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Coveredcall

THE SHORT PUT-ACQUIRE/KEEP PREMIUM-COVERED CALL CYCLEI have touched on this topic before in separate posts, but thought I'd refresh the notion of what I like to call "strategic acquisition" here, since I get repeatedly asked about how I go about acquiring shares in an underlying I actually really do want to buy and hold, usually for an indefinite period of time (we're talking years here). The focus of these acquisitions is not on growth (although that's sure always swell), but on the dividends owning the shares provide plus any premium I collect that reduces my cost basis. This may seem "radical" ("What?! You're not acquiring the shares for growth potential! Ridiculous!"), but the fact is that you cannot count on growth ad infinitum , and if you're going to bail on your dividend earning positions "intermittently" as they appear to run out of steam to the upside, then the whole purpose for owning the shares in the first place -- dividends plus cost basis reducing short call premium -- is somewhat out the window. All that being said, here's the basic cycle: 1. Sell 30 delta puts.* Depending on your account size, how aggressive you want to be, and how patient you are, you can sell one contract, 45 days-'til-expiry or ladder these out in time (e.g., one at the November expiry 30 delta; one in the December at the 30; one in January at the 30). 2. Allow the short put(s) to go to expiry. (a) If price is above the short put at expiry, the short put expires worthless, and you keep the premium you received for selling it. You can then re-up the position in the next monthly at the 30 delta, and then lather, rinse, repeat the process. If you've laddered out; you can re-up in the back month at its 30 delta. (b) If price is below the short put strike at expiry, you are assigned shares, after which you proceed to sell call(s) against them to reduce your cost basis over time. I generally sell the 20-30 delta short call against, and then roll the short call for duration when it has decreased significantly in value or-- if it has been broken -- to keep it clear of current price (because I want to hold on to the shares; I don't want them called away).** You can naturally continue to sell short puts if you want to continue acquiring additional shares at lower prices. * -- Naturally, selling a given 30 delta may not be where you would want to ideally acquire, so having a fairly long list of underlyings with "ideal" buy points is a good idea. While you're waiting for some, others may be "ripe." For me personally, I generally stick to a small number of comparatively high yield exchange-traded funds -- e.g., EFA, TLT, IYR, SPY, but I'm fine with waiting months for potential buy points and/or am willing to sell 30 deltas on a quarterly basis as compared to forty-five days out in time to get strikes more distant from current price than a 45 day 30 delta would be (compare SPY November 17th 244 short put (28 delta) with, for example, the March 29th (Quarterly) 237 (29 delta)). ** -- When rolling a short call out for duration, you always want to roll for a credit. If you want to attempt to improve the strike, you generally have to roll out further in time to do this, which is naturally okay in this case, since you want to hold onto the shares for the dividends. However, you don't want to roll out further in time than you absolutely have to, and you may have to consider improving strikes a bit more incrementally than you'd like. I mean, who wants to roll out a year to get their calls clear of current price? (Extreme example, but you get the idea).
AMEX:IYR
by NaughtyPines
3
GILD Covered Call SOLD -1 GILD 100 17 NOV 17 90 CALL @1.00 Adjusted Cost Basis $87.70 Just a few hours ago I didn't see any chance of turning a profit on this investment any time soon. Unexpectedly the stock rallied over 7% today (now up 25% off lows) and above the average year end analyst target. Expected Outcomes: - With selling off the 'unlimited upside', if GILD is above 90 (19 delta strike) by Nov expiry and the stock gets called away, I'll at least have brought in 3.76% on my adjusted cost basis (plus dividend yield). - If the stock is under 90 by Nov expiry the call expires worthless and I keep the credit to reduce my cost basis, and sell another call. This is about 80% probable this point, at 10% below the 90 strike and more than 2 months to expiration. If the stock pulls back sharply I will likely buy back the call and walk away with most of the profit, and aim to sell another call on the next rally in GILD. I've been sitting on this dog for over a year, suffering through a 27% draw down at the low in June. The stock dividend yields 2.75%, which is at least something while you wait. The stock is well rated, excellent price to free cash flow, but a 'value trap' with questionable earnings growth long term. Some of the apparent catalysts for todays big up move were acquisition of KITE and FDA approval of new class of gene therapy drugs. So I jumped at the chance to make this into a profitable trade after waiting for many months. My main goals are to bring in cash flow, reduce cost basis, and reduce positive deltas to form a more neutral portfolio. Yes, it's entirely possible GILD could be worth double what I paid for it in a couple years and I'll have walked away with chump change. Or the market gets a long over due pullback and it's another year of sideways moves in the $65 - $90 range. Who really knows for certain what will happen?
