00.

Sorry for taking so long! Please run these through your Net Callculator. Any thoughts on any of these by anyone will be appreciated.


p.s. Please let me know if this attachment works...

[Keventerprises]

I think I got the Screenshots from Investools to upload by converting them to a .pdf file. The charts don't show up directly, but they are visible in the attachment link.

Investools shows the graph, MACD and Stochastic, then to the right Fundamentals including Acc. Dist (Institutional Buying) and several other Fundamentals are shown. A high ratio of good to bad is summarized as a fraction such as 8/2. The bottom color bars indicate sector strength from red to green dated from right to left being current. Green with a high number is positive for the sector and the stock. 3 Green arrows on the graph indicates a buy based on PPS rising, MACD and Stochastic.

Here are the CC's I am watching and mentioned in the previous post:

3215

3216

3217

3218

3219

3220

3221

3222

[Keventerprises]

4 more mentioned and now posted with Investools graphs and funs:

3223

3224

3225

3226

Sorry, the previous DRYS Chart in post #10 was actually a UPL Chart. Here is DRYS (one of my favorite candidates):

3227

[netwrangler]

I think I got the Screenshots from Investools to upload by converting them to a .pdf file. The charts don't show up directly, but they are visible in the attachment link.

Investools shows the graph, MACD and Stochastic, then to the right Fundamentals including Acc. Dist (Institutional Buying) and several other Fundamentals are shown. A high ratio of good to bad is summarized as a fraction such as 8/2. The bottom color bars indicate sector strength from red to green dated from right to left being current. Green with a high number is positive for the sector and the stock. 3 Green arrows on the graph indicates a buy based on PPS rising, MACD and Stochastic.

Here are the CC's I am watching and mentioned in the previous post:

3215

3216

3217

3218

3219

3220

3221

3222
Hey, Kev,

The attachments in your post I am quoting are much better than the one you sent me earlier. I'll evaluate them individually early next week.

Just a gut feel here:
I think that most CC suggestions lean toward the volatile issues. After all, they are the ones with the high premium percentages.
IMO, evaluating CC positions on a volatile stock suggests evaluating two additional views:

How does the CC position compare to a ong position in the stock?
What are the best bail-out tactics if the price of the stock goes south?

Let the record show that I don't know the answers to these questions.
That said, we may all learn the answers over time.

[Keventerprises]

Hey, Kev,

The attachments in your post I am quoting are much better than the one you sent me earlier. I'll evaluate them individually early next week.

Just a gut feel here:
I think that most CC suggestions lean toward the volatile issues. After all, they are the ones with the high premium percentages.
IMO, evaluating CC positions on a volatile stock suggests evaluating two additional views:

How does the CC position compare to a ong position in the stock?
What are the best bail-out tactics if the price of the stock goes south?

Let the record show that I don't know the answers to these questions.
That said, we may all learn the answers over time.

I'm thinking high premium prices indicate strong confidence in the stock going up.

Here is my final analysis with a few notes on each:
DRYS: 6/2 (Good/Bad Investools Ratio), Low P/E 8.4, High Acc Dist, 8-10% Potential profit in 1 month, +++++
SOLF: 3/3, Earnings Wed, High P/E 51.8, Low EPS, Trending up in spite of some negatives. +++-
SOL: 6/1, High Acc Dist, +++
SHI: 6/2, Low P/E 7.7, 3.2 Div, 6-7% potential profit in 1 month, ++++
JASO: 8/1, High P/E 51, +++-
ELN: 3/3, Good potential, May be overpriced, I would go with the lower 27 strike in case it goes down, ++-
ANR: 6/3, Some very good things going for it, High Acc Dist, Overpriced/High P/E 99.8, Slightly neg insider trading, Strong Sector, High Premium, ++-+-+
BEAV: 8/1, ++-
UPL: 5/3, Strong Sector, High P/E 63, High growth, Low cash flow and insider trading, +++-
GME: 6/1, Weak Sector, Trending down, ++--

Good Luck, and Goodnight!

[Imperator]

I haven't written any calls in the last few weeks. The volatility and premiums just aren't there.

Last Calls I've written:
AMTD May 20 -covered
GME April 50 - 5 cents above strike, my shares were forced away.

Currently I have a call spread position on BEAV
Bought July 45 Call
Sold July 55 Call

This gives me 10 dollars worth of potential profit. Selling the 55 call paid for 1.23 of the 45 Call. I'll probably sell a July 50 or 55 call covered by the shares I currently own once the value rises.

[netwrangler]

Here is the first of the first batch of covered call analyses for June. The CC positions I had with these companies were assigned last week. As the dust [and the cash] is settling, this is a good time to see if I want to take new CC positions with these same companies. I'll present one company per post to keep the size of the posts reasonable. Each 'position' assumes purchasing 1000 shares of stock and selling ten call contracts. And, no, that is not my normal position size [thanks for asking]. I chose that size so I could ignore the transaction costs and to reduce rounding error. :wink:

3251

The rows in the table comprise present a quick & dirty analysis of what is going on with these two options choices. A few things to note about the table itself:

Hist. Vol. represents the historic volatility of the price per share [PPS] of CVX. In this and subsequent analyses, I used daily values over the last two years with a 25 day window.
The two options shown are 'near-the-money' options. The first has a strike price just below the PPS. The second has a strike just above the PPS. Most of the time I will go with a near-the-money option in a covered call.
Expiry gain is the profit that results if the position is held to expiry and the stock price does not change.
Max gain adds profit from PPS gain to Expiry gain. With in-the-money calls, the Max gain is the Expiry gain.
The % Return is a raw figure calculated as the gain/investment.
The % Return/yr is an annualized return. Be careful of this figure. Life is not as good at this figure would suggest.
The Breakeven PPS is the purchase PPS less the premium and less any dividend to be paid before expiry.
Prob Max gain is the probability, expressed as a %, that the CC position will expire with max gain.

Prob loss is the probability, expressed as a %, that the CC position will expire below the breakeven point.

The JUN 100 call is the more conservative choice, with lower downside risk and lower potential for profit. It would be the choice of someone who is bullish on CVX, but wants protection from a retracement of recent PPS gains.

The JUN 105 call offers the chance to profit from a $2.45 increase in the stock price by expiry. Note: Because you must buy back the call before you sell the stock, it is difficult to get the full value of a PPS increase prior to expiry.

BTW: The historical volatility of the stock and the implied volatility of the options are the same at 23%. So the option is price 'at par'. There is no premium or discount vis-a-vis historical volatility.

NOTE:
The expiry gain is the same for both options. That happened because of where the PPS was in relation to the two strikes. As the PPS gets closer to 100. the expiry gain of the JUN 100 call will increase and the expiry gain from the JUN 105 call will decrease.

[Work at home assignment — why is that so?] :confused2:

[netwrangler]

The second company in this first batch of covered call [CC] analyses is BNI. Here is what that table looks like:

3252

BNI is basking in the light of Warren Buffet's favor. It is also making money. The thought is that BNI has enough 'pricing power' to pass on increased energy costs. Moreover, it will benefit from an increasing volume of coal shipments.

The table is actually quite similar to that of CVX in my prior post. That said, there are a couple of significant differences:

The Imp Vol of the option is 2-3% higher than the Hist Vol of the stock. BNI has been on a roll lately, but is experiencing a down day today. This often results in an increase in option volatility. That can make a 'down day' an attractive time to open a covered call position.
BNI has announced:
Directors of Burlington Northern Santa Fe Corporation (NYSE:BNI) voted on April 24, 2008, to pay a quarterly dividend of 32 cents per share on outstanding common stock.

