In my previous post I stressed the importance of developing your own method. However, everyone needs to start somewhere, therefore most people start out using someone else's method. There are many different methods for trading covered calls out there. Some are in books, some are taught in seminars and some are website services. All of these methods have their own specific rules and they usually insist that you follow their rules in order to be successful. That's because the rules were developed, tested, and refined, through knowledge and experience, and have proven to work for the person who developed them. If I were selling my method I would also insist that people follow my rules, since they've worked for me.
Some people are very successful trading someone else's method because they're comfortable with the method and the rules. However, some people fail, usually because they don't follow the rules, and they end up quiting and look for another method to follow, which usually ends in the same result.
It's hard to follow someone else's rules, especially if you're not comfortable with them. So, if you're trading someone else's method you need to adapt it to your own personality and style of investing. The way to do that is through knowledge and experience. That's basically what I did to develop my own method. I studied various covered call methods and tried various strategies, by putting on small positions, and eventually ended up with my own method.
If you're currently trading someone else's method and find yourself having problems following all the rules, then perhaps there's some aspect of the method that you're not completely comfortable with. You should analyze the method and rules, in detail, and determine which parts you're comfortable with and which parts you're not. Then focus on the parts you're not comfortable with and try to determine why. Perhaps you don't fully understand the reason behind a specific rule. In that case, you should discuss it with the developer to get a better understanding. Perhaps you disagree with the reason behind the rule or think there may be a better way to address it.
Whatever the reason, you should learn all you can about investing and trading covered calls so you can address the problem and come up with your own solution. You can start by reading some or all of the books listed on this blog. Then experiment with small trades and try different strategies for initial positions and adjustments. Through this knowledge and experience you'll be able to either modify someone else's method to suit you or develop your own. In either case, you should end up with a method that you're completely comfortable with and can follow religiously, without hesitation or second guessing.
Saturday, December 30, 2006
Thursday, December 28, 2006
Developing Your Own Method
The purpose of this blog is not to convince everyone that my method of trading covered calls is best or that everyone should follow it. My method was developed by me and for me. It's customized to my personality and style of investing. It may not be right for everyone else. Everyone is different. We all have different personalities, investment styles, philosophies, objectives, return requirements, risk tolerance, etc. No single method is right for everyone. There is no "holy grail". That's why I think it's important for everyone to develop their own method and trading plan.
I'm currently reading The Winning Investment Habits of Warren Buffett & George Soros
by Mark Tier. If you haven't read this book then I highly recommend it. Buffett & Soros are the most successful investors of our time, and maybe of all time. However, their methods are completely different. If Buffett tried to invest like Soros, or Soros tried to invest like Buffett, they'd both probably fail miserably. That's because they wouldn't be comfortable trading the other's method. Although their methods are different, Buffett & Soros have many things in common.
In the book, Mark Tier identifies 23 winning investment habits. Here are just a few which relate to developing your own method.
3. Develop you own unique investment philosophy. The Master Investor has developed his own investment philosophy, which is an expression of his personality, abilities, knowledge, tastes, and objectives. As a result, no two highly successful investors have the same investment philosophy. The Losing Investor has no investment philosophy, or uses someone else's.
4. Develop your own personal system for selecting, buying, and selling investments. The Master Investor has developed, and tested, his own personal system for selecting, buying, and selling investments. The Losing Investor has no system, or has adopted someone else's without testing and adapting it to his/her own personality. When such a system doesn't work for him/her, he/she adopts another one, which doesn't work for him/her either.
13. Follow your system religiously. The Master Investor follows his/her system religiously. The Losing Investor continually second guesses his/her system, if he/she has one. Shifts criteria and goalposts to justify his/her actions.
The third point is difficult to follow if you use someone else's method. I don't know about you, but I've always been somewhat of a rebel and hated following some else's rules. When I studied various covered call methods there were some rules I was comfortable with and some rules I wasn't comfortable with. It was the rules I wasn't comfortable with that were the hardest to follow. I found myself always second guessing the rules, until I made them my own by developing my own method. I took from all these various methods the parts that I was comfortable with and discarded the rest. Now I have a method I'm completely comfortable with and can follow religiously, without hesitation or second guessing.
So again, I think it's important that everyone develop their own method of trading rather than following someone else's method. You have to be comfortable with whatever method you choose, so that you'll follow it without question. It's easier to do that with a method that you've developed than it is with a method that someone else developed.
I'm sharing my method and the information on this blog in the hope that it will be helpful to someone who is serious about developing their own method. Again, I'm not trying to convince you that my method is the best or even right for you, but hopefully it will give you some ideas that you can use.
I'm currently reading The Winning Investment Habits of Warren Buffett & George Soros
by Mark Tier. If you haven't read this book then I highly recommend it. Buffett & Soros are the most successful investors of our time, and maybe of all time. However, their methods are completely different. If Buffett tried to invest like Soros, or Soros tried to invest like Buffett, they'd both probably fail miserably. That's because they wouldn't be comfortable trading the other's method. Although their methods are different, Buffett & Soros have many things in common.In the book, Mark Tier identifies 23 winning investment habits. Here are just a few which relate to developing your own method.
3. Develop you own unique investment philosophy. The Master Investor has developed his own investment philosophy, which is an expression of his personality, abilities, knowledge, tastes, and objectives. As a result, no two highly successful investors have the same investment philosophy. The Losing Investor has no investment philosophy, or uses someone else's.
4. Develop your own personal system for selecting, buying, and selling investments. The Master Investor has developed, and tested, his own personal system for selecting, buying, and selling investments. The Losing Investor has no system, or has adopted someone else's without testing and adapting it to his/her own personality. When such a system doesn't work for him/her, he/she adopts another one, which doesn't work for him/her either.
13. Follow your system religiously. The Master Investor follows his/her system religiously. The Losing Investor continually second guesses his/her system, if he/she has one. Shifts criteria and goalposts to justify his/her actions.
The third point is difficult to follow if you use someone else's method. I don't know about you, but I've always been somewhat of a rebel and hated following some else's rules. When I studied various covered call methods there were some rules I was comfortable with and some rules I wasn't comfortable with. It was the rules I wasn't comfortable with that were the hardest to follow. I found myself always second guessing the rules, until I made them my own by developing my own method. I took from all these various methods the parts that I was comfortable with and discarded the rest. Now I have a method I'm completely comfortable with and can follow religiously, without hesitation or second guessing.
So again, I think it's important that everyone develop their own method of trading rather than following someone else's method. You have to be comfortable with whatever method you choose, so that you'll follow it without question. It's easier to do that with a method that you've developed than it is with a method that someone else developed.
I'm sharing my method and the information on this blog in the hope that it will be helpful to someone who is serious about developing their own method. Again, I'm not trying to convince you that my method is the best or even right for you, but hopefully it will give you some ideas that you can use.
Wednesday, December 27, 2006
RMBS - Adjustment
The following adjustment was made today on RMBS:
27-Dec-06 - Buy Back & Roll Out/Down - BTC 2 Jan07 25.00 Call @ -0.16
27-Dec-06 - Continued Trade - STO 2 Feb07 22.50 Call @ 1.04
The Jan07 25 Call had very little time value left so I bought it back and rolled out to Feb07 and down to the 22.50 strike. RMBS was down as much as 73% in Aug06. By dollar cost averaging I reduced the cost basis to $26.55. This position is currently down about 29% from the new cost basis, excluding option premiums.
Current Position Summary:
Stock Investment: $5,310.00
Income Generated: $1,427.50
Percent Income Generated: 26.88%
Net Profit If Called: $617.50
Percent Return If Called: 11.63%
Annualized Return If Called: 14.24%
Days to Expiration: 298 days
Trade History:
24-Apr-06 - Initial Stock Position - BTO 100 RMBS @ 38.33
24-Apr-06 - Initial Call Option - STO 1 May06 35.00 Call @ 7.49
23-May-06 - Continued Trade - STO 1 Nov06 35.00 Call @ 3.09
25-Jul-06 - Buy Back - BTC 1 Nov06 35.00 Call @ -0.26
25-Jul-06 - Dollar Cost Averaging - BTO 100 RMBS @ 14.77
25-Jul-06 - Combined Cost Basis - $5,310.00 200 @ 26.55
25-Jul-06 - Continued Trade - STO 2 Jan07 25.00 Call @ 1.09
27-Dec-06 - Buy Back & Roll Out/Down - BTC 2 Jan07 25.00 Call @ -0.16
27-Dec-06 - Continued Trade - STO 2 Feb07 22.50 Call @ 1.04
27-Dec-06 - Buy Back & Roll Out/Down - BTC 2 Jan07 25.00 Call @ -0.16
27-Dec-06 - Continued Trade - STO 2 Feb07 22.50 Call @ 1.04
The Jan07 25 Call had very little time value left so I bought it back and rolled out to Feb07 and down to the 22.50 strike. RMBS was down as much as 73% in Aug06. By dollar cost averaging I reduced the cost basis to $26.55. This position is currently down about 29% from the new cost basis, excluding option premiums.
Current Position Summary:
Stock Investment: $5,310.00
Income Generated: $1,427.50
Percent Income Generated: 26.88%
Net Profit If Called: $617.50
Percent Return If Called: 11.63%
Annualized Return If Called: 14.24%
Days to Expiration: 298 days
Trade History:
24-Apr-06 - Initial Stock Position - BTO 100 RMBS @ 38.33
24-Apr-06 - Initial Call Option - STO 1 May06 35.00 Call @ 7.49
23-May-06 - Continued Trade - STO 1 Nov06 35.00 Call @ 3.09
25-Jul-06 - Buy Back - BTC 1 Nov06 35.00 Call @ -0.26
25-Jul-06 - Dollar Cost Averaging - BTO 100 RMBS @ 14.77
25-Jul-06 - Combined Cost Basis - $5,310.00 200 @ 26.55
25-Jul-06 - Continued Trade - STO 2 Jan07 25.00 Call @ 1.09
27-Dec-06 - Buy Back & Roll Out/Down - BTC 2 Jan07 25.00 Call @ -0.16
27-Dec-06 - Continued Trade - STO 2 Feb07 22.50 Call @ 1.04
Tuesday, December 26, 2006
FTEK - New Position
A new position was established this morning on FTEK. The following is the trade information, including IB commissions:
26-Dec-06 - Initial Stock Position - BTO 100 FTEK @ 24.67
26-Dec-06 - Initial Call Option - STO 1 Jun07 25.00 Call @ 3.59
Stock Investment: $2,467.00
Income Generated: $359.00
Percent Income Generated: 14.55%
Net Profit If Called: $392.00
Percent Return If Called: 15.89%
Annualized Return If Called: 33.92%
Days to Expiration: 171 days
This is an example of compounding returns. I took the cash received from the adjustments made last week and reinvested them into this new position. FTEK is a good solid company. Morningstar stock grades are A- for growth, A- for profitability, and A for financial health, and it's a 5 Star stock selling below it's Fair Value Estimate of $32.00. Morningstar has a Consider Buy price at $24.70, which provides a Margin of Safety of 22% below the fair value.
By selling a covered call I have a net cost basis of $21.08, which is well below the consider buy price and it met both my criteria of 12%+ cash back (option premium) and 24%+ annualized return if called. This is a perfect example of the type of position I look for.
26-Dec-06 - Initial Stock Position - BTO 100 FTEK @ 24.67
26-Dec-06 - Initial Call Option - STO 1 Jun07 25.00 Call @ 3.59
Stock Investment: $2,467.00
Income Generated: $359.00
Percent Income Generated: 14.55%
Net Profit If Called: $392.00
Percent Return If Called: 15.89%
Annualized Return If Called: 33.92%
Days to Expiration: 171 days
This is an example of compounding returns. I took the cash received from the adjustments made last week and reinvested them into this new position. FTEK is a good solid company. Morningstar stock grades are A- for growth, A- for profitability, and A for financial health, and it's a 5 Star stock selling below it's Fair Value Estimate of $32.00. Morningstar has a Consider Buy price at $24.70, which provides a Margin of Safety of 22% below the fair value.
By selling a covered call I have a net cost basis of $21.08, which is well below the consider buy price and it met both my criteria of 12%+ cash back (option premium) and 24%+ annualized return if called. This is a perfect example of the type of position I look for.
Friday, December 22, 2006
CECO - Adjustment
The following adjustment was made today on CECO:
22-Dec-06 - Buy Back & Roll Out/Up - BTC 3 Jan07 25.00 Call @ -1.09 -
22-Dec-06 - Continued Trade - STO 3 Jul07 30.00 Call @ 1.49 -
The Jan07 25 call was an interim trade (i.e. below the cost basis) which would have resulted in a loss if called. Since the call went ITM this afternoon I decided to buy it back and roll it out to Jul07 and up to the 30 strike. Now this position will result in a profit if called. CECO was down as much as 54% at one point in this trade and I used dollar cost averaging twice to lower the cost basis.