NASDAQ:GILD
by dime
TRADE IDEA: VRX "MONIED" COVERED CALLLet's start with the metrics for this setup: Buy shares at 24.54 Sell Nov 18th 22.5 short call Whole Package/BE/Cost Basis: 20.40 db per 100 shares/contract (20.40 is also your cost basis and break even) Max Profit: $210 per 100 shares/contract (if called away at 22.50) ROC: 10.3% Now, ordinarily, I like to do "OTM" (i.e., out-of-the money) covered calls where the short call is above the price of the underlying. I feel this gives me a touch more flexibility in working the setup over a substantial period of time should I ultimately decide I want to stay in the play for whatever reason (e.g., continuing high implied volatility, it's ripping to the upside, etc.). Additionally, OTM covered calls offer better ROC %-age metrics, assuming that price continues to move toward your short call. With a "monied" covered call, you're limiting your upside profit potential from the get-go, although you can naturally attempt to roll the "monied" short call up and out for duration, assuming that you can get a decent credit to do so, which isn't always possible. However, in exchange for "going monied," you're getting a benefit: the stock price can continue to decline somewhat, and you can still make money. For instance, if price is still above the short call strike at expiry, your shares are called away and your profit is the short call strike price (x 100) minus what you paid for the setup -- in this case: $2250 minus $2040. If price is below the short call strike, but still above your cost basis, you still make money; the short call expires worthless (for which you book a profit), but the profit you made from the short call exceeds the price decline of the stock. As with any covered call, however, you can lose money if price declines below the cost basis of your setup. In that event, I continue to sell calls against my stock, further reducing my cost basis in my shares until I'm able to exit the trade for scratch or a small profit.
V
by NaughtyPines
4
NVAX TRADE UPDATEI figured I'd clean up this setup a little bit on the chart to show what's going on with this trade a little more clearly, since we're running into opex, and I'll have to do something with it here shortly. I also for mapping out what I'm going to do if price does certain things relative to my cost basis and original stock purchase price. The trade originally started out as a "Plain Jane" covered call, where I bought shares at 7.54 and sold the Sept 16th 8 call for something like a 6.39 debit (so my cost basis in the shares at that point was 6.39/share). I proceeded to sell the Sept 16th 5 short put to further reduce cost basis in my shares, as well as to sell some premium in this unusually high implied volatility underlying (I filled the short put for an additional .67 ($67)/contract credit. When, after all, can you get >$50/contract credit for a somewhat far out-of-the-money short put in an <$10 underlying -- rarely. After selling the put, my cost basis in the shares would be 6.39 minus .67 or 5.72/share. Currently, the 8 short call is valued at .72 ($72) (it was originally $115), and the short put is valued at .25 ($25) (originally, $67). Rolling into expiry, I'm looking to take the short put off at near maximum profit (.05 or less). If price finishes above $8 at expiry, my shares will be called away at $8, and I'll be out of the trade. However, what should I do if price either finishes (a) between my stock purchase price and the short call or (b) price finishes below my stock purchase price, but above my original cost basis for the covered call (6.93/share)? If price finishes "between", I'm likely to just treat the trade from that point forward as a straight "speculative long" stock play and set a stop loss for my shares at break even and then let the trade ride. The reason why I would probably not continue to sell calls against and set a stop loss on the stock is to avoid the scenario where I would get stopped out on the stock and have a naked speculative short call hanging out there which could get painful if price whips higher on news (which is due out sometime in the 4th quarter and most likely at a presentation NVAX is going to give in mid-October). If price finishes lower than what I paid for the stock originally, but above my cost basis for the original covered call, I'm likely to just close it entirely out, having made profit on the short put and on the covered call setup ... .