Dividends on common stock will be paid July 1, 2008, to shareholders of record June 10, 2008.
The $320 involved [with our 1000 share position] adds roughly 14% to the expiry gain on the JUN 105 Call and 10% to the expiry gain of the JUN 110 call.
At this writing, BNI is a candidate for a covered call position in my portfolio.

[netwrangler]

Cisco [CSCO] is the third company in the first batch of this Covered Call [CC] analyses. As a former IS/IT kinda guy, I have a lot of respect for CSCO, and think kindly of them LT. Here is their table:

3253

The first thing you might notice is that the Hist Vol in 29% and the Imp Vol of the options are 26% and 25% respectively. Absent other information, that would indicate that the options are underpriced and the CSCO was not a candidate for a covered call position.

BUT WAIT! THERE'S MORE! :wink:

CSCO stock normally trades with a spread of $0.01. That's as low as it gets.
Moreover, the call option spread is very small - usually no more than $0.02.
Finally, CSCO call options are priced within a dollar of the PPS.

All of this adds up to a traders' market with minimum 'dues' required by the market maker. This makes for a great 'trading' stock — options and all..

[netwrangler]

The common wisdom is that the volatility of a sector ETF is much lower than a stock you might want to evaluate in that sector. But maybe not.

If the ETF holds large amounts of the less volatile stocks...
And if those 'big guys' are the ones you are looking at...

ETFs can be just as volatile as some of their components.

Here's the table for XLE

3254

Happened to catch this just as the PPS was at 90. There are three option choices included to illustrate what happens at-the-money [ATM].

Note that the expiry gain is highest for the ATM option.
Note also that there is plenty of 'action' implied by these option choices.

XLE is on my short-list for Net's next Covered Call position.

=====
So, covered calls are great as long as the market is going up.
The next series of posts deals with managing covered calls in a down market.

[netwrangler]

For those of you who just like to have your ducks lined up in a row, here is a link to the full spreadsheet table of the four 'first batch' covered call candidates.

http://img32.picoodle.com/img/img32/4/5/20/f_JUN08CallsSm_9234419.jpg (http://img32.picoodle.com/img/img32/4/5/20/f_JUN08CallsSm_9234419.jpg)

Please post [or PM] questions or comments.

[Jelly]

Most excellent net!

The only thing Scottrade would let me do at first are covered calls. I don't know why. They are not the least risky of plays. Probably cause there is no way to create a margin situation.

BTW: Just got "Options 101".

[netwrangler]

My covered call position with CVX was assigned, last week, a few days before expiry.

So, late last week I was able to open a covered call position with UPL.
I have liked UPL since last August, when the PPS was around 40. Somehow, I never got around to buying them [more's the pity].

So, here's the table on the position I opened last week:

3257

The obvious difference between this table and those prior is the 'Purchase PPS' line. This records the original purchase price of the shares. It also reflects the changing of the 'odds' inherent in an increase in the PPS.

The 68% / 18% spread between probable Max Gain and Probable loss is heartening. Looks like I might make money here.

But I could lock in a gain, and may, in fact, do that.

JUN 85 PUTS are selling for ~1.60. I could buy 10 puts for the call premium I have already received.

hmm... I'll have to do the math and see where that may lead. Tune in tomorrow.

...or kibitz if you are a player. :cool2:

[Keventerprises]

The common wisdom is that the volatility of a sector ETF is much lower than a stock you might want to evaluate in that sector. But maybe not.

If the ETF holds large amounts of the less volatile stocks...
And if those 'big guys' are the ones you are looking at...

ETFs can be just as volatile as some of their components.

Here's the table for XLE

3254

Happened to catch this just as the PPS was at 90. There are three option choices included to illustrate what happens at-the-money [ATM].

Note that the expiry gain is highest for the ATM option.
Note also that there is plenty of 'action' implied by these option choices.

XLE is on my short-list for Net's next Covered Call position.

=====
So, covered calls are great as long as the market is going up.
The next series of posts deals with managing covered calls in a down market.

You made very good choices on BNI, UPL and ANR, Net! They were all up even during a down day. I'm still in the green and made some good choices, but you were wise to wait. Is the first week after expiration always volatile?

I'm thinking of rolling out my PAL Calls to September for $.95 on the same $7.50 Strike Price. What do you think? Brings my Cost down to $4.69. Not asking you to do any homework, just respect your opinion. :D

Even as UPL has risen nicely, it seems to have paralleled it's PPS/Strike ratio. Do you still feel good about it?

I'm trying to develop good charts Net, do you enter your fields manually on an Excel file or do you have a formula formatted on your Excel?

Herb Caen did alot of great writing on an old Underwood typewriter.

Thank you very much for all you do! I really appreciate your wisdom.

[Keventerprises]

Here's what I've been doing with Covered Calls for the last two days (Tuesday and Wednesday, 5/20 & 5/21):

DRYS: Sold Jun 115 calls at 10.00, and bought them back at 2.75 thereby reducing my cost to 102.52 which shielded me from the decline yesterday. I will sell them again at a higher price if the stock goes back up.

UPL: Bought UPL late at 94.19, and with the possibility of a pullback, I opted to sell the lower 90 Calls which were ITM for 6.00. Not only was the Premium 2.00+ higher, I am protected down lower to 88.19. I missed 7.00 by a few minutes. This worked out well since the stock dropped back to close at 92.30 today, and my net cost is 88.19.

PAL: Bought back my Jun 7.50 calls for .35 and resold Sep 7.50 calls for 1.00, raising $10,000.00 cash (7500.00 Net, 6500.00 + 1000.00 for initial sale of Jun 7.50 calls=7500.00) to reinvest. This also reduced my cost on PAL shares to 4.64.

Visa: Bought more Visa at 80.85 and will sell Jun 85 calls (VFQ) if they go back up close to 3.00 (Currently 2.20).

Also holding CC's on:
BNI Jun 105
SOL Jun 30
SOLF Jun 25 & Jun 30
JASO Jun 25 & Jun 30
LDK Jun 45
SWC Jun 17.50

I will take Netwrangler's advice and wait out the first week after Expirations to let things settle. In spite of this and 2 bad days on the stock market, I'm still in the green and feel good about these choices. Any thoughts or input is always appreciated!

[Keventerprises]

I haven't written any calls in the last few weeks. The volatility and premiums just aren't there.

Last Calls I've written:
AMTD May 20 -covered
GME April 50 - 5 cents above strike, my shares were forced away.

Currently I have a call spread position on BEAV
Bought July 45 Call
Sold July 55 Call

This gives me 10 dollars worth of potential profit. Selling the 55 call paid for 1.23 of the 45 Call. I'll probably sell a July 50 or 55 call covered by the shares I currently own once the value rises.

Hi Imperator, Just my recent learning and feeling about BEAV. I would have sold the closer-to-the-money lower 45 calls with the higher premium and better (lower) downside protection, and bought the cheaper, higher 55 calls for inexpensive upside. IMHO. I'm glad we're all learning together and discussing these issues, and the very interesting topic of covered calls.

[Keventerprises]

SOLF Earnings Report! Doesn't get much better than this:

http://au.biz.yahoo.com/080521/43/1r3gs.html

[Imperator]

I put on the call spread a couple of months back when the pricing was more attractive. I have a price target range of $50/share on BEAV, so I bought/sold those strikes to reflect that. On this last 10% down day, I may add another call, then sell and write two calls once the stock rebounds.

[Keventerprises]

I put on the call spread a couple of months back when the pricing was more attractive. I have a price target range of $50/share on BEAV, so I bought/sold those strikes to reflect that. On this last 10% down day, I may add another call, then sell and write two calls once the stock rebounds.