Current Position Summary:
Stock Investment: $8,924.01
Income Generated: $1,075.25
Percent Income Generated: 12.05%
Net Profit If Called: $1,151.24
Percent Return If Called: 12.90%
Annualized Return If Called: 7.04%
Days to Expiration: 669 days
Trade History:
19-Sep-05 - Initial Stock Position - BTO 100 CECO @ 38.64 -
19-Sep-05 - Initial Call Option - STO 1 Oct05 40.00 Call @ 1.04 - Closed
05-Oct-05 - Continued Trade - BTC 1 Oct05 40.00 Call @ -0.11 -
08-Nov-05 - Continued Trade - STO 1 Dec05 40.00 Call @ 0.29 - Expired
23-Jan-06 - Interim Trade - STO 1 Feb06 35.00 Call @ 0.30 - Expired
21-Feb-06 - Continued Trade - STO 1 Apr06 40.00 Call @ 0.19 - Expired
24-Apr-06 - Continued Trade - STO 1 Jul06 40.00 Call @ 1.91 - Closed
30-Jun-06 - Buy Back - BTC 1 Jul06 40.00 Call @ -0.06 -
30-Jun-06 - Dollar Cost Averaging - BTO 100 CECO @ 29.82 -
30-Jun-06 - Combined Cost Basis - $6,846.01 200 @ 34.23 -
30-Jun-06 - Continued Trade - STO 2 Jan07 35.00 Call @ 1.71 - Closed
18-Sep-06 - Buy Back - BTC 2 Jan07 35.00 Call @ -0.11 -
18-Sep-06 - Dollar Cost Averaging - BTO 100 CECO @ 20.78 -
18-Sep-06 - Combined Cost Basis - $8,924.01 300 @ 29.75 -
18-Sep-06 - Interim Trade - STO 3 Jan07 25.00 Call @ 0.92 - Closed
22-Dec-06 - Buy Back & Roll Out/Up - BTC 3 Jan07 25.00 Call @ -1.09 -
22-Dec-06 - Continued Trade - STO 3 Jul07 30.00 Call @ 1.49 -
22-Dec-06 - Buy Back & Roll Out/Up - BTC 3 Jan07 25.00 Call @ -1.09 -
22-Dec-06 - Continued Trade - STO 3 Jul07 30.00 Call @ 1.49 -
The Jan07 25 call was an interim trade (i.e. below the cost basis) which would have resulted in a loss if called. Since the call went ITM this afternoon I decided to buy it back and roll it out to Jul07 and up to the 30 strike. Now this position will result in a profit if called. CECO was down as much as 54% at one point in this trade and I used dollar cost averaging twice to lower the cost basis.
Current Position Summary:
Stock Investment: $8,924.01
Income Generated: $1,075.25
Percent Income Generated: 12.05%
Net Profit If Called: $1,151.24
Percent Return If Called: 12.90%
Annualized Return If Called: 7.04%
Days to Expiration: 669 days
Trade History:
19-Sep-05 - Initial Stock Position - BTO 100 CECO @ 38.64 -
19-Sep-05 - Initial Call Option - STO 1 Oct05 40.00 Call @ 1.04 - Closed
05-Oct-05 - Continued Trade - BTC 1 Oct05 40.00 Call @ -0.11 -
08-Nov-05 - Continued Trade - STO 1 Dec05 40.00 Call @ 0.29 - Expired
23-Jan-06 - Interim Trade - STO 1 Feb06 35.00 Call @ 0.30 - Expired
21-Feb-06 - Continued Trade - STO 1 Apr06 40.00 Call @ 0.19 - Expired
24-Apr-06 - Continued Trade - STO 1 Jul06 40.00 Call @ 1.91 - Closed
30-Jun-06 - Buy Back - BTC 1 Jul06 40.00 Call @ -0.06 -
30-Jun-06 - Dollar Cost Averaging - BTO 100 CECO @ 29.82 -
30-Jun-06 - Combined Cost Basis - $6,846.01 200 @ 34.23 -
30-Jun-06 - Continued Trade - STO 2 Jan07 35.00 Call @ 1.71 - Closed
18-Sep-06 - Buy Back - BTC 2 Jan07 35.00 Call @ -0.11 -
18-Sep-06 - Dollar Cost Averaging - BTO 100 CECO @ 20.78 -
18-Sep-06 - Combined Cost Basis - $8,924.01 300 @ 29.75 -
18-Sep-06 - Interim Trade - STO 3 Jan07 25.00 Call @ 0.92 - Closed
22-Dec-06 - Buy Back & Roll Out/Up - BTC 3 Jan07 25.00 Call @ -1.09 -
22-Dec-06 - Continued Trade - STO 3 Jul07 30.00 Call @ 1.49 -
WGO - Adjustment
The following adjustment was made today on WGO:
22-Dec-06 - Buy Back & Roll Out - BTC 2 Jan07 35.00 Call @ -0.16 -
22-Dec-06 - Continued Trade - STO 2 Apr07 35.00 Call @ 1.19 -
The Jan07 35 call had very little time value left so the call was rolled out to Apr07.
Current Position Summary:
Stock Investment: $6,455.00
Income Generated: $766.00
Percent Income Generated: 11.87%
Net Profit If Called: $1,311.00
Percent Return If Called: 20.31%
Annualized Return If Called: 11.58%
Days to Expiration: 640 days
Trade History:
19-Jul-05 - Initial Stock Position - BTO 100 WGO @ 34.92 -
19-Jul-05 - Initial Call Option - STO 1 Aug05 35.00 Call @ 1.09 - Expired
22-Aug-05 - Continued Trade - STO 1 Sep05 35.00 Call @ 0.44 - Closed
01-Sep-05 - Buy Back & Roll Out - BTC 1 Sep05 35.00 Call @ -0.06 -
19-Sep-05 - Continued Trade - STO 1 Nov05 35.00 Call @ 0.34 - Closed
3-Oct-05 - Dividend Received - DIV 100 Dividend @ 0.09 -
21-Oct-05 - Buy Back & Roll Down - BTC 1 Nov05 35.00 Call @ -0.06 -
24-Oct-05 - Interim Trade - STO 1 Nov05 30.00 Call @ 0.24 - Closed
14-Nov-05 - Buy Back & Roll Up - BTC 1 Nov05 30.00 Call @ -2.66 -
21-Nov-05 - Continued Trade - STO 1 Jan06 35.00 Call @ 0.99 - Expired
09-Jan-06 - Dividend Received - DIV 100 Dividend @ 0.09 -
23-Jan-06 - Continued Trade - STO 1 Mar06 35.00 Call @ 0.44 - Expired
20-Mar-06 - Dollar Cost Averaging - BTO 100 WGO @ 29.63 -
20-Mar-06 - Combined Cost Basis - $6,455.00 200 @ 32.28 -
20-Mar-06 - Continued Trade - STO 2 Jul05 35.00 Call @ 0.69 - Expired
03-Apr-06 - Dividend Received - DIV 100 Dividend @ 0.09 -
10-Jul-06 - Dividend Received - DIV 200 Dividend @ 0.09 -
24-Jul-06 - Continued Trade - STO 2 Jan07 35.00 Call @ 1.39 - Closed
09-Oct-06 - Dividend Received - DIV 200 Dividend @ 0.10 -
22-Dec-06 - Buy Back & Roll Out - BTC 2 Jan07 35.00 Call @ -0.16 -
22-Dec-06 - Continued Trade - STO 2 Apr07 35.00 Call @ 1.19 -
22-Dec-06 - Buy Back & Roll Out - BTC 2 Jan07 35.00 Call @ -0.16 -
22-Dec-06 - Continued Trade - STO 2 Apr07 35.00 Call @ 1.19 -
The Jan07 35 call had very little time value left so the call was rolled out to Apr07.
Current Position Summary:
Stock Investment: $6,455.00
Income Generated: $766.00
Percent Income Generated: 11.87%
Net Profit If Called: $1,311.00
Percent Return If Called: 20.31%
Annualized Return If Called: 11.58%
Days to Expiration: 640 days
Trade History:
19-Jul-05 - Initial Stock Position - BTO 100 WGO @ 34.92 -
19-Jul-05 - Initial Call Option - STO 1 Aug05 35.00 Call @ 1.09 - Expired
22-Aug-05 - Continued Trade - STO 1 Sep05 35.00 Call @ 0.44 - Closed
01-Sep-05 - Buy Back & Roll Out - BTC 1 Sep05 35.00 Call @ -0.06 -
19-Sep-05 - Continued Trade - STO 1 Nov05 35.00 Call @ 0.34 - Closed
3-Oct-05 - Dividend Received - DIV 100 Dividend @ 0.09 -
21-Oct-05 - Buy Back & Roll Down - BTC 1 Nov05 35.00 Call @ -0.06 -
24-Oct-05 - Interim Trade - STO 1 Nov05 30.00 Call @ 0.24 - Closed
14-Nov-05 - Buy Back & Roll Up - BTC 1 Nov05 30.00 Call @ -2.66 -
21-Nov-05 - Continued Trade - STO 1 Jan06 35.00 Call @ 0.99 - Expired
09-Jan-06 - Dividend Received - DIV 100 Dividend @ 0.09 -
23-Jan-06 - Continued Trade - STO 1 Mar06 35.00 Call @ 0.44 - Expired
20-Mar-06 - Dollar Cost Averaging - BTO 100 WGO @ 29.63 -
20-Mar-06 - Combined Cost Basis - $6,455.00 200 @ 32.28 -
20-Mar-06 - Continued Trade - STO 2 Jul05 35.00 Call @ 0.69 - Expired
03-Apr-06 - Dividend Received - DIV 100 Dividend @ 0.09 -
10-Jul-06 - Dividend Received - DIV 200 Dividend @ 0.09 -
24-Jul-06 - Continued Trade - STO 2 Jan07 35.00 Call @ 1.39 - Closed
09-Oct-06 - Dividend Received - DIV 200 Dividend @ 0.10 -
22-Dec-06 - Buy Back & Roll Out - BTC 2 Jan07 35.00 Call @ -0.16 -
22-Dec-06 - Continued Trade - STO 2 Apr07 35.00 Call @ 1.19 -
EXPD - Adjustment
The following adjustment was made today on EXPD:
22-Dec-06 - Buy Back & Roll Out - BTC 1 Jan07 45.00 Call @ -0.16
22-Dec-06 - Continued Trade - STO 1 May07 45.00 Call @ 2.04
The Jan07 45 call had very little time value left so the call was rolled out to May07. This position was established with my new stock selection criteria and position sizing.
Current Position Summary:
Stock Investment: $4,515.00
Income Generated: $897.00
Percent Income Generated: 18.98%
Net Profit If Called: $842.00
Percent Return If Called: 18.65%
Annualized Return If Called: 23.00%
Days to Expiration: 296 days
Trade History:
26-Jul-06 - Initial Stock Position - BTO 100 EXPD @ 45.15
26-Jul-06 - Initial Call Option - STO 1 Jan07 45.00 Call @ 6.69
22-Dec-06 - Buy Back & Roll Out - BTC 1 Jan07 45.00 Call @ -0.16
22-Dec-06 - Continued Trade - STO 1 May07 45.00 Call @ 2.04
22-Dec-06 - Buy Back & Roll Out - BTC 1 Jan07 45.00 Call @ -0.16
22-Dec-06 - Continued Trade - STO 1 May07 45.00 Call @ 2.04
The Jan07 45 call had very little time value left so the call was rolled out to May07. This position was established with my new stock selection criteria and position sizing.
Current Position Summary:
Stock Investment: $4,515.00
Income Generated: $897.00
Percent Income Generated: 18.98%
Net Profit If Called: $842.00
Percent Return If Called: 18.65%
Annualized Return If Called: 23.00%
Days to Expiration: 296 days
Trade History:
26-Jul-06 - Initial Stock Position - BTO 100 EXPD @ 45.15
26-Jul-06 - Initial Call Option - STO 1 Jan07 45.00 Call @ 6.69
22-Dec-06 - Buy Back & Roll Out - BTC 1 Jan07 45.00 Call @ -0.16
22-Dec-06 - Continued Trade - STO 1 May07 45.00 Call @ 2.04
BJS - Adjustment
The following adjustment was made today on BJS:
22-Dec-06 - Buy Back & Roll Out - BTC 3 Jan07 35.00 Call @ -0.11
22-Dec-06 - Continued Trade - STO 3 Jul07 35.00 Call @ 1.66
The Jan07 35 call had very little time value left so the call was rolled out to Jul07. This position was established before I changed my stock selection criteria and position sizing. BJS was down as much as 31% at one point and additional shares were bought.
Current Position Summary:
Stock Investment: $11,238.00
Income Generated: $1,760.25
Percent Income Generated: 15.66%
Net Profit If Called: $1,022.25
Percent Return If Called: 9.10%
Annualized Return If Called: 6.14%
Days to Expiration: 541 days
Trade History:
25-Jan-06 - Initial Stock Position - BTO 200 BJS @ 40.05
25-Jan-06 - Initial Call Option - STO 2 Feb06 40.00 Call @ 1.54
21-Feb-06 - Continued Trade - STO 2 Apr06 40.00 Call @ 0.49
20-Mar-06 - Buy Back - BTC 2 Apr06 40.00 Call @ -0.11
20-Mar-06 - Dollar Cost Averaging - BTO 100 BJS @ 32.29
20-Mar-06 - Combined Cost Basis - $11,238.00 300 @ 37.46
20-Mar-06 - Continued Trade - STO 3 Jul05 37.50 Call @ 0.94
14-Jul-06 - Dividend Received - DIV 100 Dividend @ 0.15
24-Jul-06 - Interim Trade - STO 3 Oct06 35.00 Call @ 1.19
13-Oct-06 - Dividend Received - DIV 300 Dividend @ 0.05
23-Oct-06 - Interim Trade - STO 3 Jan07 35.00 Call @ 0.79
22-Dec-06 - Buy Back & Roll Out - BTC 3 Jan07 35.00 Call @ -0.11
22-Dec-06 - Continued Trade - STO 3 Jul07 35.00 Call @ 1.66
22-Dec-06 - Buy Back & Roll Out - BTC 3 Jan07 35.00 Call @ -0.11
22-Dec-06 - Continued Trade - STO 3 Jul07 35.00 Call @ 1.66
The Jan07 35 call had very little time value left so the call was rolled out to Jul07. This position was established before I changed my stock selection criteria and position sizing. BJS was down as much as 31% at one point and additional shares were bought.