NASDAQ:NVAX
by NaughtyPines
6
TRADE IDEA: AMD COVERED CALL/NAKED SHORT PUTMy "guess" is that AMD will not hold onto this level (I briefly considered going "monied" with the short call with the covered call setup, selling the 7 strike instead of the 8). However. implied volatility is fairly high here (64.6%), and my mechanical approach to most of these setups is basically to "ditch the guessing" and pull the trigger; price will go where it goes ... . Covered Call Metrics: Buy 100 Shares at 7.51 Sell Oct 21st 8 Call Whole Package: 6.93 db (off hours; 6.93 will be my cost basis in the stock) Max Profit: $107 (if called away at 8) ROC%: 15.4% Notes: As an alternative, I looked at selling a put in the Oct 21st expiry below current price. The Oct 21st 7 short put, for example, currently offers up .54 ($54) in premium at the mid. The notion there would either be to (a) keep the premium if AMD finishes above $7 at expiry; (b) look to be put the stock at $7 if it doesn't; or (c) roll the short put down and out for additional credit if price breaks $7. Anything below the $7 strike in the Oct 21st expiry won't offer you much premium at the moment (e.g., the 6 strike offers .25 at the mid, which approaches "not worth it"). At NY open, I'll probably just "flip a coin" as to whether I go with the naked put or the covered call.
NASDAQ:AMD
by NaughtyPines
RIGL COVERED CALLThis ranks up there as one of the more ridiculous covered calls I've done. I say "ridiculous" because I'm selling the short call right at where current price is and dramatically reducing my cost basis at the same time (the share price line is depicted at 2.40 so that the stock price line/short call line don't overlap). Metrics: Buy 100 shares RIGL at 2.51 Sell Sept 16th 2.5 short call Entire Package: 1.76 debit (i.e., your cost basis in the shares is 1.76/share) Max Profit: $75/contract if called away at 2.5 (ROC 42.6%)
NASDAQ:RIGLLong
by NaughtyPines
TRADE IDEA: LC COVERED CALLMetrics: Buy 100 shares at 5.41 Sell Oct 21st 5.5 call Whole Package: 4.93 db (4.93/share's your break even/cost basis) Max Profit: $57 (if called away at 5.5) ROC: 11.6% Notes: I've looked at this underlying several times over the past several weeks, as it keeps popping up on my high implied volatility screens. The good thing about the setup: the short call strike is near to current price, so price needn't move much to finish above 5.50 at expiration. The bad thing about the setup: lows are around $4/share, so it could cave into the poo pile its longer-term charts make it look like -- a post-downhill slide from its initial public offering price of >$25 per share, although support is ZigZag indicated at about 5.15.
NYSE:LC
by NaughtyPines
TRADE IDEA: GNW COVERED CALLMetrics: Buy Shares at 4.62 Sell Oct 21st 5 call Whole Package: 4.36 Max Profit: $64 (if called away at 5) ROC: 14.7% Notes: The ROC metrics are good here; the chart is not. The underlying is at highs, so it might be beneficial to wait for a pullback to initiate a play. By the same token, there is room to the upside (albeit small to next ZigZag indicated resistance at 5.16). I looked at premium on the put side; in my opinion, not enough juice there to sell, for example, the naked Oct 21st 4.
NYSE:GNW
by NaughtyPines
TRADE IDEA: CDE COVERED CALL/NAKED SHORT PUTCovered Call Metrics: Buy 100 shares stock at 13.68 Sell Oct 21st 14 call Whole Package: 12.36 db Max Profit: $164 (if called away at $14) ROC: 13.3% Alternative: Sell Oct 21st 12 put Probability of Profit: 71% Max Profit: $70 (if filled at the mid price) Max Loss: $1140 (if you do nothing and stock goes to $0 by expiration) Notes: The short put play would be either a naked premium selling play or a precursor to initiating a covered call. For the former, look to roll down and out for duration and credit when the price of the short put equals 2x what you received in credit; otherwise, leave the option alone and look to take off in profit at 50% max or above. For the latter, take the assignment at 12 or roll the put down and out for duration and credit to shoot for assignment at a more favorable price. Given the underlying's trajectory and the amount of "air below", I'd probably opt for just selling the short put here. A lot of miners are looking somewhat weak here ... .
NYSE:CDE
by NaughtyPines