Thanks for your input. Please know that I was not telling you that I am an expert, just that the more information and experience we share the more we can all help each other!

I was shocked by SOLF dropping so much today after such a great earnings report. GS even downgraded them on the same day as being overvalued. I suppose built up expectations can sometimes be overdone, but the earnings report couldn't have been much better!

I think Netwrangler is right about the volatility of May. Lots of earnings reports come out and Memorial weekend contributed to driving up the price of oil which hurt the market in the last few days. The only good thing about a volatile covered call is selling the calls and buying them back lower, while you own it anyway, to reduce your cost. I sold Jun 115 calls on DRYS for 10.00, and bought them back for $2.95. Then after it went back up a bit I sold calls on a lower strike price for $8.60, bought them back for 7.00 and finally sold June 100 calls for $5.50. This brought my cost down along the way as a defensive measure and reduced my cost by $14.15, which is over 10% and saved me from a $3,000.00 loss! Ironically, that was my favorite pick from indicators over the weekend. I will make a point to be light around Holiday weekends in the future. I should have learned that from Martin Luther King day.

So far on CC's, I like stocks that trade in a fairly predictable, narrow and stable range, though I'm interested and closely following a few with high premiums to cycle the Calls. They still need to cycle up and down though, and stay near the computer.

Please continue adding your input so we can all learn from each other!

[Imperator]

Bought another July 45 Call on BEAV today for $0.45

[netwrangler]

The worst thing that can happen with a covered call position is to have the pps of the underlying security tank. The covered call position isn't a nimble as just owning the stock. By the time you buy back the call, then sell the stock, and sort through the losses from the two bid/ask spreads and the two transaction fees, bailing from a covered call position can be expensive.

But it is even more expensive to 'gut it out' - only to wind up with a stock that has lost half its value and with virtually no chance of climbing out of the hole before my 11-year-old granddaughter graduates from college.

Here are some alternative tactics to gutting it out:

I set an alert to tell me when the value of the call falls to less than 25% of the original premium. When the alert fires, my computer beeps and the trading software loads the covered call position. The alert does not trigger a market order to buy the call. I need to see what is going on before submitting an order. But if that alert fires early in the life of a covered call position, the likelihood is it's time to bail. [BTW: I title these alerts 'Buy Back The Calls!" just in case I forget why I set them.]


It is also a good idea to set a downside alert based on the stock price. Same action here - beep and load the position into the trading window. Most of the time the pps of the stock will fall faster than the premium for the call. The change in the pps may be your first warning that it's time to bail-out. [It's never fun to bail-out, but any pilot will tell you that 'bailing-out' is preferable to 'auguring-in'.]


The greatest danger in a covered call position comes in the first half of the position's life. If something bad happens a few days after you write a covered call it's easy to convince yourself that you have plenty of time to recover. Well, that is true, but you also have plenty of time to get into real trouble. I believe it is essential to set and adhere to stop-loss guidelines with covered call positions.


=====
But, let's look on the brighter side. Here is a tactic to lock in a gain.

Sometimes, just for spite, the pps of the stock in your covered call position will rise well above the strike price for the call you sold.
Rather than beating yourself up for the missed profit opportunity, see if you can buy a put that locks in a profit.

You would like to buy a put with a strike that is at or above your cost for the stock and that costs less than the premium you received for selling the call.
If you can buy such a put, you can lock in a profit.

Is the locked-in profit enough, compared to your 'potential'?
Well, remember that this is risk-free gain.
It is every bit as safe as a US T-bill.

It is a good idea to have an acceptable figure for a risk-free return in mind.
It should be somewhere between the 90-day T-bill return and the [honest] average return of your last 30 trades.
uhh...you do know your return on your last 30-trades, don't you? I suspect that calculating that is the subject of a future post.

One more thing - when you buy that put, you will smile if the stock price retraces. The best of all possible worlds is if you make max-profit on you covered call and score on the put as well. :biggrin:

[netwrangler]

Bought another July 45 Call on BEAV today for $0.45
I sold out my BEAV covered call position today and went short on the stock. I figure that if the airlines are in trouble, BEAV is too. I'm hoping that my short is not too late - that there is a delay between the airlines stock and the airline-vendors stock.

It is rare for me to take such a definitive stand. [My short position is relatively small, which may help me to be brave.]

This should be fun to watch.

[Keventerprises]

The worst thing that can happen with a covered call position is to have the pps of the underlying security tank. The covered call position isn't a nimble as just owning the stock. By the time you buy back the call, then sell the stock, and sort through the losses from the two bid/ask spreads and the two transaction fees, bailing from a covered call position can be expensive.

But it is even more expensive to 'gut it out' - only to wind up with a stock that has lost half its value and with virtually no chance of climbing out of the hole before my 11-year-old granddaughter graduates from college.

Here are some alternative tactics to gutting it out:

I set an alert to tell me when the value of the call falls to less than 25% of the original premium. When the alert fires, my computer beeps and the trading software loads the covered call position. The alert does not trigger a market order to buy the call. I need to see what is going on before submitting an order. But if that alert fires early in the life of a covered call position, the likelihood is it's time to bail. [BTW: I title these alerts 'Buy Back The Calls!" just in case I forget why I set them.]


It is also a good idea to set a downside alert based on the stock price. Same action here - beep and load the position into the trading window. Most of the time the pps of the stock will fall faster than the premium for the call. The change in the pps may be your first warning that it's time to bail-out. [It's never fun to bail-out, but any pilot will tell you that 'bailing-out' is preferable to 'auguring-in'.]


The greatest danger in a covered call position comes in the first half of the position's life. If something bad happens a few days after you write a covered call it's easy to convince yourself that you have plenty of time to recover. Well, that is true, but you also have plenty of time to get into real trouble. I believe it is essential to set and adhere to stop-loss guidelines with covered call positions.


=====
But, let's look on the brighter side. Here is a tactic to lock in a gain.

Sometimes, just for spite, the pps of the stock in your covered call position will rise well above the strike price for the call you sold.
Rather than beating yourself up for the missed profit opportunity, see if you can buy a put that locks in a profit.

You would like to buy a put with a strike that is at or above your cost for the stock and that costs less than the premium you received for selling the call.
If you can buy such a put, you can lock in a profit.

Is the locked-in profit enough, compared to your 'potential'?
Well, remember that this is risk-free gain.
It is every bit as safe as a US T-bill.

It is a good idea to have an acceptable figure for a risk-free return in mind.
It should be somewhere between the 90-day T-bill return and the [honest] average return of your last 30 trades.
uhh...you do know your return on your last 30-trades, don't you? I suspect that calculating that is the subject of a future post.

One more thing - when you buy that put, you will smile if the stock price retraces. The best of all possible worlds is if you make max-profit on you covered call and score on the put as well. :biggrin:

Thanks Net!
Two things come to mind.


You are right that buying a Put can be good insurance if you're on the fence. Since I am as of now not approved for Naked Options to sell the (covered) shares without selling the call first, I have been considering buying Puts as a backup also.

With your good recommendation on BNI, I sold Jun 105's at 5.20 when the PPS was 105. With a current PPS of 107.75 and not going down, I'm thinking of Buying Back the Jun 105 Calls for 5.00, which is still slightly below where I sold them at for 5.20. Since the Jun 105 is ITM and still holds today, I'm considering this so that I won't lose the current gain to $107.75. BNI seems like it will keep going, and so should the calls prices. Ideally I would buy back the Jun 105's for 5.00 (even) and sell 110's for $2.40+ (today's close). This way I won't lose the gain from 105.00-107.75, if they were assigned, so I'd like to benefit from this gain since it doesn't seem to be going down.