Current Position Summary:
Stock Investment: $11,238.00
Income Generated: $1,760.25
Percent Income Generated: 15.66%
Net Profit If Called: $1,022.25
Percent Return If Called: 9.10%
Annualized Return If Called: 6.14%
Days to Expiration: 541 days
Trade History:
25-Jan-06 - Initial Stock Position - BTO 200 BJS @ 40.05
25-Jan-06 - Initial Call Option - STO 2 Feb06 40.00 Call @ 1.54
21-Feb-06 - Continued Trade - STO 2 Apr06 40.00 Call @ 0.49
20-Mar-06 - Buy Back - BTC 2 Apr06 40.00 Call @ -0.11
20-Mar-06 - Dollar Cost Averaging - BTO 100 BJS @ 32.29
20-Mar-06 - Combined Cost Basis - $11,238.00 300 @ 37.46
20-Mar-06 - Continued Trade - STO 3 Jul05 37.50 Call @ 0.94
14-Jul-06 - Dividend Received - DIV 100 Dividend @ 0.15
24-Jul-06 - Interim Trade - STO 3 Oct06 35.00 Call @ 1.19
13-Oct-06 - Dividend Received - DIV 300 Dividend @ 0.05
23-Oct-06 - Interim Trade - STO 3 Jan07 35.00 Call @ 0.79
22-Dec-06 - Buy Back & Roll Out - BTC 3 Jan07 35.00 Call @ -0.11
22-Dec-06 - Continued Trade - STO 3 Jul07 35.00 Call @ 1.66
Wednesday, December 20, 2006
Value Line vs PowerOptions
I just started a trial subscription to Value Line Daily Options Survey, which was recommend by a member of the Yahoo Group.
I've used PowerOptions for the past 2 years and have been happy with their service. PowerOptions costs $59.95/month for the delayed quote service. I only use a small portion of their site, mainly just searching for covered call trades about once a month. However, the cost is much higher than Value Line, which is only $149/year, or $5.99/month if you're a Fidelity customer. So in an effort to control my trading costs, I've decided to give Value Line a try.
If you're a Fidelity customer, like I am, you can sign up for a free 30 day trial and discount subscription , after which you only pay $5.99/month. That's 10 times less expensive than PowerOptions. Otherwise, sign up for a regular subscription at $149/year. Either way it's a bargain.
I'll continue to subscribe to both for a few months to compare them before deciding which one to keep, but it's hard to argue with the savings of switching to Value Line. I'll post a review comparing both services and my decision in the coming months.
I've used PowerOptions for the past 2 years and have been happy with their service. PowerOptions costs $59.95/month for the delayed quote service. I only use a small portion of their site, mainly just searching for covered call trades about once a month. However, the cost is much higher than Value Line, which is only $149/year, or $5.99/month if you're a Fidelity customer. So in an effort to control my trading costs, I've decided to give Value Line a try.
If you're a Fidelity customer, like I am, you can sign up for a free 30 day trial and discount subscription , after which you only pay $5.99/month. That's 10 times less expensive than PowerOptions. Otherwise, sign up for a regular subscription at $149/year. Either way it's a bargain.
I'll continue to subscribe to both for a few months to compare them before deciding which one to keep, but it's hard to argue with the savings of switching to Value Line. I'll post a review comparing both services and my decision in the coming months.
Tuesday, December 19, 2006
Today's Adjustments
I just posted adjustments on 7 of my positions that I made this morning. I could have waited to make the adjustments on DHI & EXP, since they had enough time value remaining, but I wanted to get this over with today so I can sit back and enjoy the holidays. Now all my positions are set and I don't have to do anything until Jan expiration. Now, where's that eggnog? ;-)
Happy Holidays!
Happy Holidays!
SNDK - Adjustment
The following adjustment was made today on SNDK:
19-Dec-06 - Buy Back & Roll Out/Down - BTC 2 Jan07 55.00 Call @ -0.16
19-Dec-06 - Continued Trade - STO 2 Feb07 50.00 Call @ 1.69
The Jan07 55 call had very little time value left so the call was rolled out to Feb07 and down to the 50 strike.
Current Position Summary:
Stock Investment: $10,854.00
Income Generated: $2,107.00
Percent Income Generated: 19.41%
Net Profit If Called: $1,253.00
Percent Return If Called: 11.54%
Annualized Return If Called: 14.14%
Days to Expiration: 298 days
Trade History:
24-Apr-06 - Initial Stock Position - BTO 100 SNDK @ 59.56
24-Apr-06 - Initial Call Option - STO 1 Jul06 57.50 Call @ 7.09
06-Jul-06 - Buy Back & Roll Out/Down - BTC 1 Jul06 57.50 Call @ -0.16
06-Jul-06 - Dollar Cost Averaging - BTO 100 SNDK @ 48.98
06-Jul-06 - Combined Cost Basis - $10,854.00 200 @ 54.27
06-Jul-06 - Continued Trade - STO 2 Oct06 55.00 Call @ 3.39
23-Oct-06 - Continued Trade - STO 2 Jan07 55.00 Call @ 2.14
19-Dec-06 - Buy Back & Roll Out/Down - BTC 2 Jan07 55.00 Call @ -0.16
19-Dec-06 - Continued Trade - STO 2 Feb07 50.00 Call @ 1.69
19-Dec-06 - Buy Back & Roll Out/Down - BTC 2 Jan07 55.00 Call @ -0.16
19-Dec-06 - Continued Trade - STO 2 Feb07 50.00 Call @ 1.69
The Jan07 55 call had very little time value left so the call was rolled out to Feb07 and down to the 50 strike.
Current Position Summary:
Stock Investment: $10,854.00
Income Generated: $2,107.00
Percent Income Generated: 19.41%
Net Profit If Called: $1,253.00
Percent Return If Called: 11.54%
Annualized Return If Called: 14.14%
Days to Expiration: 298 days
Trade History:
24-Apr-06 - Initial Stock Position - BTO 100 SNDK @ 59.56
24-Apr-06 - Initial Call Option - STO 1 Jul06 57.50 Call @ 7.09
06-Jul-06 - Buy Back & Roll Out/Down - BTC 1 Jul06 57.50 Call @ -0.16
06-Jul-06 - Dollar Cost Averaging - BTO 100 SNDK @ 48.98
06-Jul-06 - Combined Cost Basis - $10,854.00 200 @ 54.27
06-Jul-06 - Continued Trade - STO 2 Oct06 55.00 Call @ 3.39
23-Oct-06 - Continued Trade - STO 2 Jan07 55.00 Call @ 2.14
19-Dec-06 - Buy Back & Roll Out/Down - BTC 2 Jan07 55.00 Call @ -0.16
19-Dec-06 - Continued Trade - STO 2 Feb07 50.00 Call @ 1.69
PALM - Adjustment
The following adjustment was made today on PALM:
19-Dec-06 - Buy Back & Roll Out - BTC 2 Feb07 20.00 Call @ -0.11
19-Dec-06 - Continued Trade - STO 2 Aug07 20.00 Call @ 0.55
The Feb07 20 call had very little time value left so the call was rolled out to Aug07.
Current Position Summary:
Stock Investment: $3,917.00
Income Generated: $613.50
Percent Income Generated: 15.66%
Net Profit If Called: $696.50
Percent Return If Called: 17.78%
Annualized Return If Called: 13.52%
Days to Expiration: 480 days
Trade History:
24-Apr-06 - Initial Stock Position - BTO 100 PALM @ 23.16
24-Apr-06 - Initial Call Option - STO 1 Aug06 22.50 Call @ 2.95
05-Jul-06 - Buy Back & Roll Down - BTC 1 Aug06 22.50 Call @ -0.11
05-Jul-06 - Dollar Cost Averaging - BTO 100 PALM @ 16.01
05-Jul-06 - Combined Cost Basis - $3,917.00 200 @ 19.59
05-Jul-06 - Continued Trade - STO 2 Feb07 20.00 Call @ 1.20
19-Dec-06 - Buy Back & Roll Out - BTC 2 Feb07 20.00 Call @ -0.11
19-Dec-06 - Continued Trade - STO 2 Aug07 20.00 Call @ 0.55
19-Dec-06 - Buy Back & Roll Out - BTC 2 Feb07 20.00 Call @ -0.11
19-Dec-06 - Continued Trade - STO 2 Aug07 20.00 Call @ 0.55
The Feb07 20 call had very little time value left so the call was rolled out to Aug07.
Current Position Summary:
Stock Investment: $3,917.00
Income Generated: $613.50
Percent Income Generated: 15.66%
Net Profit If Called: $696.50
Percent Return If Called: 17.78%
Annualized Return If Called: 13.52%
Days to Expiration: 480 days
Trade History:
24-Apr-06 - Initial Stock Position - BTO 100 PALM @ 23.16
24-Apr-06 - Initial Call Option - STO 1 Aug06 22.50 Call @ 2.95
05-Jul-06 - Buy Back & Roll Down - BTC 1 Aug06 22.50 Call @ -0.11
05-Jul-06 - Dollar Cost Averaging - BTO 100 PALM @ 16.01
05-Jul-06 - Combined Cost Basis - $3,917.00 200 @ 19.59
05-Jul-06 - Continued Trade - STO 2 Feb07 20.00 Call @ 1.20
19-Dec-06 - Buy Back & Roll Out - BTC 2 Feb07 20.00 Call @ -0.11
19-Dec-06 - Continued Trade - STO 2 Aug07 20.00 Call @ 0.55
OSUR - Adjustment
The following adjustment was made today on OSUR:
19-Dec-06 - Buy Back & Roll Out - BTC 1 Jan07 10.00 Call @ -0.11
19-Dec-06 - Continued Trade - STO 1 Jul07 10.00 Call @ 0.49
The Jan07 10 call had very little time value left so the call was rolled out to Jul07.
Current Position Summary:
Stock Investment: $1,042.00
Income Generated: $276.00
Percent Income Generated: 26.49%
Net Profit If Called: $234.00
Percent Return If Called: 22.46%
Annualized Return If Called: 16.83%
Days to Expiration: 487 days
Trade History:
20-Mar-06 - Initial Stock Position - BTO 100 OSUR @ 10.42
20-Mar-06 - Initial Call Option - STO 1 Jul06 10.00 Call @ 1.49
24-Jul-06 - Continued Trade - STO 1 Jan07 10.00 Call @ 0.89
19-Dec-06 - Buy Back & Roll Out - BTC 1 Jan07 10.00 Call @ -0.11
19-Dec-06 - Continued Trade - STO 1 Jul07 10.00 Call @ 0.49
19-Dec-06 - Buy Back & Roll Out - BTC 1 Jan07 10.00 Call @ -0.11
19-Dec-06 - Continued Trade - STO 1 Jul07 10.00 Call @ 0.49
The Jan07 10 call had very little time value left so the call was rolled out to Jul07.
Current Position Summary:
Stock Investment: $1,042.00
Income Generated: $276.00
Percent Income Generated: 26.49%
Net Profit If Called: $234.00
Percent Return If Called: 22.46%
Annualized Return If Called: 16.83%
Days to Expiration: 487 days
Trade History:
20-Mar-06 - Initial Stock Position - BTO 100 OSUR @ 10.42
20-Mar-06 - Initial Call Option - STO 1 Jul06 10.00 Call @ 1.49
24-Jul-06 - Continued Trade - STO 1 Jan07 10.00 Call @ 0.89
19-Dec-06 - Buy Back & Roll Out - BTC 1 Jan07 10.00 Call @ -0.11
19-Dec-06 - Continued Trade - STO 1 Jul07 10.00 Call @ 0.49
JBHT - Adjustment
The following adjustment was made today on JBHT:
19-Dec-06 - Buy Back & Roll Out - BTC 3 Jan07 25.00 Call @ -0.11
19-Dec-06 - Continued Trade - STO 3 May07 25.00 Call @ 0.59
The Jan07 25 call had very little time value left so the call was rolled out to May07.
Current Position Summary:
Stock Investment: $7,358.00
Income Generated: $1,034.00
Percent Income Generated: 14.05%
Net Profit If Called: $1,176.00
Percent Return If Called: 15.98%
Annualized Return If Called: 12.93%
Days to Expiration: 451 days
Trade History:
21-Feb-06 - Initial Stock Position - BTO 300 JBHT @ 24.53
21-Feb-06 - Initial Call Option - STO 3 Mar06 25.00 Call @ 0.59
20-Mar-06 - Continued Trade - STO 3 Aug06 25.00 Call @ 1.19
15-May-06 - Dividend Received - DIV 300 Dividend @ 0.08
25-Jul-06 - Buy Back & Roll Out - BTC 3 Aug06 25.00 Call @ -0.06
25-Jul-06 - Continued Trade - STO 3 Jan07 25.00 Call @ 0.99
18-Aug-06 - Dividend Received - DIV 300 Dividend @ 0.08
28-Nov-06 - Dividend Received - DIV 300 Dividend @ 0.08
19-Dec-06 - Buy Back & Roll Out - BTC 3 Jan07 25.00 Call @ -0.11
19-Dec-06 - Continued Trade - STO 3 May07 25.00 Call @ 0.59
19-Dec-06 - Buy Back & Roll Out - BTC 3 Jan07 25.00 Call @ -0.11
19-Dec-06 - Continued Trade - STO 3 May07 25.00 Call @ 0.59
The Jan07 25 call had very little time value left so the call was rolled out to May07.
Current Position Summary:
Stock Investment: $7,358.00
Income Generated: $1,034.00
Percent Income Generated: 14.05%
Net Profit If Called: $1,176.00
Percent Return If Called: 15.98%
Annualized Return If Called: 12.93%
Days to Expiration: 451 days
Trade History:
21-Feb-06 - Initial Stock Position - BTO 300 JBHT @ 24.53
21-Feb-06 - Initial Call Option - STO 3 Mar06 25.00 Call @ 0.59
20-Mar-06 - Continued Trade - STO 3 Aug06 25.00 Call @ 1.19
15-May-06 - Dividend Received - DIV 300 Dividend @ 0.08
25-Jul-06 - Buy Back & Roll Out - BTC 3 Aug06 25.00 Call @ -0.06
25-Jul-06 - Continued Trade - STO 3 Jan07 25.00 Call @ 0.99
18-Aug-06 - Dividend Received - DIV 300 Dividend @ 0.08
28-Nov-06 - Dividend Received - DIV 300 Dividend @ 0.08
19-Dec-06 - Buy Back & Roll Out - BTC 3 Jan07 25.00 Call @ -0.11
19-Dec-06 - Continued Trade - STO 3 May07 25.00 Call @ 0.59
HLX - Adjustment
The following adjustment was made today on HLX:
19-Dec-06 - Buy Back & Roll Out - BTC 2 Jan07 40.00 Call @ -0.16
19-Dec-06 - Continued Trade - STO 2 Feb07 40.00 Call @ 0.49
The Jan07 40 call had very little time value left so the call was rolled out to Feb07.