Sorry for the long post, just developing my thinking, and also telling you my highlights so that we can share our thoughts, actions and experiences.

[Keventerprises]

p.s.:

It is a high compliment to emulate successful people.



It is rare to find such a thorough musician.

Thanks Net! Much respect.

[netwrangler]

With your good recommendation on BNI, I sold Jun 105's at 5.20 when the PPS was 105. With a current PPS of 107.75 and not going down, I'm thinking of Buying Back the Jun 105 Calls for 5.00, which is still slightly below where I sold them at for 5.20. Since the Jun 105 is ITM and still holds today, I'm considering this so that I won't lose the current gain to $107.75. BNI seems like it will keep going, and so should the calls prices. Ideally I would buy back the Jun 105's for 5.00 (even) and sell 110's for $2.40+ (today's close). This way I won't lose the gain from 105.00-107.75, if they were assigned, so I'd like to benefit from this gain since it doesn't seem to be going down.

One of the key factors of covered call tactics is patience - otherwise known as understanding when you are well off.

If you can bring in $5.20 on an investment of $105 in a month, you are getting pretty close to 5% for the month or 60% for the year. That is a good return. Be happy with that and don't dick with it. There are far more ways to screw that up then there are ways to make it better.

You already have an effective price of $110.20. Why would you jeopardize that to go after a current price of $107.75?
Think of the $2.75 cushion over the strike as insurance. I can't tell you the number of times I have had deep in-the-money covered call positions turn into at-the-money or out-of-the-money positions when the market went south.

Sure rollouts and rollups are fun. But it you have a 60% return in hand, TAKE THE MONEY! If you roll up and the pps tanks, you really feel stupid. You also feel poorer - because you are.

If you don't have a lot of patience and just HAVE to do something, try doing a little DD on finding your next 60% return position - the one you are going to open when your BNI position gets assigned. :fisheye:

[Keventerprises]

One of the key factors of covered call tactics is patience - otherwise known as understanding when you are well off.

If you can bring in $5.20 on an investment of $105 in a month, you are getting pretty close to 5% for the month or 60% for the year. That is a good return. Be happy with that and don't dick with it. There are far more ways to screw that up then there are ways to make it better.

You already have an effective price of $110.20. Why would you jeopardize that to go after a current price of $107.75?
Think of the $2.75 cushion over the strike as insurance. I can't tell you the number of times I have had deep in-the-money covered call positions turn into at-the-money or out-of-the-money positions when the market went south.

Sure rollouts and rollups are fun. But it you have a 60% return in hand, TAKE THE MONEY! If you roll up and the pps tanks, you really feel stupid. You also feel poorer - because you are.

If you don't have a lot of patience and just HAVE to do something, try doing a little DD on finding your next 60% return position - the one you are going to open when your BNI position gets assigned. :fisheye:

Thank you Master! You are very right, very often. I would really like to know more of your thinking, as you have time.

You were also right about May volatility and post-Expiration unsettledness. I have never been through a May Market before. Is there anything else in particular I should watch out for throughout the year? Do you have a Calendar showing good and bad times for investing? :laugh:

I'm serious about wanting to learn more from you Net, at your convenience. Perhaps you would be willing to pick a Topic of the Week or something as they come up and expand on it, such as the Beta or Charting that we discussed briefly. I have some pretty decent Excel Charts myself, although I do not know how to format formulas in cells or columns.

Thank you very much Net! I look forward to hearing from you. Thanks for sharing your knowledge. It is much appreciated!

[netwrangler]

Thank you Master! You are very right, very often. I would really like to know more of your thinking, as you have time.

You were also right about May volatility and post-Expiration unsettledness. I have never been through a May Market before. Is there anything else in particular I should watch out for throughout the year? Do you have a Calendar showing good and bad times for investing? :laugh:

I'm serious about wanting to learn more from you Net, at your convenience. Perhaps you would be willing to pick a Topic of the Week or something as they come up and expand on it, such as the Beta or Charting that we discussed briefly. I have some pretty decent Excel Charts myself, although I do not know how to format formulas in cells or columns.

Thank you very much Net! I look forward to hearing from you. Thanks for sharing your knowledge. It is much appreciated!
uhh...did I mention that flattery will get you everywhere?

Well, BNI closed today @ 106.14 - down 1.61. In after-hours trading, BNI is, at this writing, 105.75 - down another .39.

If my prior post prevented you from destroying your covered call position, I will cheerfully accept lunch from you the next time I am in the middle of our state. Let the record show that I like Pork Chile Verde and Pacifico.

Kev, have a great holiday weekend.

[netwrangler]

So, to get back to the original idea of this thread, here are the new covered call positions I opened since the start of this thread. Note that I evaluate the position as if there were no change in the stock price between now and expiry. Moreover, I count unrealized gains or losses in the underlying stock as part of the evaluation. All evaluations ignore transaction fees, as your mileage may differ.


Ultra Petroleum [UPL]
Ultra Petroleum is a low cost natural gas producer in the Greater Green River Basin in southwestern Wyoming. Here is a link to the page on their site (http://www.ultrapetroleum.com/prop-greenriver.html) that describes their properties. UPL stands to benefit from the opening of the Rockies Express pipeline.

Stock entry point: $88.81
Covered Call: JUN 90
Premium: 3.50
Breakeven point: $85.31
Position value as of 5/27 close:
premium: 3.50
stock +/-: -1.71
net: +1.79
Time will tell on this position. I figure I got in a little high on the stock. Still, I have faith in the stock long-term.


Alpha Natural Resources [ANR]
New member Peter18 was the first to recommend ANR, followed closely by forum leader Albert0373. The chart and the fundamentals looked good to me and I went for it. [Thanks Peter and Albert]
Stock entry point: $72.79
Covered Call: JUN 75
Premium: 4.00
Breakeven point: $68.72
Position value as of 5/27 close:
premium: 4.00
stock +/-: -0.06
net: +3.94

XTO Energy [XTO]
I first encountered XTO at an energy conference in Denver last August. The stock sold for ~$54/share then. Wish I had bought then at that price - but, as my grandmother said, "If wishes were horses then beggars would ride."
So here's what happened in real life:
Stock entry point: $69.10
Covered Call: JUN 70
Premium: 2.41
Breakeven point: $66.69
On Friday May 23rd, XTO opened at 65.92 and closed at 64.21
On Tuesday, May 27th, XTO opened at 63.75.
When the premium value of the JUN 70 calls fell below 25% of the premium I paid for them, I bought back the calls at $0.50.
Shortly thereafter I sold the shares of XTO at 62.71
Shortly after that, I shorted shares of XTO at 62.72.
Position value as of 5/27 close:
premium: net = 1.91
stock +/-: -6.39
short +/1: -.03
net: -4.51
This is a great example of how covered call positions can lose money.
We shall see how this position works out.


Spider Energy ETF [XLE]
The Energy SPDR [XLE] is a 'reasonably' safe energy play, but it still jumps around a lot.
Stock entry point: $90.25
Covered Call: JUN 91
Premium: 2.69
Breakeven point: $87.56
Position value as of 5/27 close:
premium: 2.69
stock +/-: -4.55
net: -1.86
I rolled down the call to a JUL 90.
The new 'net' is -0.31 as of today's close.


Sempra Energy [SRE]
Sempra is a dynamic 'utility' with a stake in the Rockies Express pipeline.
Stock entry point: $59.71
Covered Call: JUN 60
Premium: 1.22
Breakeven point: $58.49
Position value as of 5/27 close:
premium: 1.22
stock +/-: -1.13
net: +0.09

I'll update these positions on the first trading day of each week [the Good Lord willing and the creek don't rise].

[Keventerprises]

So, to get back to the original idea of this thread, here are the new covered call positions I opened since the start of this thread. Note that I evaluate the position as if there were no change in the stock price between now and expiry. Moreover, I count unrealized gains or losses in the underlying stock as part of the evaluation. All evaluations ignore transaction fees, as your mileage may differ.


Ultra Petroleum [UPL]
Ultra Petroleum is a low cost natural gas producer in the Greater Green River Basin in southwestern Wyoming. Here is a link to the page on their site (http://www.ultrapetroleum.com/prop-greenriver.html) that describes their properties. UPL stands to benefit from the opening of the Rockies Express pipeline.

Stock entry point: $88.81
Covered Call: JUN 90
Premium: 3.50
Breakeven point: $85.31
Position value as of 5/27 close:
premium: 3.50
stock +/-: -1.71
net: +1.79
Time will tell on this position. I figure I got in a little high on the stock. Still, I have faith in the stock long-term.


Alpha Natural Resources [ANR]
New member Peter18 was the first to recommend ANR, followed closely by forum leader Albert0373. The chart and the fundamentals looked good to me and I went for it. [Thanks Peter and Albert]
Stock entry point: $72.79
Covered Call: JUN 75
Premium: 4.00
Breakeven point: $68.72
Position value as of 5/27 close:
premium: 4.00
stock +/-: -0.06
net: +3.94

XTO Energy [XTO]
I first encountered XTO at an energy conference in Denver last August. The stock sold for ~$54/share then. Wish I had bought then at that price - but, as my grandmother said, "If wishes were horses then beggars would ride."
So here's what happened in real life:
Stock entry point: $69.10
Covered Call: JUN 70
Premium: 2.41
Breakeven point: $66.69
On Friday May 23rd, XTO opened at 65.92 and closed at 64.21
On Tuesday, May 27th, XTO opened at 63.75.
When the premium value of the JUN 70 calls fell below 25% of the premium I paid for them, I bought back the calls at $0.50.
Shortly thereafter I sold the shares of XTO at 62.71
Shortly after that, I shorted shares of XTO at 62.72.
Position value as of 5/27 close:
premium: net = 1.91
stock +/-: -6.39
short +/1: -.03
net: -4.51
This is a great example of how covered call positions can lose money.
We shall see how this position works out.


Spider Energy ETF [XLE]
The Energy SPDR [XLE] is a 'reasonably' safe energy play, but it still jumps around a lot.
Stock entry point: $90.25
Covered Call: JUN 91
Premium: 2.69
Breakeven point: $87.56
Position value as of 5/27 close:
premium: 2.69
stock +/-: -4.55
net: -1.86
I rolled down the call to a JUL 90.
The new 'net' is -0.31 as of today's close.


Sempra Energy [SRE]
Sempra is a dynamic 'utility' with a stake in the Rockies Express pipeline.
Stock entry point: $59.71
Covered Call: JUN 60
Premium: 1.22
Breakeven point: $58.49
Position value as of 5/27 close:
premium: 1.22
stock +/-: -1.13
net: +0.09

I'll update these positions on the first trading day of each week [the Good Lord willing and the creek don't rise].

Thanks Net! I've been monitoring current and future possible calls, and doing some other things I need to do. One of the additional good things about CC's is that I have time to do other things, and not dwell too much on the holdings.

I will look at your recommendations of yours for good potential positions also. I'm already in UPL at $94.19 and sold the calls for $6.00.

My Options 101 book arrived today!

Thanks Net!

[Keventerprises]

So, to get back to the original idea of this thread, here are the new covered call positions I opened since the start of this thread. Note that I evaluate the position as if there were no change in the stock price between now and expiry. Moreover, I count unrealized gains or losses in the underlying stock as part of the evaluation. All evaluations ignore transaction fees, as your mileage may differ.


Ultra Petroleum [UPL]
Ultra Petroleum is a low cost natural gas producer in the Greater Green River Basin in southwestern Wyoming. Here is a link to the page on their site (http://www.ultrapetroleum.com/prop-greenriver.html) that describes their properties. UPL stands to benefit from the opening of the Rockies Express pipeline.

Stock entry point: $88.81
Covered Call: JUN 90
Premium: 3.50
Breakeven point: $85.31
Position value as of 5/27 close:
premium: 3.50
stock +/-: -1.71
net: +1.79
Time will tell on this position. I figure I got in a little high on the stock. Still, I have faith in the stock long-term.


Alpha Natural Resources [ANR]
New member Peter18 was the first to recommend ANR, followed closely by forum leader Albert0373. The chart and the fundamentals looked good to me and I went for it. [Thanks Peter and Albert]
Stock entry point: $72.79
Covered Call: JUN 75
Premium: 4.00
Breakeven point: $68.72
Position value as of 5/27 close:
premium: 4.00
stock +/-: -0.06
net: +3.94

XTO Energy [XTO]
I first encountered XTO at an energy conference in Denver last August. The stock sold for ~$54/share then. Wish I had bought then at that price - but, as my grandmother said, "If wishes were horses then beggars would ride."
So here's what happened in real life:
Stock entry point: $69.10
Covered Call: JUN 70
Premium: 2.41
Breakeven point: $66.69
On Friday May 23rd, XTO opened at 65.92 and closed at 64.21
On Tuesday, May 27th, XTO opened at 63.75.
When the premium value of the JUN 70 calls fell below 25% of the premium I paid for them, I bought back the calls at $0.50.
Shortly thereafter I sold the shares of XTO at 62.71
Shortly after that, I shorted shares of XTO at 62.72.
Position value as of 5/27 close:
premium: net = 1.91
stock +/-: -6.39
short +/1: -.03
net: -4.51
This is a great example of how covered call positions can lose money.
We shall see how this position works out.


Spider Energy ETF [XLE]
The Energy SPDR [XLE] is a 'reasonably' safe energy play, but it still jumps around a lot.
Stock entry point: $90.25
Covered Call: JUN 91
Premium: 2.69
Breakeven point: $87.56
Position value as of 5/27 close:
premium: 2.69
stock +/-: -4.55
net: -1.86
I rolled down the call to a JUL 90.
The new 'net' is -0.31 as of today's close.


Sempra Energy [SRE]
Sempra is a dynamic 'utility' with a stake in the Rockies Express pipeline.
Stock entry point: $59.71
Covered Call: JUN 60
Premium: 1.22
Breakeven point: $58.49
Position value as of 5/27 close:
premium: 1.22
stock +/-: -1.13
net: +0.09

I'll update these positions on the first trading day of each week [the Good Lord willing and the creek don't rise].

Steward, fetch my Brown Pants! :goodnight: :banghead: :egg:

[Keventerprises]

So, to get back to the original idea of this thread, here are the new covered call positions I opened since the start of this thread. Note that I evaluate the position as if there were no change in the stock price between now and expiry. Moreover, I count unrealized gains or losses in the underlying stock as part of the evaluation. All evaluations ignore transaction fees, as your mileage may differ.


Ultra Petroleum [UPL]
Ultra Petroleum is a low cost natural gas producer in the Greater Green River Basin in southwestern Wyoming. Here is a link to the page on their site (http://www.ultrapetroleum.com/prop-greenriver.html) that describes their properties. UPL stands to benefit from the opening of the Rockies Express pipeline.

Stock entry point: $88.81
Covered Call: JUN 90
Premium: 3.50
Breakeven point: $85.31
Position value as of 5/27 close:
premium: 3.50
stock +/-: -1.71
net: +1.79
Time will tell on this position. I figure I got in a little high on the stock. Still, I have faith in the stock long-term.