Current Position Summary:
Stock Investment: $8,053.00
Income Generated: $1,345.00
Percent Income Generated: 16.70%
Net Profit If Called: $1,292.00
Percent Return If Called: 16.04%
Annualized Return If Called: 15.13%
Days to Expiration: 387 days
Trade History:
25-Jan-06 - Initial Stock Position - BTO 200 HLX @ 40.27
25-Jan-06 - Initial Call Option - STO 2 Feb06 40.00 Call @ 1.91
01-Mar-06 - Continued Trade - STO 2 Mar06 40.00 Call @ 0.64
20-Mar-06 - Continued Trade - STO 2 Jun06 40.00 Call @ 1.49
26-Jun-06 - Continued Trade - STO 2 Jan07 40.00 Call @ 2.34
19-Dec-06 - Buy Back & Roll Out - BTC 2 Jan07 40.00 Call @ -0.16
19-Dec-06 - Continued Trade - STO 2 Feb07 40.00 Call @ 0.49
19-Dec-06 - Buy Back & Roll Out - BTC 2 Jan07 40.00 Call @ -0.16
19-Dec-06 - Continued Trade - STO 2 Feb07 40.00 Call @ 0.49
The Jan07 40 call had very little time value left so the call was rolled out to Feb07.
Current Position Summary:
Stock Investment: $8,053.00
Income Generated: $1,345.00
Percent Income Generated: 16.70%
Net Profit If Called: $1,292.00
Percent Return If Called: 16.04%
Annualized Return If Called: 15.13%
Days to Expiration: 387 days
Trade History:
25-Jan-06 - Initial Stock Position - BTO 200 HLX @ 40.27
25-Jan-06 - Initial Call Option - STO 2 Feb06 40.00 Call @ 1.91
01-Mar-06 - Continued Trade - STO 2 Mar06 40.00 Call @ 0.64
20-Mar-06 - Continued Trade - STO 2 Jun06 40.00 Call @ 1.49
26-Jun-06 - Continued Trade - STO 2 Jan07 40.00 Call @ 2.34
19-Dec-06 - Buy Back & Roll Out - BTC 2 Jan07 40.00 Call @ -0.16
19-Dec-06 - Continued Trade - STO 2 Feb07 40.00 Call @ 0.49
EXP - Adjustment
The following adjustment was made on EXP today:
19-Dec-06 - Buy Back & Roll Out/Up - BTC 2 Jan07 40.00 Call @ -3.41
19-Dec-06 - Interim Trade - STO 2 Jul07 45.00 Call @ 4.39
The Jan07 40 call option was an interim trade at a strike price lower than the cost basis. I did not want this call exercised and since it was ITM I rolled it out to Jul07 and up to the 45 strike to avoid assignment. This position is another interim trade and may have to be rolled again.
Current Position Summary:
Stock Investment: $11,903.00
Income Generated: $2,188.50
Percent Income Generated: 18.39%
Net Profit If Called: -$712.50
Percent Return If Called: -5.99%
Annualized Return If Called: -4.83%
Days to Expiration: 452 days
Trade History:
24-Apr-06 - Initial Stock Position - BTO 100 EXP @ 70.60
24-Apr-06 - Initial Call Option - STO 1 May06 65.00 Call @ 8.29
22-May-06 - Dollar Cost Averaging - BTO 100 EXP @ 48.41
22-May-06 - Combined Cost Basis - $11,901.00 200 @ 59.51
22-May-06 - Continued Trade - STO 2 Oct06 60.00 Call @ 2.39
20-Jul-06 - Dividend Received - DIV 200 Dividend @ 0.18
25-Jul-06 - Buy Back & Roll Out/Down - BTC 2 Oct06 60.00 Call @ -0.21
25-Jul-06 - Interim Trade - STO 2 Jan07 50.00 Call @ 2.19
23-Oct-06 - Buy Back & Roll Down - BTC 2 Jan07 50.00 Call @ -0.26
23-Oct-06 - Interim Trade - STO 2 Jan07 40.00 Call @ 1.34
02-Nov-06 - Dividend Received - DIV 200 Dividend @ 0.18
19-Dec-06 - Buy Back & Roll Out/Up - BTC 2 Jan07 40.00 Call @ -3.41
19-Dec-06 - Interim Trade - STO 2 Jul07 45.00 Call @ 4.39
19-Dec-06 - Buy Back & Roll Out/Up - BTC 2 Jan07 40.00 Call @ -3.41
19-Dec-06 - Interim Trade - STO 2 Jul07 45.00 Call @ 4.39
The Jan07 40 call option was an interim trade at a strike price lower than the cost basis. I did not want this call exercised and since it was ITM I rolled it out to Jul07 and up to the 45 strike to avoid assignment. This position is another interim trade and may have to be rolled again.
Current Position Summary:
Stock Investment: $11,903.00
Income Generated: $2,188.50
Percent Income Generated: 18.39%
Net Profit If Called: -$712.50
Percent Return If Called: -5.99%
Annualized Return If Called: -4.83%
Days to Expiration: 452 days
Trade History:
24-Apr-06 - Initial Stock Position - BTO 100 EXP @ 70.60
24-Apr-06 - Initial Call Option - STO 1 May06 65.00 Call @ 8.29
22-May-06 - Dollar Cost Averaging - BTO 100 EXP @ 48.41
22-May-06 - Combined Cost Basis - $11,901.00 200 @ 59.51
22-May-06 - Continued Trade - STO 2 Oct06 60.00 Call @ 2.39
20-Jul-06 - Dividend Received - DIV 200 Dividend @ 0.18
25-Jul-06 - Buy Back & Roll Out/Down - BTC 2 Oct06 60.00 Call @ -0.21
25-Jul-06 - Interim Trade - STO 2 Jan07 50.00 Call @ 2.19
23-Oct-06 - Buy Back & Roll Down - BTC 2 Jan07 50.00 Call @ -0.26
23-Oct-06 - Interim Trade - STO 2 Jan07 40.00 Call @ 1.34
02-Nov-06 - Dividend Received - DIV 200 Dividend @ 0.18
19-Dec-06 - Buy Back & Roll Out/Up - BTC 2 Jan07 40.00 Call @ -3.41
19-Dec-06 - Interim Trade - STO 2 Jul07 45.00 Call @ 4.39
DHI - Adjustment
The following adjustment was made on DHI today:
19-Dec-06 - Buy Back & Roll Up - BTC 3 Jan07 25.00 Call @ -2.36
19-Dec-06 - Continued Trade - STO 3 Jan08 30.00 Call @ 2.74
The Jan07 25 call option was an interim trade at a strike price lower than the cost basis. I did not want this call exercised and since it was ITM I rolled it out to Jan08 and up to the 30 strike to avoid assignment.
Current Position Summary:
Stock Investment: $8,777.00
Income Generated: $1,131.25
Percent Income Generated: 12.89%
Net Profit If Called: $1,354.25
Percent Return If Called: 15.43%
Annualized Return If Called: 6.26%
Days to Expiration: 535 days
Trade History:
01-Aug-05 - Initial Stock Position - BTO 100 DHI @ 40.18
01-Aug-05 - Initial Call Option - STO 1 Aug05 40.00 Call @ 1.29
19-Aug-05 - Dividend Received - DIV 100 Dividend @ 0.09
22-Aug-05 - Continued Trade - STO 1 Oct05 40.00 Call @ 0.54
05-Oct-05 - Buy Back & Roll Out/Down - BTC 1 Oct05 40.00 Call @ -0.11
24-Oct-05 - Interim Trade - STO 1 Nov05 35.00 Call @ 0.49
31-Oct-05 - Dividend Received - DIV 100 Dividend @ 0.09
18-Nov-05 - Buy Back & Roll Out/Up - BTC 1 Nov05 35.00 Call @ -0.31
21-Nov-05 - Continued Trade - STO 1 Dec05 40.00 Call @ 0.34
09-Jan-06 - Continued Trade - STO 1 Jan06 40.00 Call @ 0.49
23-Jan-06 - Continued Trade - STO 1 Feb06 40.00 Call @ 0.69
10-Feb-06 - Dividend Received - DIV 100 Dividend @ 0.10
21-Feb-06 - Continued Trade - STO 1 Apr06 40.00 Call @ 0.44
23-Mar-06 - Buy Back & Roll Out - BTC 1 Apr06 40.00 Call @ -0.11
23-Mar-06 - Continued Trade - STO 1 Aug06 40.00 Call @ 0.94
19-May-06 - Dividend Received - DIV 100 Dividend @ 0.10
23-May-06 - Buy Back & Roll Out/Down - BTC 1 Aug06 40.00 Call @ -0.11
23-May-06 - Dollar Cost Averaging - BTO 100 DHI @ 26.89
23-May-06 - Combined Cost Basis - $6,706.00 200 @ 33.53
23-May-06 - Continued Trade - STO 2 Jan07 35.00 Call @ 1.04
25-Jul-06 - Buy Back & Roll Down - BTC 2 Jan07 35.00 Call @ -0.16
25-Jul-06 - Dollar Cost Averaging - BTO 100 DHI @ 20.70
25-Jul-06 - Combined Cost Basis - $8,777.00 300 @ 29.26
25-Jul-06 - Interim Trade - STO 3 Jan07 25.00 Call @ 0.99
01-Nov-06 - Dividend Received - DIV 300 Dividend @ 0.15
19-Dec-06 - Buy Back & Roll Up - BTC 3 Jan07 25.00 Call @ -2.36
19-Dec-06 - Continued Trade - STO 3 Jan08 30.00 Call @ 2.74
19-Dec-06 - Buy Back & Roll Up - BTC 3 Jan07 25.00 Call @ -2.36
19-Dec-06 - Continued Trade - STO 3 Jan08 30.00 Call @ 2.74
The Jan07 25 call option was an interim trade at a strike price lower than the cost basis. I did not want this call exercised and since it was ITM I rolled it out to Jan08 and up to the 30 strike to avoid assignment.
Current Position Summary:
Stock Investment: $8,777.00
Income Generated: $1,131.25
Percent Income Generated: 12.89%
Net Profit If Called: $1,354.25
Percent Return If Called: 15.43%
Annualized Return If Called: 6.26%
Days to Expiration: 535 days
Trade History:
01-Aug-05 - Initial Stock Position - BTO 100 DHI @ 40.18
01-Aug-05 - Initial Call Option - STO 1 Aug05 40.00 Call @ 1.29
19-Aug-05 - Dividend Received - DIV 100 Dividend @ 0.09
22-Aug-05 - Continued Trade - STO 1 Oct05 40.00 Call @ 0.54
05-Oct-05 - Buy Back & Roll Out/Down - BTC 1 Oct05 40.00 Call @ -0.11
24-Oct-05 - Interim Trade - STO 1 Nov05 35.00 Call @ 0.49
31-Oct-05 - Dividend Received - DIV 100 Dividend @ 0.09
18-Nov-05 - Buy Back & Roll Out/Up - BTC 1 Nov05 35.00 Call @ -0.31
21-Nov-05 - Continued Trade - STO 1 Dec05 40.00 Call @ 0.34
09-Jan-06 - Continued Trade - STO 1 Jan06 40.00 Call @ 0.49
23-Jan-06 - Continued Trade - STO 1 Feb06 40.00 Call @ 0.69
10-Feb-06 - Dividend Received - DIV 100 Dividend @ 0.10
21-Feb-06 - Continued Trade - STO 1 Apr06 40.00 Call @ 0.44
23-Mar-06 - Buy Back & Roll Out - BTC 1 Apr06 40.00 Call @ -0.11
23-Mar-06 - Continued Trade - STO 1 Aug06 40.00 Call @ 0.94
19-May-06 - Dividend Received - DIV 100 Dividend @ 0.10
23-May-06 - Buy Back & Roll Out/Down - BTC 1 Aug06 40.00 Call @ -0.11
23-May-06 - Dollar Cost Averaging - BTO 100 DHI @ 26.89
23-May-06 - Combined Cost Basis - $6,706.00 200 @ 33.53
23-May-06 - Continued Trade - STO 2 Jan07 35.00 Call @ 1.04
25-Jul-06 - Buy Back & Roll Down - BTC 2 Jan07 35.00 Call @ -0.16
25-Jul-06 - Dollar Cost Averaging - BTO 100 DHI @ 20.70
25-Jul-06 - Combined Cost Basis - $8,777.00 300 @ 29.26
25-Jul-06 - Interim Trade - STO 3 Jan07 25.00 Call @ 0.99
01-Nov-06 - Dividend Received - DIV 300 Dividend @ 0.15
19-Dec-06 - Buy Back & Roll Up - BTC 3 Jan07 25.00 Call @ -2.36
19-Dec-06 - Continued Trade - STO 3 Jan08 30.00 Call @ 2.74
Monday, December 18, 2006
PSUN - Adjustment
The following adjustment was made on PSUN today:
18-Dec-06 - Buy Back & Roll Out/Up - BTC 4 Jan07 17.50 Call @ -3.01
18-Dec-06 - Continued Trade - STO 4 Jan09 22.50 Call @ 3.69
Current Position Summary:
Stock Investment: $9,108.00
Income Generated: $1,489.00
Percent Income Generated: 16.35%
Net Profit If Called: $1,381.00
Percent Return If Called: 15.16%
Annualized Return If Called: 4.80%
Days to Expiration: 1152 days
Trade History:
21-Nov-05 - Initial Stock Position - BTO 200 PSUN @ 26.39
21-Nov-05 - Initial Call Option - STO 2 Dec05 25.00 Call @ 1.84
20-Dec-05 - Continued Trade - STO 2 Jan06 25.00 Call @ 0.69
23-Jan-06 - Continued Trade - STO 2 Mar06 25.00 Call @ 0.74
20-Mar-06 - Continued Trade - STO 2 Jun06 25.00 Call @ 0.64
26-Jun-06 - Dollar Cost Averaging - BTO 200 PSUN @ 19.16
26-Jun-06 - Combined Cost Basis - $9,108.00 400 @ 22.77
26-Jun-06 - Continued Trade - STO 4 Dec06 22.50 Call @ 0.69
18-Sep-06 - Buy Back & Roll Out/Down - BTC 4 Dec06 22.50 Call @ -0.16
18-Sep-06 - Interim Trade - STO 4 Jan07 17.50 Call @ 0.54
18-Dec-06 - Buy Back & Roll Out/Up - BTC 4 Jan07 17.50 Call @ -3.01
18-Dec-06 - Continued Trade - STO 4 Jan09 22.50 Call @ 3.69
BTO - Buy to Open BTC - Buy to Close STO - Sell to Open STC - Sell to Close
Notice that I rolled the calls out 2 years. This is one reason why you should only invest in stocks you're willing to hold for the long term, and preferably stocks that have LEAPS options available.