Alpha Natural Resources [ANR]
New member Peter18 was the first to recommend ANR, followed closely by forum leader Albert0373. The chart and the fundamentals looked good to me and I went for it. [Thanks Peter and Albert]
Stock entry point: $72.79
Covered Call: JUN 75
Premium: 4.00
Breakeven point: $68.72
Position value as of 5/27 close:
premium: 4.00
stock +/-: -0.06
net: +3.94

XTO Energy [XTO]
I first encountered XTO at an energy conference in Denver last August. The stock sold for ~$54/share then. Wish I had bought then at that price - but, as my grandmother said, "If wishes were horses then beggars would ride."
So here's what happened in real life:
Stock entry point: $69.10
Covered Call: JUN 70
Premium: 2.41
Breakeven point: $66.69
On Friday May 23rd, XTO opened at 65.92 and closed at 64.21
On Tuesday, May 27th, XTO opened at 63.75.
When the premium value of the JUN 70 calls fell below 25% of the premium I paid for them, I bought back the calls at $0.50.
Shortly thereafter I sold the shares of XTO at 62.71
Shortly after that, I shorted shares of XTO at 62.72.
Position value as of 5/27 close:
premium: net = 1.91
stock +/-: -6.39
short +/1: -.03
net: -4.51
This is a great example of how covered call positions can lose money.
We shall see how this position works out.


Spider Energy ETF [XLE]
The Energy SPDR [XLE] is a 'reasonably' safe energy play, but it still jumps around a lot.
Stock entry point: $90.25
Covered Call: JUN 91
Premium: 2.69
Breakeven point: $87.56
Position value as of 5/27 close:
premium: 2.69
stock +/-: -4.55
net: -1.86
I rolled down the call to a JUL 90.
The new 'net' is -0.31 as of today's close.


Sempra Energy [SRE]
Sempra is a dynamic 'utility' with a stake in the Rockies Express pipeline.
Stock entry point: $59.71
Covered Call: JUN 60
Premium: 1.22
Breakeven point: $58.49
Position value as of 5/27 close:
premium: 1.22
stock +/-: -1.13
net: +0.09

I'll update these positions on the first trading day of each week [the Good Lord willing and the creek don't rise].

Hi Net,
2 CC possibilities, though not very high premiums, the first two are in strong Sectors/Industries:

Tera Industries, TRA: PPS 43.63, Jun 45 Calls 1.70, 8/1 (Investools Good/Bad ratio) on Fundamentals. Fertilizer/Nitrogen Industry. Here's the Screenshot from Investools:

3310

James River Coal Company, JRCC: PPS 38.09, Jun 40 Calls 2.00, 3/4 Investools, Strong Sector/Industry. Some negatives, here is Investools Screenshot:

3311

Lastly, for information in reference to the BUD discussion in the Zap Thread, BUD: PPS 57.46, Jun 60 Calls 1.15. Very weak Sector and low Group Rank, Low Earnings and Growth, Negative Insider Trading, but high Institutional Investing (Acc Dist). Here is the Investools Screenshot:

3312

Also, Your ANR Pick is doing very well, do you think it's too late for it to continue? You first mentioned it at a PPS of $72.84 and a Jun 75 Call of 3.70, it now has a PPS of $81.68 and a Jun 85 Call of 3.30, and a Jun 80 Call of 5.90! Do you think this can continue? The Jun 80 Call might be safest. What are your thoughts on this or others?

Here is the ANR Screenshot:

3313

[netwrangler]

When I bought UPL, I mentioned that I had first wanted to buy the stock last August, but never found a 'buy point'. Looks like, when I finally bought, I bought 'high'.

Well, this is one of the 'advantages' of covered calls. That is:
If you find yourself buying in to stocks you really like, but at a high price, then sell the call as you buy. That will help give you a decent 'entry' price for the stock.

Here are the results of last week for the UPL covered call position:

3320

I'm still ahead here on the position.
Moreover, I am happy to be in this stock.

There are some interesting times ahead for Natural Gas stocks like UPL.
Frankly, I'm happy if I am above breakeven on this position at expiry.
Well, much depends on the price of NatGas and the 'demand' figure for energy this summer.
Still, I like the long-term prospects of UPL.

If I don't get assigned in this position, I intend to write another covered call for JUL.

[netwrangler]

Well, the pps of ANR took off this week and this position is comfortably above the max-return level.

3321

Whenever the pps of a stock goes above the 'max-return' level, there is a near-universal gut-reaction amongst traders to dump that covered call position and follow that stock.

I suggest the proper advice is:
Don't do something. Sit there!
Most often, the best thing you can do is to just let your position mature and take the money.
That's exactly what I intend to do with ANR.

[netwrangler]

I bought XTO at $69.10
The covered call position had a break-even price of $66.69.
Suffice to say that the PPS moved against my CC position.

I sold the XTGFM covered call @ $2.41, and bought it back @ $0.50.

On 5/27 I sold my shares of XTO @ 67.705, and immediately sold short the same number of shares for 67.72.

The next day. I covered the short @ 60.98.

If I had continued to trade that day, I could have recovered all of the losses from this position.

But I did not continue to trade. Moreover, I suggest that, even if I had, those trades should not be part of an evaluation of this covered call position.

But what about the short position?
Well, I think that should be included.
I took the short positions immediately after selling the long position.
I suggest that taking a short position on shares is a valid 'bail-out' tactic to execute when a covered call position tanks.

So how did I come out on this?
Stock transaction:
Buy: $69.10
Sell: $62.71
Net: ($6.39)
Call Transaction:
Sell: $2.41
Buy: ($.50)
Net: $1.91
Short Transaction:
Sell: $62.72
Buy: $60.98
Net: $1.74
Total Position: ($2.74)

This is clearly a losing position at this time. But the loss is mitigated by the call premium and the gain on the short sale.

Of course, I didn't need to bail on this position. I could have held on to expiry. For comparison, here is the table that shows the value of the covered call position - if I had held it.

3322

Hard to say, at this point in time, if that would have been a better strategy. But we can track that strategy and see.

[netwrangler]

XLE, the energy ETF, is one of my investment perennials.
The ETF has a bullish slant.
If I buy high [and sell the call high as well] I don't need to worry about a dip.
The pps will recover.

Well, that's a pretty good description of the position I am in:

3323

I bought in a little high.
That said, the real question is where I will exit.
I might keep [and work] this position for several months.

Then again, if the energy bubble bursts, this position will cause me a great deal of pain.

I'm sure it's fun for you to watch. Trust me, it's even more exciting if you have skin in the game. :wink:

[netwrangler]

I really like this stock.

Well, that's a good thing, because I may have some time to wait before this position makes me money.

Here's an update:

3324

This is another example of my using a covered call to reduce the entry point for a stock I wanted to buy.

Should be fun to follow.

[netwrangler]

My good friend Keventerprises has asked me if ANR is still a viable candidate for a covered call position.

My answer is a definite 'maybe'. Let's take a look:

We are looking at a closing price for ANR of $81.68. That's about 14% above what I bought it for on May 21st.
Can it keep going up? Well, of course, but it can go back down just as easily.

Let's recall how I got into ANR in the first place.
Peter18 and Albert0383 recommended it in the Net Covered Call thread.
(I love them for that.)
I actually did do some DD on ANR before I bought.
ANR went up.

At this point, I figure ANR is still a good stock [I'm not selling] but may not be the best covered call candidate.

In my experience, there is more to gain from finding new covered call candidates than there is from piggy-backing on previously identified positions.
Think of this as a form of zero-based-budgeting.
You always want to start with a clean slate.