PSUN was initially purchased on 11/21/05 @ 26.39 and front month options were sold at the 25 strike for a couple of months. This was before I switched to longer term options with more downside protection and also before I changed my stock selection criteria. Also 200 shares were purchased initially. Now I limit my initial purchases to 100 shares.
The stock declined about 27% by June and I purchased another 200 shares @ 19.16, so my cost basis in the stock, excluding option premiums, is 22.77. I then sold 4 Dec06 22.50 calls.
Then by Sep the stock declined even further and was down 50% from the original purchase price. I bought back the 4 Dec06 22.50 calls and sold 4 Jan07 17.50 calls.
PSUN started to recover and the Jan07 17.50 calls were ITM with very little time value left so I rolled them out to Jan09 and up to the 22.50 strike today.
This position will now have a holding period of a little over 3 years if held until expiration. The return will only be 4.80% annualized, but that's not bad for a stock that was down by 50% at one point. A lot can happen between now and Jan09 so it's possible that this position will produce a higher return. Time will tell.
18-Dec-06 - Buy Back & Roll Out/Up - BTC 4 Jan07 17.50 Call @ -3.01
18-Dec-06 - Continued Trade - STO 4 Jan09 22.50 Call @ 3.69
Current Position Summary:
Stock Investment: $9,108.00
Income Generated: $1,489.00
Percent Income Generated: 16.35%
Net Profit If Called: $1,381.00
Percent Return If Called: 15.16%
Annualized Return If Called: 4.80%
Days to Expiration: 1152 days
Trade History:
21-Nov-05 - Initial Stock Position - BTO 200 PSUN @ 26.39
21-Nov-05 - Initial Call Option - STO 2 Dec05 25.00 Call @ 1.84
20-Dec-05 - Continued Trade - STO 2 Jan06 25.00 Call @ 0.69
23-Jan-06 - Continued Trade - STO 2 Mar06 25.00 Call @ 0.74
20-Mar-06 - Continued Trade - STO 2 Jun06 25.00 Call @ 0.64
26-Jun-06 - Dollar Cost Averaging - BTO 200 PSUN @ 19.16
26-Jun-06 - Combined Cost Basis - $9,108.00 400 @ 22.77
26-Jun-06 - Continued Trade - STO 4 Dec06 22.50 Call @ 0.69
18-Sep-06 - Buy Back & Roll Out/Down - BTC 4 Dec06 22.50 Call @ -0.16
18-Sep-06 - Interim Trade - STO 4 Jan07 17.50 Call @ 0.54
18-Dec-06 - Buy Back & Roll Out/Up - BTC 4 Jan07 17.50 Call @ -3.01
18-Dec-06 - Continued Trade - STO 4 Jan09 22.50 Call @ 3.69
BTO - Buy to Open BTC - Buy to Close STO - Sell to Open STC - Sell to Close
Notice that I rolled the calls out 2 years. This is one reason why you should only invest in stocks you're willing to hold for the long term, and preferably stocks that have LEAPS options available.
PSUN was initially purchased on 11/21/05 @ 26.39 and front month options were sold at the 25 strike for a couple of months. This was before I switched to longer term options with more downside protection and also before I changed my stock selection criteria. Also 200 shares were purchased initially. Now I limit my initial purchases to 100 shares.
The stock declined about 27% by June and I purchased another 200 shares @ 19.16, so my cost basis in the stock, excluding option premiums, is 22.77. I then sold 4 Dec06 22.50 calls.
Then by Sep the stock declined even further and was down 50% from the original purchase price. I bought back the 4 Dec06 22.50 calls and sold 4 Jan07 17.50 calls.
PSUN started to recover and the Jan07 17.50 calls were ITM with very little time value left so I rolled them out to Jan09 and up to the 22.50 strike today.
This position will now have a holding period of a little over 3 years if held until expiration. The return will only be 4.80% annualized, but that's not bad for a stock that was down by 50% at one point. A lot can happen between now and Jan09 so it's possible that this position will produce a higher return. Time will tell.
KOMG - Adjustment
The following adjustment was made on KOMG today:
18-Dec-06 - Continued Trade - STO 1 Jun07 45.00 Call @ 2.69
Current Position Summary:
Stock Investment: $4.987.00
Income Generated: $1,630.00
Percent Income Generated: 32.68%
Net Profit If Called: $1,143.00
Percent Return If Called: 22.92%
Annualized Return If Called: 18.51%
Days to Expiration: 452 days
Trade History:
20-Mar-06 - Initial Stock Position - BTO 100 KOMG @ 49.87
20-Mar-06 - Initial Call Option - STO 1 Apr06 45.00 Call @ 5.93
24-Apr-06 - Continued Trade - STO 1 Jun06 45.00 Call @ 2.79
26-Jun-06 - Continued Trade - STO 1 Dec06 45.00 Call @ 4.89
18-Dec-06 - Continued Trade - STO 1 Jun07 45.00 Call @ 2.69
BTO - Buy to Open BTC - Buy to Close STO - Sell to Open STC - Sell to Close
KOMG was purchased on 3/20/06 @ $49.87. So far I've sold 4 calls at the 45 strike, including today's. The first 3 calls expired worthless. KOMG is currently down about 23% but was down as much as 39% in Sep.
18-Dec-06 - Continued Trade - STO 1 Jun07 45.00 Call @ 2.69
Current Position Summary:
Stock Investment: $4.987.00
Income Generated: $1,630.00
Percent Income Generated: 32.68%
Net Profit If Called: $1,143.00
Percent Return If Called: 22.92%
Annualized Return If Called: 18.51%
Days to Expiration: 452 days
Trade History:
20-Mar-06 - Initial Stock Position - BTO 100 KOMG @ 49.87
20-Mar-06 - Initial Call Option - STO 1 Apr06 45.00 Call @ 5.93
24-Apr-06 - Continued Trade - STO 1 Jun06 45.00 Call @ 2.79
26-Jun-06 - Continued Trade - STO 1 Dec06 45.00 Call @ 4.89
18-Dec-06 - Continued Trade - STO 1 Jun07 45.00 Call @ 2.69
BTO - Buy to Open BTC - Buy to Close STO - Sell to Open STC - Sell to Close
KOMG was purchased on 3/20/06 @ $49.87. So far I've sold 4 calls at the 45 strike, including today's. The first 3 calls expired worthless. KOMG is currently down about 23% but was down as much as 39% in Sep.
Friday, December 15, 2006
New Yahoo Discussion Group
I just created a new Yahoo Group to provide a forum for discussing My Covered Call Blog.
The discussion will focus on how to trade covered calls. No other option strategies will be discussed. This group will allow a better exchange of ideas than just posting comments on the blog. Comments will still be accepted, but for further discussion the group will provide a better forum, with the ability to post files, such as the Trading Plan Template, spreadsheets, graphs, etc.
If you currently trade covered calls, or are interested in learning how, then you're welcome to join. Just enter your email address on the sign up form near the top right side of this blog or go directly to the group website.
The discussion will focus on how to trade covered calls. No other option strategies will be discussed. This group will allow a better exchange of ideas than just posting comments on the blog. Comments will still be accepted, but for further discussion the group will provide a better forum, with the ability to post files, such as the Trading Plan Template, spreadsheets, graphs, etc.
If you currently trade covered calls, or are interested in learning how, then you're welcome to join. Just enter your email address on the sign up form near the top right side of this blog or go directly to the group website.
Thursday, December 14, 2006
Risk Analysis for Covered Calls
All investment strategies have risk and covered calls are no different. The important thing is to understand where the risk is and have a plan for minimizing it.
A covered call consists of two components, long stock and short call (e.g. buy 100 shares of stock and sell 1 call option). Let's look at both to see where the risk is.
When you sell a call option you receive cash in the form of option premium. This option premium is yours to keep whether the option expires worthless or is exercised. As long as the call option sold is above the cost basis of the stock, such that it will result in a profit if exercised, then there is no risk in the call option.
So, if there's no risk in the call option that must mean that all the risk is in the stock. The risk in the stock is a major price decline and/or company bankruptcy. This is no different than a buy & hold strategy, where again all the risk is in the stock. So, covered calls are no more risky than buy & hold.
Now that we know that all the risk is in the stock, how do we minimize that risk? Two methods that I use are stock selection and position sizing.
For stock selection, I basically use the methods described in Pat Dorsey's book "The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market"
. Mr. Dorsey is the Director of Stock Analysis at Morningstar. This is a value investing approach. I look for companies that generate positive earnings, free cash flow, have good return on equity and low debt. I use Morningstar to find these companies and then run the stocks through Value Line Daily Options Survey (I previously used PowerOptions) to find potential covered call trades.
I don't believe that any type of analysis has any relevance on future stock prices. I'm only concerned with the current price at the time I buy the stock and whether or not the stock is overvalued or undervalued. I believe if you buy an overvalued stock there's a greater risk of that stock declining. My goal with trying to find undervalued stocks is to reduce the risk of a major decline. Also selecting good solid companies reduces the catastrophic risk of a company bankruptcy, which is the biggest risk in covered call trading.
I also don't believe in just picking the stocks with the highest covered call return. Premiums are usually high for a reason and usually event driven. This is especially true for biotech and pharmaceutical companies.
The second method I use to minimize risk is position sizing. Covered calls, just like buy & hold, have a limited risk, since a stock can only fall to zero. Granted, this would result in a 100% loss, but that's the most you can lose (i.e. it has a limit) and the likelihood of a stock going to zero is very low.
I use a position sizing limit of 5% or less of total capital. For example, if I had $100,000 of total capital my position size would be limited to $5,000 per stock. Now, if a stock's price was $50.00 I could buy 100 shares, and if it was $10.00 I could buy 500 shares. However, I limit all my initial positions to 100 shares. This gives me room, in most cases, to buy additional shares (dollar cost averaging) should the stock decline after I purchase it.
So, by selecting solid companies trading at or below their fair value and limiting the position size I potentially minimize the risk to my portfolio. However, this is still no guarantee that a stock won't decline, but that's where my position management strategy kicks in. By having a plan, I know what to do ahead of time, so when the eventual decline happens, and it will happen, I'm prepared for it and don't panic.
Another form of risk in trading covered calls is lost opportunity risk. If the stock's price soars far above the strike price of the call, then the call will most likely be exercised and you'll be forced to sell the stock below the current market value. In this case you would have done better with a buy & hold strategy.
As you can see from some of my past trade examples this has happened, however, I'm not concerned about lost opportunity risk. How many stocks are likely to soar? It happens, but not that often. When you compare the certainty of short term returns from writing covered calls to the risk of losing potential capital gains on appreciated stock price, you'll see that the consistency in writing covered calls produces better risk adjusted returns.
As long as I meet or surpass my return goals, I'm satisfied. That's why it's important to set return goals and have a means to measure them, in addition to managing risk. If you don't know where you're going, how will you know when you get there?
A covered call consists of two components, long stock and short call (e.g. buy 100 shares of stock and sell 1 call option). Let's look at both to see where the risk is.
When you sell a call option you receive cash in the form of option premium. This option premium is yours to keep whether the option expires worthless or is exercised. As long as the call option sold is above the cost basis of the stock, such that it will result in a profit if exercised, then there is no risk in the call option.
So, if there's no risk in the call option that must mean that all the risk is in the stock. The risk in the stock is a major price decline and/or company bankruptcy. This is no different than a buy & hold strategy, where again all the risk is in the stock. So, covered calls are no more risky than buy & hold.
Now that we know that all the risk is in the stock, how do we minimize that risk? Two methods that I use are stock selection and position sizing.
For stock selection, I basically use the methods described in Pat Dorsey's book "The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market"
. Mr. Dorsey is the Director of Stock Analysis at Morningstar. This is a value investing approach. I look for companies that generate positive earnings, free cash flow, have good return on equity and low debt. I use Morningstar to find these companies and then run the stocks through Value Line Daily Options Survey (I previously used PowerOptions) to find potential covered call trades.I don't believe that any type of analysis has any relevance on future stock prices. I'm only concerned with the current price at the time I buy the stock and whether or not the stock is overvalued or undervalued. I believe if you buy an overvalued stock there's a greater risk of that stock declining. My goal with trying to find undervalued stocks is to reduce the risk of a major decline. Also selecting good solid companies reduces the catastrophic risk of a company bankruptcy, which is the biggest risk in covered call trading.
I also don't believe in just picking the stocks with the highest covered call return. Premiums are usually high for a reason and usually event driven. This is especially true for biotech and pharmaceutical companies.
The second method I use to minimize risk is position sizing. Covered calls, just like buy & hold, have a limited risk, since a stock can only fall to zero. Granted, this would result in a 100% loss, but that's the most you can lose (i.e. it has a limit) and the likelihood of a stock going to zero is very low.
I use a position sizing limit of 5% or less of total capital. For example, if I had $100,000 of total capital my position size would be limited to $5,000 per stock. Now, if a stock's price was $50.00 I could buy 100 shares, and if it was $10.00 I could buy 500 shares. However, I limit all my initial positions to 100 shares. This gives me room, in most cases, to buy additional shares (dollar cost averaging) should the stock decline after I purchase it.
So, by selecting solid companies trading at or below their fair value and limiting the position size I potentially minimize the risk to my portfolio. However, this is still no guarantee that a stock won't decline, but that's where my position management strategy kicks in. By having a plan, I know what to do ahead of time, so when the eventual decline happens, and it will happen, I'm prepared for it and don't panic.
Another form of risk in trading covered calls is lost opportunity risk. If the stock's price soars far above the strike price of the call, then the call will most likely be exercised and you'll be forced to sell the stock below the current market value. In this case you would have done better with a buy & hold strategy.
As you can see from some of my past trade examples this has happened, however, I'm not concerned about lost opportunity risk. How many stocks are likely to soar? It happens, but not that often. When you compare the certainty of short term returns from writing covered calls to the risk of losing potential capital gains on appreciated stock price, you'll see that the consistency in writing covered calls produces better risk adjusted returns.
As long as I meet or surpass my return goals, I'm satisfied. That's why it's important to set return goals and have a means to measure them, in addition to managing risk. If you don't know where you're going, how will you know when you get there?
Wednesday, December 13, 2006
Trading Plan Template
One of the most important things you should do as an investor/trader is to develop a written trading plan. Having a written plan takes the emotions out of investing/trading. It also provides a disciplined approach. Unfortunately, this is one step that most people don't put enough time into, if at all. Some people invest/trade without a written plan, and, IMHO, that's a recipe for disaster.
In the interest of helping everyone write their own trading plan I included a Trading Plan Template below. My own trading plan is also posted on this blog. I hope you take the time to not only read that document but also put it to use and develop your own trading plan BEFORE you place your first trade. Even if you already started trading it's never too late to write down your trading plan.
Another important reason to have a written trading plan, that most people don't think of, is for backup purposes. As investors/traders we mostly trade in isolation. You might know what you're doing and think you don't need a written plan but what if something should happen to you? Who will take over if you're unable to trade? What will happen to your open positions? These are important issues to consider. If you're married, will your spouse know what to do? Without a written trading plan, probably not. So your plan should be detailed enough, including step-by-step instructions, so that someone else can take over for you in an emergency. Share your plan with your spouse or a friend you can trust or your broker. Make sure they understand it and can execute it if needed.
Once it's written remember it's not caste in stone. It should be a living document, updated as needed. I'm on the 3rd version of my trading plan. I'm constantly tweeking it as I learn from experience, and you should too.
TRADING PLAN TEMPLATE
OBJECTIVE
Describe the objective of this trading plan (e.g. capital appreciation, current income, etc.), your return requirements, and how you will measure your results (e.g. account balance, cash flow, etc.).
STRATEGY
Describe the strategy you will use to meet your objectives (e.g. trend following, breakouts, option spreads, covered calls, etc.).
Determine the risks involved in your chosen strategy and what you will do to minimize those risks.
CAPITAL
Broker: Name of the brokerage firm
Account Type: Cash, Margin, or IRA
Capital Available: Starting capital
INSTRUMENTS
Describe the investment instruments you’ll be trading (e.g. stocks, options, bonds, indices, futures, commodities, etc.)
TIMEFRAME
Describe both the overall timeframe for this plan and the timeframe of individual trades (e.g. short, medium, or long term).
POSITION SIZING
Describe how much capital will be invested in any given trade, how much total capital will be invested and how much will be held as cash reserves (e.g. 2% per trade, 90% invested, and 10% cash reserves).
TRADE ENTRY STRATEGY
Describe, in detail, your criteria for entering a trade (e.g. technical analysis, fundamental analysis, etc.).
Describe how you will enter a trade (e.g. market order, limit order, leg in, spread, etc.) including the commission cost.
TRADE EXIT STRATEGY
Describe, in detail, your criteria for exiting a trade (e.g. technical analysis, fundamental analysis, etc.).
Describe how you will exit a trade (e.g. stop loss, market order, limit order, leg out, spread, etc.) including the commission cost.
POSITION MANAGEMENT STRATEGY
Describe, in detail, how you will manage a position once it’s entered, assuming it hasn’t met your exit criteria.
What will you do if:
1. The price is unchanged.
2. The price is slightly lower.
3. The price is significantly lower.
4. The price is slightly higher.
5. The price is significantly higher.
TAX STRATEGY (For Taxable Accounts Only)
Describe, in detail, how you will manage taxable events and, if possible, defer taxes to subsequent years (e.g. year-end tax strategies, SysCW Tax Deferred Strategy, etc.).
In the interest of helping everyone write their own trading plan I included a Trading Plan Template below. My own trading plan is also posted on this blog. I hope you take the time to not only read that document but also put it to use and develop your own trading plan BEFORE you place your first trade. Even if you already started trading it's never too late to write down your trading plan.
Another important reason to have a written trading plan, that most people don't think of, is for backup purposes. As investors/traders we mostly trade in isolation. You might know what you're doing and think you don't need a written plan but what if something should happen to you? Who will take over if you're unable to trade? What will happen to your open positions? These are important issues to consider. If you're married, will your spouse know what to do? Without a written trading plan, probably not. So your plan should be detailed enough, including step-by-step instructions, so that someone else can take over for you in an emergency. Share your plan with your spouse or a friend you can trust or your broker. Make sure they understand it and can execute it if needed.
Once it's written remember it's not caste in stone. It should be a living document, updated as needed. I'm on the 3rd version of my trading plan. I'm constantly tweeking it as I learn from experience, and you should too.
TRADING PLAN TEMPLATE
OBJECTIVE
Describe the objective of this trading plan (e.g. capital appreciation, current income, etc.), your return requirements, and how you will measure your results (e.g. account balance, cash flow, etc.).
STRATEGY
Describe the strategy you will use to meet your objectives (e.g. trend following, breakouts, option spreads, covered calls, etc.).
Determine the risks involved in your chosen strategy and what you will do to minimize those risks.
CAPITAL
Broker: Name of the brokerage firm
Account Type: Cash, Margin, or IRA
Capital Available: Starting capital
INSTRUMENTS
Describe the investment instruments you’ll be trading (e.g. stocks, options, bonds, indices, futures, commodities, etc.)
TIMEFRAME
Describe both the overall timeframe for this plan and the timeframe of individual trades (e.g. short, medium, or long term).
POSITION SIZING
Describe how much capital will be invested in any given trade, how much total capital will be invested and how much will be held as cash reserves (e.g. 2% per trade, 90% invested, and 10% cash reserves).
TRADE ENTRY STRATEGY
Describe, in detail, your criteria for entering a trade (e.g. technical analysis, fundamental analysis, etc.).
Describe how you will enter a trade (e.g. market order, limit order, leg in, spread, etc.) including the commission cost.
TRADE EXIT STRATEGY
Describe, in detail, your criteria for exiting a trade (e.g. technical analysis, fundamental analysis, etc.).
Describe how you will exit a trade (e.g. stop loss, market order, limit order, leg out, spread, etc.) including the commission cost.
POSITION MANAGEMENT STRATEGY
Describe, in detail, how you will manage a position once it’s entered, assuming it hasn’t met your exit criteria.
What will you do if:
1. The price is unchanged.
2. The price is slightly lower.
3. The price is significantly lower.
4. The price is slightly higher.
5. The price is significantly higher.
TAX STRATEGY (For Taxable Accounts Only)
Describe, in detail, how you will manage taxable events and, if possible, defer taxes to subsequent years (e.g. year-end tax strategies, SysCW Tax Deferred Strategy, etc.).
Sunday, December 10, 2006
CBOE S&P 500 Buy-Write Index
The Chicago Board of Options Exchange (CBOE) has a benchmark index designed to track the performance of a hypothetical buy-write (covered call) strategy on the S&P 500 Index named the CBOE S&P 500 BuyWrite Index (BXM). Case studies were done by Ibbotson and Callan. These studies show that the returns on BXM vs the S&P were almost identical, however, on a risk adjusted basis the BXM outperformed the S&P.
The new Callan Associates study had several key findings, including:
- BXM generated superior risk-adjusted returns over the last 18 years, generating a return comparable to that of the S&P 500 with approximately two-thirds of the risk. (The compound annual return of the BXM was 11.77% compared to 11.67% for the S&P 500, and BXM returns were generated with a standard deviation of 9.29%, two-thirds of the 13.89% volatility of the S&P 500.)
- The risk-adjusted performance, as measured by the monthly Stutzer Index over the 18-year period, was 0.20 for the BXM vs. 0.15 for the S&P 500. A comparison using the monthly Sharpe Ratio yielded similar results (0.22 vs. 0.16, respectively), confirming the relative efficiency of the BXM over the 219-month study period.
- The BXM underperformed the S&P 500 during most rising equity markets and consistently outperformed the S&P 500 in all periods of declining equity markets, demonstrating the return cushion provided by income from writing the calls.
- The BXM generates a return pattern different from that of the S&P 500, offering a source of potential diversification. The addition of the BXM to a diversified investor portfolio would have generated significant improvement in risk-adjusted performance over the past 18 years.
Friday, December 8, 2006
Portfolio Allocation
I'm a firm believer in not putting all your eggs in one basket. Therefore, I've divided my IRA account into several different portfolios with different assets, investment methodologies, and brokerages. Most of these are passive investments with periodic rebalancing, except for my covered call portfolio which is actively managed. By dividing up my IRA account in this manner I reduce the risk of any one asset/methodology from having an adverse effect on my overall account.
Here's a breakdown of my IRA account:
Here's a breakdown of my IRA account:
| Percent | Brokerage | Assets/Methodology | Objective |
| 30% | Interactive Brokers | Covered Calls on Stocks | Income |
| 25% | Vanguard | Index Funds | Growth & Income |
| 15% | Interactive Brokers | Buy & Hold Stocks | Growth |
| 15% | Scottrade | Closed-End Funds | Income |
| 15% | Scottrade | CD Ladder | Income |
Tuesday, December 5, 2006
KCI - Adjustment
The following adjustment was made on KCI today.
05-Dec-06 - Buy Back & Roll Out/Up - BTC 2 Dec06 35.00 Call @ -3.69
05-Dec-06 - Interim Trade - STO 2 Jun07 40.00 Call @ 4.00
Current Position Summary:
Stock Investment: $9,906.00
Income Generated: $1,454.00
Percent Income Generated: 14.68%
Net Profit If Called: -$452.00
Percent Return If Called: -4.56%
Annualized Return If Called: -2.44%
Days to Expiration: 683 days
Trade History:
01-Aug-05 - Initial Stock Position - BTO 100 KCI @ 59.83
01-Aug-05 - Initial Call Option - STO 1 Aug05 60.00 Call @ 1.69
22-Aug-05 - Continued Trade - STO 1 Sep05 60.00 Call @ 1.29
19-Sep-05 - Continued Trade - STO 1 Oct05 60.00 Call @ 0.54
06-Oct-05 - Buy Back & Roll Out - BTC 1 Oct05 60.00 Call @ -0.11
25-Oct-05 - Continued Trade - STO 1 Nov05 60.00 Call @ 0.44
28-Oct-05 - Buy Back & Roll Down - BTC 1 Nov05 60.00 Call @ -0.11
28-Oct-05 - Interim Trade - STO 1 Nov05 35.00 Call @ 2.04
14-Nov-05 - Buy Back & Roll Out/Up - BTC 1 Nov05 35.00 Call @ -4.11
23-Nov-05 - Interim Trade - STO 1 Jan06 45.00 Call @ 0.69
23-Jan-06 - Interim Trade - STO 1 Feb06 45.00 Call @ 0.39
21-Feb-06 - Interim Trade - STO 1 Mar06 45.00 Call @ 0.09
20-Mar-06 - Dollar Cost Averaging - BTO 100 KCI @ 39.23
20-Mar-06 - Combined Cost Basis - $9,906.00 200 @ 49.53
20-Mar-06 - Interim Trade - STO 2 Sep06 45.00 Call @ 4.59
18-Sep-06 - Interim Trade - STO 2 Dec06 35.00 Call @ 0.94
05-Dec-06 - Buy Back & Roll Out/Up - BTC 2 Dec06 35.00 Call @ -3.69
05-Dec-06 - Interim Trade - STO 2 Jun07 40.00 Call @ 4.00
KCI is currently a losing position. It was originally purchased in Aug05 at $59.83. This is a solid company which had a virtual monopoly on it's vacuum-assisted closure (VAC) product until Medicare and Medicaid Services announced their decision to use the same reimbursement code for competitor BlueSky Medical and its own VAC product in Oct05. The stock gapped down from $56.00 to close at $34.94, or down about 38%, the following day. At this point the stock position was down about 42%.
In Mar06, I bought an additional 100 shares of KCI and now have an average cost basis, excluding option premiums, of $49.53.
Then in Aug06, KCI lost a patent infringement case against BlueSky Medical and once again the stock gapped down from $42.58 to close at $24.95, or down about 41%. At this point the stock position was down about 50%.
The Dec 35 Call options were an interim trade, meaning they were below the cost basis, and at a strike that I did not want to sell the stock. This is one strategy used to recover a losing position, but it must be monitored closely.
With less than 2 weeks until Dec expiration, the Dec 35 Calls were ITM and had only .10 time value left so the decision was made to roll out to Jun07 and up to the 40 strike to avoid assignment.
The Jun07 40 Call options are also an interim trade (i.e. below the cost basis) and may need to be rolled again. The stock position is currently down about 20%. If called the loss would be about $450. The position has generated about $1,500 in income, or about 15% of the cost basis of the stock, since inception. By Jun07 expiration the position will have been held for 683 days.