For those who feel overwhelmed at the thought of doing their own DD, all I can say is, "Come on it, the water's fine."
DD is not that tough, at least at the entry level.
Entry level DD is all you need to start. You would be amazed at how many bad decisions are eliminated by basic [entry level] DD.

Relying on 'tips' is a losers strategy.

So, Kev, let's keep talking on the DD level. Together, we are likely to find a few worthwhile prospects. :fisheye:

[Florida]

Well, the pps of ANR took off this week and this position is comfortably above the max-return level.

3321

Whenever the pps of a stock goes above the 'max-return' level, there is a near-universal gut-reaction amongst traders to dump that covered call position and follow that stock.

I suggest the proper advice is:
Don't do something. Sit there!
Most often, the best thing you can do is to just let your position mature and take the money.
That's exactly what I intend to do with ANR.

Forgive me if I'm wrong, as I do not profess to be a CC expert, but would you not be better off in doing one of the following:

1. If you still believe in the stock, and want to keep it, buy back the call at $9.00 and sell the June $85 or even the June $90 against it. This would lock in the $4.35 profit you have already gained, reducing your net cost of the stock itself, and perhaps gaining additional income between now and expiry.

or,

2. If you do not believe in the stock as much as you did when you entered the position, sell the stock and buy the call back, locking in a $4.35 gain per share and then invest the money in another position that you feel is stronger.

Simply setting on the position once the maximum gain has been achieved would seem to me to be a waste of time. If the stock keeps moving up, you will gain nothing, but the stock could turn around and drop to a point below break even between now and expiry, leaving you with no gain, and perhaps even a loss.

Risk reward going forward would not appear to be in your favor, in my opinion.

[Keventerprises]

My good friend Keventerprises has asked me if ANR is still a viable candidate for a covered call position.

My answer is a definite 'maybe'. Let's take a look:

We are looking at a closing price for ANR of $81.68. That's about 14% above what I bought it for on May 21st.
Can it keep going up? Well, of course, but it can go back down just as easily.

Let's recall how I got into ANR in the first place.
Peter18 and Albert0383 recommended it in the Net Covered Call thread.
(I love them for that.)
I actually did do some DD on ANR before I bought.
ANR went up.

At this point, I figure ANR is still a good stock [I'm not selling] but may not be the best covered call candidate.

In my experience, there is more to gain from finding new covered call candidates than there is from piggy-backing on previously identified positions.
Think of this as a form of zero-based-budgeting.
You always want to start with a clean slate.

For those who feel overwhelmed at the thought of doing their own DD, all I can say is, "Come on it, the water's fine."
DD is not that tough, at least at the entry level.
Entry level DD is all you need to start. You would be amazed at how many bad decisions are eliminated by basic [entry level] DD.

Relying on 'tips' is a losers strategy.

So, Kev, let's keep talking on the DD level. Together, we are likely to find a few worthwhile prospects. :fisheye:

Thanks always, Net!
I appreciate your input. I only take tips as an introduction to the possibility. I do as much DD as I know how to, as far as Fundamentals, researching some knowledge of the company, percent gain/loss potential with consideration of selling the call and the resulting Net Cost (Minimum) and Maximum PPS/Gain Potential, and Investools statistics, research and rankings. I do have an admittedly weak ability to always discover and keep abreast of tid-bits of relevant news occasionally on some stocks. That is helped with information exchanges with other investors though and hopefully I provide the same on things I discover, and potential candidates.

2 new CC's for me this morning:

TRA: PPS 44.29, Sold Jun 45 Calls for 2.20.
JRCC: PPS 39.00, Sold Jun 40 Calls for 2.50.

Still might do ANR @ PPS<85 and sell Jun 85 Calls for close to $5.00.

Any comments are appreciated.

[netwrangler]

Forgive me if I'm wrong, as I do not profess to be a CC expert, but would you not be better off in doing one of the following:

1. If you still believe in the stock, and want to keep it, buy back the call at $9.00 and sell the June $85 or even the June $90 against it. This would lock in the $4.35 profit you have already gained, reducing your net cost of the stock itself, and perhaps gaining additional income between now and expiry.

or,

2. If you do not believe in the stock as much as you did when you entered the position, sell the stock and buy the call back, locking in a $4.35 gain per share and then invest the money in another position that you feel is stronger.

Simply setting on the position once the maximum gain has been achieved would seem to me to be a waste of time. If the stock keeps moving up, you will gain nothing, but the stock could turn around and drop to a point below break even between now and expiry, leaving you with no gain, and perhaps even a loss.

Risk reward going forward would not appear to be in your favor, in my opinion.You raise good issues, Florida — issues that need no apologies.
Let's see how well I can do at putting my point of view into words.

Downside breakeven point:
The is the pps you paid at entry minus the premium received for the call. As long as the pps is above your downside breakeven point, you are making money in the position. If you modify your position after entry, your downside breakeven point will almost alwaya change. It can go higher or lower, depending on how you modified the position.

For the ANR position, the downside breakeven point is $68.79

Upside breakeven point:
This is the strike price plus the call premium received. It is also the effective selling price of the position if the position is assigned. This is a very important concept.

For the ANR position, the upside breakeven point is $79.00. I believe many folks new to covered calls think they start losing money as soon as the pps goes above the strike price. But that doesn't take the call premium into account. For any pps below $79.00, the covered call position outperforms holding the stock alone.

With $79.00 as the upside breakeven amount, the ANR position wasn't significantly above that until last Friday, when it closed at $81.68. As I write this on Monday morning, the pps is just over $85. Yes, it's time to think about modifying the position, but it's still three weeks to expiry. No need to do anything rash.

"Locking in" the gain:
Right now the position shows an unrealized gain of $6.21 or just over 9%. That is a delightful return for a 30-day position. But there is no way to lock in that entire gain at this time.
There are, however, a couple of ways to lock in part of that gain:

I can buy back the call and sell the stock. This is called 'unwinding' the covered call position. As I write this now, the pps is 84.70 bid and the JUN 75 call is 11.40 ask. The net proceeds from unwinding would be $73.30. That would realize a gain of $4.41. I would leave $1.80 'on the table' in exchange for 'locking in'.


I can buy a JUN 75 put for $1.60. This would lock-in $4.61, but I would have to wait until expiry to realize that gain.
Both of these 'lock-in' strategies are tempting (and the first one is essentially the same as your point #2 in your post). Whether or not to lock-in depends, as you suggest, on how you feel about the stock. It also depends on whether you feel the chance of an additional $1.80 in three weeks [~2.5%] is worth trying for.

Rollout:
Point #1 in your post is pretty close to a standard 'rollout' of a covered call position. My own 'guidelines' for a rollout are:

I want to keep the stock - either as a long term holding, or to preserve holding time and qualify for L/T capital gains treatment when I sell.
I will buy back the covered call I sold, and sell a new call with a later expiry. The later expiry isn't required, but the extra time helps finance the deal.
The pps should be near the strike price of the call I am buying back.
Rollouts work best when done close to expiry.
The net premium from the rollover needs to meet my rate of return criteria.

For the ANR position, I could roll the JUN 75 call to a JUL 80 call for cost of about $1.20. That would do the following:

The Downside Breakeven Point would rise from $68.79 to $69.99, reflecting the $1.20 in call premium I had to give back in order to rollout.
The Upside Breakeven Point would rise from $79.00 to $82.80, reflecting the higher strike price and the lower net premium received.
The max gain for the position rises from $6.21 to 10.11, but that comes [if it comes] over a longer period of time.
The average % return per [week/month/year] goes down. This is normal for rollouts.