I looked at doing another dollar cost averaging but that would have put this position over 5% of total capital, which is my limit for each position. As my capital grows between now and Jun07 I may be able to do a dollar cost averaging then. Time will tell.
Since KCI is still a solid company, I'll hold it until it can be sold at a profit. While I've had losing positions, like KCI, in the past, I've never closed a position for a loss. Some positions don't work out as initially planned, but if you invest in solid companies you wouldn't mind holding, then eventually either the stock will recover or you can manage it by making adjustments until the position can be closed at a profit. The important thing is to have a plan, don't panic, and never sell at a loss unless absolutely necessary.
05-Dec-06 - Buy Back & Roll Out/Up - BTC 2 Dec06 35.00 Call @ -3.69
05-Dec-06 - Interim Trade - STO 2 Jun07 40.00 Call @ 4.00
Current Position Summary:
Stock Investment: $9,906.00
Income Generated: $1,454.00
Percent Income Generated: 14.68%
Net Profit If Called: -$452.00
Percent Return If Called: -4.56%
Annualized Return If Called: -2.44%
Days to Expiration: 683 days
Trade History:
01-Aug-05 - Initial Stock Position - BTO 100 KCI @ 59.83
01-Aug-05 - Initial Call Option - STO 1 Aug05 60.00 Call @ 1.69
22-Aug-05 - Continued Trade - STO 1 Sep05 60.00 Call @ 1.29
19-Sep-05 - Continued Trade - STO 1 Oct05 60.00 Call @ 0.54
06-Oct-05 - Buy Back & Roll Out - BTC 1 Oct05 60.00 Call @ -0.11
25-Oct-05 - Continued Trade - STO 1 Nov05 60.00 Call @ 0.44
28-Oct-05 - Buy Back & Roll Down - BTC 1 Nov05 60.00 Call @ -0.11
28-Oct-05 - Interim Trade - STO 1 Nov05 35.00 Call @ 2.04
14-Nov-05 - Buy Back & Roll Out/Up - BTC 1 Nov05 35.00 Call @ -4.11
23-Nov-05 - Interim Trade - STO 1 Jan06 45.00 Call @ 0.69
23-Jan-06 - Interim Trade - STO 1 Feb06 45.00 Call @ 0.39
21-Feb-06 - Interim Trade - STO 1 Mar06 45.00 Call @ 0.09
20-Mar-06 - Dollar Cost Averaging - BTO 100 KCI @ 39.23
20-Mar-06 - Combined Cost Basis - $9,906.00 200 @ 49.53
20-Mar-06 - Interim Trade - STO 2 Sep06 45.00 Call @ 4.59
18-Sep-06 - Interim Trade - STO 2 Dec06 35.00 Call @ 0.94
05-Dec-06 - Buy Back & Roll Out/Up - BTC 2 Dec06 35.00 Call @ -3.69
05-Dec-06 - Interim Trade - STO 2 Jun07 40.00 Call @ 4.00
KCI is currently a losing position. It was originally purchased in Aug05 at $59.83. This is a solid company which had a virtual monopoly on it's vacuum-assisted closure (VAC) product until Medicare and Medicaid Services announced their decision to use the same reimbursement code for competitor BlueSky Medical and its own VAC product in Oct05. The stock gapped down from $56.00 to close at $34.94, or down about 38%, the following day. At this point the stock position was down about 42%.
In Mar06, I bought an additional 100 shares of KCI and now have an average cost basis, excluding option premiums, of $49.53.
Then in Aug06, KCI lost a patent infringement case against BlueSky Medical and once again the stock gapped down from $42.58 to close at $24.95, or down about 41%. At this point the stock position was down about 50%.
The Dec 35 Call options were an interim trade, meaning they were below the cost basis, and at a strike that I did not want to sell the stock. This is one strategy used to recover a losing position, but it must be monitored closely.
With less than 2 weeks until Dec expiration, the Dec 35 Calls were ITM and had only .10 time value left so the decision was made to roll out to Jun07 and up to the 40 strike to avoid assignment.
The Jun07 40 Call options are also an interim trade (i.e. below the cost basis) and may need to be rolled again. The stock position is currently down about 20%. If called the loss would be about $450. The position has generated about $1,500 in income, or about 15% of the cost basis of the stock, since inception. By Jun07 expiration the position will have been held for 683 days.
I looked at doing another dollar cost averaging but that would have put this position over 5% of total capital, which is my limit for each position. As my capital grows between now and Jun07 I may be able to do a dollar cost averaging then. Time will tell.
Since KCI is still a solid company, I'll hold it until it can be sold at a profit. While I've had losing positions, like KCI, in the past, I've never closed a position for a loss. Some positions don't work out as initially planned, but if you invest in solid companies you wouldn't mind holding, then eventually either the stock will recover or you can manage it by making adjustments until the position can be closed at a profit. The important thing is to have a plan, don't panic, and never sell at a loss unless absolutely necessary.
Friday, December 1, 2006
NSS - Review
Here's a position on NSS that closed in June. The following is the trade history and returns, including IB commissions.
03/20/06 - Bought 100 shares @ 42.27
03/20/06 - Sold 1 Jun06 40 Call @ 4.89
06/16/06 - Jun06 40 Call exercised and stock called away
Stock Investment: $4,227.00
Income Generated: $489.00
Net Profit: $262.00
Percent Return: 6.20%
Annualized Return: 25.71%
Duration of Trade: 88 days
Buy & Hold Comparison
Opening Price: $42.27
Closing Price: $47.89
Dividends: $0.00
Net Profit: $562.00
Percent Return: 13.30%
Annualized Return: 55.16%
Duration of Trade: 88 days
This position did worse than buy and hold. If you look at a chart of NSS you'll see that the stock rose shortly after the initial purchase and then declined. It traded as high as $55.43 in April, or up about 31%, and as low as $65.51 in June, or up about 5%.
No adjustments were needed for this trade and the profit was received 3 months before the position closed. Even though I could have done better with buy and hold, I still exceeded my goal of 12-24% annualized, and am therefore satisfied with the return.
03/20/06 - Bought 100 shares @ 42.27
03/20/06 - Sold 1 Jun06 40 Call @ 4.89
06/16/06 - Jun06 40 Call exercised and stock called away
Stock Investment: $4,227.00
Income Generated: $489.00
Net Profit: $262.00
Percent Return: 6.20%
Annualized Return: 25.71%
Duration of Trade: 88 days
Buy & Hold Comparison
Opening Price: $42.27
Closing Price: $47.89
Dividends: $0.00
Net Profit: $562.00
Percent Return: 13.30%
Annualized Return: 55.16%
Duration of Trade: 88 days
This position did worse than buy and hold. If you look at a chart of NSS you'll see that the stock rose shortly after the initial purchase and then declined. It traded as high as $55.43 in April, or up about 31%, and as low as $65.51 in June, or up about 5%.
No adjustments were needed for this trade and the profit was received 3 months before the position closed. Even though I could have done better with buy and hold, I still exceeded my goal of 12-24% annualized, and am therefore satisfied with the return.
HYDL - Review
Here's a position on HYDL that closed in June. The following is the trade history and returns, including IB commissions.
03/20/06 - Bought 100 shares @ 74.38
03/20/06 - Sold 1 Jun06 70 Call @ 8.49
06/16/06 - Jun06 70 Call exercised and stock called away
Stock Investment: $7,438.00
Income Generated: $849.00
Net Profit: $411.00
Percent Return: 5.53%
Annualized Return: 22.92%
Duration of Trade: 88 days
Buy & Hold Comparison
Opening Price: $74.38
Closing Price: $71.79
Dividends: $0.00
Net Profit: $-$259.00
Percent Return: -3.48%
Annualized Return: -14.44%
Duration of Trade: 88 days
This position did better than buy and hold. If you look at a chart of HYDL you'll see that the stock rose shortly after the initial purchase and then declined. It traded as high as $89.71 in April, or up about 21%, and as low as $65.51 in June, or down about 12%.
No adjustments were needed for this trade and the profit was received 3 months before the position closed.
03/20/06 - Bought 100 shares @ 74.38
03/20/06 - Sold 1 Jun06 70 Call @ 8.49
06/16/06 - Jun06 70 Call exercised and stock called away
Stock Investment: $7,438.00
Income Generated: $849.00
Net Profit: $411.00
Percent Return: 5.53%
Annualized Return: 22.92%
Duration of Trade: 88 days
Buy & Hold Comparison
Opening Price: $74.38
Closing Price: $71.79
Dividends: $0.00
Net Profit: $-$259.00
Percent Return: -3.48%
Annualized Return: -14.44%
Duration of Trade: 88 days
This position did better than buy and hold. If you look at a chart of HYDL you'll see that the stock rose shortly after the initial purchase and then declined. It traded as high as $89.71 in April, or up about 21%, and as low as $65.51 in June, or down about 12%.
No adjustments were needed for this trade and the profit was received 3 months before the position closed.
Monday, November 27, 2006
ENER - Review
Here's a position on ENER that closed in January. The following is the trade history and returns, including IB commissions. This position was established before I changed my return and stock selection criteria.
09/19/05 - Bought 100 shares @ 37.92
09/19/05 - Sold 1 Oct05 35 Call @ 3.99
10/21/05 - Oct05 35 Call expired
10/24/05 - Sold 1 Nov05 35 Call @ 1.74
11/18/05 - Nov05 35 Call expired
11/23/05 - Sold 1 Dec05 35 Call @ 0.49
12/16/05 - Bought 1 Dec05 35 Call @ -0.71
12/16/05 - Sold 1 Jan06 35 Call @ 2.74
01/20/06 - Jan06 35 Call exercised and stock called away
Stock Investment: $3,792.00
Income Generated: $825.00
Net Profit: $533.00
Percent Return: 14.06%
Annualized Return: 41.71%
Duration of Trade: 123 days
Buy & Hold Comparison
Opening Price: $37.92
Closing Price: $54.44
Dividends: $0.00
Net Profit: $1,652.00
Percent Return: 43.58%
Annualized Return: 129.31%
Duration of Trade: 123 days
This is a good example of a position that would have done better with buy & hold. If you look at a chart of ENER you'll see that the stock declined shortly after the initial purchase and then recovered. At one point, in Dec05, it traded as low as $28.76, or down about 24%.
The first two months the options expired worthless as the stock declined. The Dec option was bought back and rolled out to January. The stock shot up from Dec until Jan expiration, where the call was exercised and the stock was called away.
The profit on this trade was well above my goal of 24% annualized, and therefore I let the stock get called away. As stated above, I would have done much better with a buy & hold strategy. However, I don't worry about that. Hindsight is 20/20. I set a goal and exceeded it, so I'm satisfied with the return.
I go for base hits, not home runs. Sure, everyone loves home runs, but they don't happen very often. Look at the batting average of most home run hitters, they strike out a lot, but when they hit a home run everyone cheers. However, it's the guys that consistently get base hits that have the best batting averages and help win ball games. With bases loaded, every base hit scores a run.
09/19/05 - Bought 100 shares @ 37.92
09/19/05 - Sold 1 Oct05 35 Call @ 3.99
10/21/05 - Oct05 35 Call expired
10/24/05 - Sold 1 Nov05 35 Call @ 1.74
11/18/05 - Nov05 35 Call expired
11/23/05 - Sold 1 Dec05 35 Call @ 0.49
12/16/05 - Bought 1 Dec05 35 Call @ -0.71
12/16/05 - Sold 1 Jan06 35 Call @ 2.74
01/20/06 - Jan06 35 Call exercised and stock called away
Stock Investment: $3,792.00
Income Generated: $825.00
Net Profit: $533.00
Percent Return: 14.06%
Annualized Return: 41.71%
Duration of Trade: 123 days
Buy & Hold Comparison
Opening Price: $37.92
Closing Price: $54.44
Dividends: $0.00
Net Profit: $1,652.00
Percent Return: 43.58%
Annualized Return: 129.31%
Duration of Trade: 123 days
This is a good example of a position that would have done better with buy & hold. If you look at a chart of ENER you'll see that the stock declined shortly after the initial purchase and then recovered. At one point, in Dec05, it traded as low as $28.76, or down about 24%.
The first two months the options expired worthless as the stock declined. The Dec option was bought back and rolled out to January. The stock shot up from Dec until Jan expiration, where the call was exercised and the stock was called away.
The profit on this trade was well above my goal of 24% annualized, and therefore I let the stock get called away. As stated above, I would have done much better with a buy & hold strategy. However, I don't worry about that. Hindsight is 20/20. I set a goal and exceeded it, so I'm satisfied with the return.
I go for base hits, not home runs. Sure, everyone loves home runs, but they don't happen very often. Look at the batting average of most home run hitters, they strike out a lot, but when they hit a home run everyone cheers. However, it's the guys that consistently get base hits that have the best batting averages and help win ball games. With bases loaded, every base hit scores a run.
Saturday, November 25, 2006
SWFT - Review
Here's a position on SWFT that closed in July. The following is the trade history and returns, including IB commissions. This position was established before I changed my return and stock selection criteria.