Note that a rollout does not lock-in any gains. If the pps falls below the Downside Breakeven Point [$69.99 after the rollout] the position loses money.

I figure I have some time this week to decide which choice I want to make.
=====
Florida, thank you for your post.
In my view, the essence of covered call investing is managing the positions.
Sure choosing which positions to enter is important. But even successful positions, like this one with ANR, serve up a lot of choices.

I don't see this part of covered call investing written up much in books or magazine articles.
For me, it is easier to see how it all works when I'm dealing with a real position. Analyzing covered calls through paper trades misses the time dynamic that is at the heart of these positions.

That's why I am using positions I actually own as examples in this thread — well, that and for the input I am getting from members, which helps me select and manage those positions. ;)

[Keventerprises]

I just received approval for Naked Options. I will not even consider selling Naked Puts (From what I have heard), but I am seriously looking at selling a few select Naked Calls. Do any of you have experience or advice on such?

Here is what I see so far. Please feel free to offer advice and/or correct me if I am wrong:

Considerations:
Situation #1. Picking a stock which I feel will not hit the strike price by expiration, in which case the gain=100% of the Premium. (Slightly Bearish to Mildly Bullish)

Situation #2. On a stock I already own Long, and sold the Covered Calls against, but the stock has gone down, selling additional Calls will further reduce my Cost on the shares I already own and which seems less likely than ever to hit it's Strike Price, thereby offsetting a loss on the PPS having gone down. As long as the stock doesn't go back up alot before expiration and the premium is worth the risk, this seems worth considering. Ideally the PPS would go up but not hit the Strike Price. (Mildly Bullish)

Situation #3. On a stock I feel has no chance of hitting it's Strike Price by expiration, Naked Calls could be sold close to expiration for smaller premiums with less risk. (Bearish)

Situation #4. The PPS rises above the Strike Price by the same amount as the Premium of the Naked Call=Breakeven.

Situation #5. (Worst case scenario) The PPS rises well above the Strike Price in excess of the Premium Price received, which would be the amount of the loss. (A surprisingly Bullish move would have to occur)


Example of a stock being considered for Selling Naked Calls:
DRYS:
PPS: 92.50
Jun 100 Calls: 3.00 (on a down day, may go up more).

Possible Results of DRYS:
1. Immediately brings my Long Position Cost down by $3.00 for sure right now.

2. Stock would have to rise $10.50 to $103.00 to reach Breakeven and I would either buy back the Call or buy someone some shares at $103.00/Mkt Value. (Close monitoring would be Required if approaching Strike Price!)

3. At approaching Expiration, the Premium will tend to go down, minus the amount that the stock has gone up, and even if it goes ITM the Premium is almost always exactly equal to the amount that the PPS is ITM. At worst I could buy the call back for the amount ITM. With a stock such as DRYS the PPS would have to rise by 3.5 times the price of the Premium. In other words, the Premium is over 25% of the rise needed to lose money. That seems pretty good odds to me. Is DRYS going to go up $10.50 in 19 days? DRYS would have to go to $105.50 for a 1:1 Risk to Reward Ratio. In other words it seems like a 1:4 Ratio of Risk to Reward, and also a good defense against a CC position that has gone down.

Closing:
Any input and experience is always appreciated, and I welcome :welcome:) information from any one, not just Netwrangler. We have some good minds here, and I hope we can all help each other!

[netwrangler]

Personally, I don't believe that selling naked calls is worth the risk.

There is almost always a better [smarter] way to play the situation.

That's just my opinion, but it is one I hold strongly.

[Keventerprises]

Personally, I don't believe that selling naked calls is worth the risk.

There is almost always a better [smarter] way to play the situation.

That's just my opinion, but it is one I hold strongly.

My 'Paper Trading' forethought is that, in the case of DRYS, if at worst it goes up $7.50 to the $100.00 Strike Price, I'm going to either buy back the Calls at $5-6 and lose $200-300 on 100 shares, or if I feel strongly that it will continue rising well past 103, I will buy 100 shares at the Strike Price of $100. So, is it going to skyrocket past the strike price while I'm not looking? Not unless I'm in the Hospital. From what I know, this is the worst case scenario/downside. Surprising drops are much more common and less avoidable than surprising 10% single day upturns. The only one that I can think of is when Google went up $80.00 in one day. That would be a problem. But it still didn't hit the $600.00 Strike Price that I could have sold Calls at for $48.00. That's just an example of the only one I can think of skyrocketing unexpectedly, and I will not do this with expensive stocks such as Google.

As always, any input and experience is appreciated!!! I hope this is of interest and help to others too.

[netwrangler]

My 'Paper Trading' forethought is that, in the case of DRYS, if at worst it goes up $7.50 to the $100.00 Strike Price, I'm going to either buy back the Calls at $5-6 and lose $200-300 on 100 shares, or if I feel strongly that it will continue rising well past 103, I will buy 100 shares at the Strike Price of $100. So, is it going to skyrocket past the strike price while I'm not looking? Not unless I'm in the Hospital. From what I know, this is the worst case scenario/downside. Surprising drops are much more common and less avoidable than surprising 10% single day upturns. The only one that I can think of is when Google went up $80.00 in one day. That would be a problem. But it still didn't hit the $600.00 Strike Price that I could have sold Calls at for $48.00. That's just an example of the only one I can think of skyrocketing unexpectedly, and I will not do this with expensive stocks such as Google.

As always, any input and experience is appreciated!!! I hope this is of interest and help to others too.
Well, I didn't need to go back very far in DRYS history to find an interesting example of price movement. Here is a chart from last month:

3330


Note the 17% move from Friday, May 9th to Friday May 16th.
Note the gap up from Thursday, May 15th to Friday May 16th.
That puppy rocketed by at night, when the option market was closed.
It's enough to put someone in the hospital.
And finally, note that Friday, May 16th was Expiry Friday for May — that was the last day to modify a position.

Good thing you waited to start you new naked call sales strategy until this month.

Well, Captain, I'm sure the steward will have a second pair of pants ready for you in an appropriate color. :captain:

________
All kidding aside, Kev, you might want to try some back-testing.
I know that's tough to do with options.
You really need intraday option and stock price data for a good test.
But it's worth going after.

Bon Voyage et bon chance, mon vieux.

[Keventerprises]

Well, I didn't need to go back very far in DRYS history to find an interesting example of price movement. Here is a chart from last month:

3330


Note the 17% move from Friday, May 9th to Friday May 16th.
Note the gap up from Thursday, May 15th to Friday May 16th.
That puppy rocketed by at night, when the option market was closed.
It's enough to put someone in the hospital.
And finally, note that Friday, May 16th was Expiry Friday for May — that was the last day to modify a position.

Good thing you waited to start you new naked call sales strategy until this month.

Well, Captain, I'm sure the steward will have a second pair of pants ready for you in an appropriate color. :captain:

________
All kidding aside, Kev, you might want to try some back-testing.
I know that's tough to do with options.
You really need intraday option and stock price data for a good test.
But it's worth going after.

Bon Voyage et bon chance, mon vieux.

Oh, mais oui. You are indeed a Smartaleck. :biggrin: Did your Grandmother ever call you that? Mine did. I like your thinking. You don't forget a thing. lol

I will proceed cautiously, and try not to make my paper trades into Diapers.

So, are higher premium calls usually only on Volatile stocks (Beta>1+)?? Is a high Premium expressing more than just confidence in the stock going past the strike price, such as Volatility or Risk/Reward???

As the stock approaches SP, two pressures occur. Time pushing it down, and the bouyancy of the stock. Past the SP it Bob's up!

Just thinking out loud and expanding on the subject. Thanks for listening!