05/27/05 - Bought 200 shares @ 24.91
05/27/05 - Sold 2 Jun05 25 Calls @ 0.74
06/17/05 - Jun05 25 Calls expired
06/20/05 - Sold 2 Jul05 25 Calls @ 0.24
07/15/05 - Jul05 25 Calls expired
07/18/05 - Sold 2 Oct05 25 Calls @ 0.79
08/25/05 - Bought 2 Oct05 25 Calls @ -0.11
09/23/05 - Sold 2 Oct05 17.50 Calls @ 0.59
10/21/05 - Bought 2 Oct05 17.50 Calls @ -0.21
10/25/05 - Sold 2 Nov05 20 Calls @ 0.19
11/14/05 - Bought 2 Nov05 20 Calls @ -0.66
11/23/05 - Sold 2 Jan06 22.50 Calls @ 0.44
01/19/06 - Bought 2 Jan06 22.50 Call @ -0.61
01/19/06 - Sold 2 Apr06 25 Calls @ 1.04
03/24/06 - Bought 2 Apr06 25 Calls @ -0.16
03/24/06 - Sold Jul06 25 Calls @ 0.89
07/21/06 - Apr06 25 Calls exercised and stock called away
Stock Investment: $4,982.00
Income Generated: $637.00
Net Profit: $655.00
Percent Return: 13.15%
Annualized Return: 11.43%
Duration of Trade: 420 days
Buy & Hold Comparison
Opening Price: $24.91
Closing Price: $26.54
Dividends: $0.00
Net Profit: $163.00
Percent Return: 6.55%
Annualized Return: 5.69%
Duration of Trade: 420 days
This is a good example of a position that was recovered using rolling strategies. If you look at a chart of SWFT you'll see that the stock declined shortly after the initial purchase and then recovered. At one point, in Sep05, it traded as low as $16.25, or down about 35%.
In Sep05, after the stock dropped to its lowest point, the 25 calls were rolled down to 17.50. But then the stock started to recover and those calls had to be bought back and rolled up to 20. Then the 20 calls were bought back and rolled up to 22.50. And finally the 22.50 calls were bought back and rolled up to 25. The 25 calls were exercised in Jul06 and the stock was called away. Again, I allowed the stock to be called away because I no longer wanted to hold it.
This position did better than buy & hold, which only had a 5.69% annualized return. Even though the stock was down 35% at one point, again, rather than sell at a loss, the position was managed to a profit. Again, notice that the income generated was received long before the stock was called away and was able to be reinvested into other positions.
05/27/05 - Bought 200 shares @ 24.91
05/27/05 - Sold 2 Jun05 25 Calls @ 0.74
06/17/05 - Jun05 25 Calls expired
06/20/05 - Sold 2 Jul05 25 Calls @ 0.24
07/15/05 - Jul05 25 Calls expired
07/18/05 - Sold 2 Oct05 25 Calls @ 0.79
08/25/05 - Bought 2 Oct05 25 Calls @ -0.11
09/23/05 - Sold 2 Oct05 17.50 Calls @ 0.59
10/21/05 - Bought 2 Oct05 17.50 Calls @ -0.21
10/25/05 - Sold 2 Nov05 20 Calls @ 0.19
11/14/05 - Bought 2 Nov05 20 Calls @ -0.66
11/23/05 - Sold 2 Jan06 22.50 Calls @ 0.44
01/19/06 - Bought 2 Jan06 22.50 Call @ -0.61
01/19/06 - Sold 2 Apr06 25 Calls @ 1.04
03/24/06 - Bought 2 Apr06 25 Calls @ -0.16
03/24/06 - Sold Jul06 25 Calls @ 0.89
07/21/06 - Apr06 25 Calls exercised and stock called away
Stock Investment: $4,982.00
Income Generated: $637.00
Net Profit: $655.00
Percent Return: 13.15%
Annualized Return: 11.43%
Duration of Trade: 420 days
Buy & Hold Comparison
Opening Price: $24.91
Closing Price: $26.54
Dividends: $0.00
Net Profit: $163.00
Percent Return: 6.55%
Annualized Return: 5.69%
Duration of Trade: 420 days
This is a good example of a position that was recovered using rolling strategies. If you look at a chart of SWFT you'll see that the stock declined shortly after the initial purchase and then recovered. At one point, in Sep05, it traded as low as $16.25, or down about 35%.
In Sep05, after the stock dropped to its lowest point, the 25 calls were rolled down to 17.50. But then the stock started to recover and those calls had to be bought back and rolled up to 20. Then the 20 calls were bought back and rolled up to 22.50. And finally the 22.50 calls were bought back and rolled up to 25. The 25 calls were exercised in Jul06 and the stock was called away. Again, I allowed the stock to be called away because I no longer wanted to hold it.
This position did better than buy & hold, which only had a 5.69% annualized return. Even though the stock was down 35% at one point, again, rather than sell at a loss, the position was managed to a profit. Again, notice that the income generated was received long before the stock was called away and was able to be reinvested into other positions.
Friday, November 24, 2006
PPC - Review
Here's a position on PPC that closed in September. The following is the trade history and returns, including IB commissions. This position was established before I changed my return and stock selection criteria.
09/19/05 - Bought 100 shares @ 35.17
09/19/05 - Sold 1 Oct05 35 Call @ 1.19
10/21/05 - Oct05 35 Call expired
10/24/05 - Sold 1 Nov05 35 Call @ 1.99
11/18/05 - Nov05 35 Call expired
11/23/05 - Sold 1 Jan06 35 Call @ 0.64
12/30/05 - Dividend received @ 0.02
01/13/06 - Dividend received @ 1.00
01/20/06 - Jan06 35 Call expired
01/23/06 - Sold 1 Mar06 30 Call @ 0.19
02/21/06 - Bought 100 shares @ 23.92
02/21/06 - Combined Cost Basis @ 29.55
02/21/06 - Sold 1 Mar06 30 Call @ 0.04
03/17/06 - Mar06 30 Calls expired
03/20/06 - Bought 100 shares @ 22.18
03/20/06 - Combined Cost Basis @ 27.09
03/20/06 - Sold 3 Sep06 25 Call @ 1.44
03/31/06 - Dividend Received @ 0.02
06/30/06 - Dividend Received @ 0.02
09/15/06 - Sep06 25 Calls exercised and stock called away
09/29/06 - Dividend Received @ 0.02
Stock Investment: $8,127.00
Income Generated: $958.00
Net Profit: $331.00
Percent Return: 4.07%
Annualized Return: 4.12%
Duration of Trade: 361 days
Buy & Hold Comparison
Opening Price: $35.17
Closing Price: $27.68
Dividends: $108.00
Net Profit: -$641.00
Percent Return: -18.23%
Annualized Return: -18.43%
Duration of Trade: 361 days
This is a good example of a position that was recovered by dollar cost averaging. If you look at a chart of PPC you'll see that the stock declined shortly after the initial purchase and never recovered. At one point, in Mar & Apr, it traded as low as $20.94, or down about 40%.
Rather than panic and sell at a loss, I used dollar cost averaging twice during this holding period to lower the cost basis of the stock, which allowed me to get out at a profit. I allowed the stock to get called away since I no longer wanted to hold this stock.
Notice that the stock was called away at a price ($25) that was 29% below the original purchase price ($35.17). By lowering the cost basis with dollar cost averaging the stock doesn't have to recover back to the original price. Also notice that $958 of income was generated during this period, which was reinvested in other positions.
The annualized return on this position wasn't great, in fact I could have done better in a money market account. However, it beat buy & hold, which was down over 18% annualized. Sure I probably could have done better with a different stock, by the point here is that I didn't lose money. Sometimes positions don't work out, but if managed properly you can still preserve your capital and come out ahead.
09/19/05 - Bought 100 shares @ 35.17
09/19/05 - Sold 1 Oct05 35 Call @ 1.19
10/21/05 - Oct05 35 Call expired
10/24/05 - Sold 1 Nov05 35 Call @ 1.99
11/18/05 - Nov05 35 Call expired
11/23/05 - Sold 1 Jan06 35 Call @ 0.64
12/30/05 - Dividend received @ 0.02
01/13/06 - Dividend received @ 1.00
01/20/06 - Jan06 35 Call expired
01/23/06 - Sold 1 Mar06 30 Call @ 0.19
02/21/06 - Bought 100 shares @ 23.92
02/21/06 - Combined Cost Basis @ 29.55
02/21/06 - Sold 1 Mar06 30 Call @ 0.04
03/17/06 - Mar06 30 Calls expired
03/20/06 - Bought 100 shares @ 22.18
03/20/06 - Combined Cost Basis @ 27.09
03/20/06 - Sold 3 Sep06 25 Call @ 1.44
03/31/06 - Dividend Received @ 0.02
06/30/06 - Dividend Received @ 0.02
09/15/06 - Sep06 25 Calls exercised and stock called away
09/29/06 - Dividend Received @ 0.02
Stock Investment: $8,127.00
Income Generated: $958.00
Net Profit: $331.00
Percent Return: 4.07%
Annualized Return: 4.12%
Duration of Trade: 361 days
Buy & Hold Comparison
Opening Price: $35.17
Closing Price: $27.68
Dividends: $108.00
Net Profit: -$641.00
Percent Return: -18.23%
Annualized Return: -18.43%
Duration of Trade: 361 days
This is a good example of a position that was recovered by dollar cost averaging. If you look at a chart of PPC you'll see that the stock declined shortly after the initial purchase and never recovered. At one point, in Mar & Apr, it traded as low as $20.94, or down about 40%.
Rather than panic and sell at a loss, I used dollar cost averaging twice during this holding period to lower the cost basis of the stock, which allowed me to get out at a profit. I allowed the stock to get called away since I no longer wanted to hold this stock.
Notice that the stock was called away at a price ($25) that was 29% below the original purchase price ($35.17). By lowering the cost basis with dollar cost averaging the stock doesn't have to recover back to the original price. Also notice that $958 of income was generated during this period, which was reinvested in other positions.
The annualized return on this position wasn't great, in fact I could have done better in a money market account. However, it beat buy & hold, which was down over 18% annualized. Sure I probably could have done better with a different stock, by the point here is that I didn't lose money. Sometimes positions don't work out, but if managed properly you can still preserve your capital and come out ahead.
Tuesday, November 21, 2006
Trade Selection
For stock selection, I basically use the methods described in Pat Dorsey's book "The Five Rules for Successful Stock Investing: Morningstar's Guide to Building Wealth and Winning in the Market". Mr. Dorsey is the Director of Stock Analysis at Morningstar. This is a value investing approach. I look for companies that generate positive earnings, free cash flow, have good return on equity and low debt. I use Morningstar to find these companies and then run the stocks through Value Line Daily Options Survey (I previously used PowerOptions) to find potential covered call trades.
Here is an example of the thought process I go through when selecting and analyzing trades.
This is an excerpt from a Yahoo discussion regarding a proposed WFMI trade on 11/2, where the stock dropped about 23% the following day after an earnings announcement.
First of all, establishing a covered call trade on or near the day of earnings announcement is risky. It's better to wait until after the announcement to see how the stock reacts.
With that said, let's assume that a position was established on 11/2 using closing prices of that day per OptionsXpress Historical Quotes:
Buy 100 WMFI at $60.13
Sell 1 Dec06 50 Call at $11.59
Stock Investment: $6,013.00
Income Generated: $1,159.00
Percent Income Generated: 19.27%
Net Profit If Called: $146.00
Percent Return If Called: 2.43%
Annualized Return If Called: 20.61%
Days to Expiration: 43 days
The stock dropped $13.86 (23.10%) to $46.26. The break even is $48.54 so the above position is only down $2.28 (3.8%). And there's still 43 days until expiration, so the stock could recover back up to $50 and get called away for the expected profit.
This is just an example and not necessarily what I would have done, but it just shows that it was possible to put on this trade and still make out ok.
Here's how I would have analyzed this trade.
First I start with the company. WFMI is a good solid company. They've had increasing sales revenue and earnings per share for the past 10 years. They've generated free cash flow for the past 5 years. Their return on equity has averaged about 14% per year over the past 10 years. They have a very low debt/equity ratio. And they pay a dividend, which currently yields 1.3%. So, in my view this is a good stock to own for the long term.
Then I read the Morningstar analyst report and compare the stock price relative to the fair value. I try to find companies that are trading at a discount to their fair value. If a stock is overpriced I usually skip it. In this case this stock was undervalued according to Morningstar.
Next I would see if the cost of the stock is within my position sizing limit, which is 5% or less of total capital. So, for example, if I had $100,000 total capital, that limit would be $5,000 per stock position. In this case the total stock cost, including commissions, is $6,013, which is over the limit so I probably would not have placed this trade.
If the stock is within my position sizing limit, I would then look at the options to see if I could place a covered call trade that meets my return and downside protection criteria. For this example I used SysCW's criteria of 15%/15%.
If the trade has passed all of the above I then look at news and company events. I probably would not have placed this trade on this particular day since earnings were going to be announced after the market close. I would have waited a few days to see how the stock reacted.
Now, let's assume I ignored some of my rules and established this position anyway on 11/2. The stock is down about 23%, trading at $46.26, which is below the strike price of $50 with 43 days until expiration.
Now, since I've already determined that WFMI is a good long term stock, I would not close the position and take my loss. I would hold out until expiration. If the stock recovers and closes above $50 I would make my expected return. If not, I would sell another call at that time and may dollar cost average to pick up more shares at a better price.
Update as of 11/21: WFMI is trading at $49, within $1 of the strike price with 24 days before expiration, so it looks like this trade just might work out.
The key is in the stock selection. I only choose stocks I'm willing to buy & hold, so when they drop I don't panic and sell at a loss. These are potential long term holdings. If I'm not willing to hold a stock I don't buy it.
In my opinion, the following 5 assumptions, as described in Options Trading for the Conservative Investor: Increasing Profits Without Increasing Your Risk (Financial Times Prentice Hall Books)
by Michael Thomsett, are critical to successful covered call trading.
1. You will limit option activities to stocks you have pre-qualified.
2. You believe that your stocks will rise in value.
3. You accept the premise that fundamental analysis of stocks is an
essential first step in the process of examining options opportunities.
4. In the event of a temporary downward movement in a stock's price, you
would be happy to buy more.
5. You believe that there are an adequate number of available stocks that
meet your criteria.
. Mr. Dorsey is the Director of Stock Analysis at Morningstar. This is a value investing approach. I look for companies that generate positive earnings, free cash flow, have good return on equity and low debt. I use Morningstar to find these companies and then run the stocks through Value Line Daily Options Survey (I previously used PowerOptions) to find potential covered call trades.Here is an example of the thought process I go through when selecting and analyzing trades.
This is an excerpt from a Yahoo discussion regarding a proposed WFMI trade on 11/2, where the stock dropped about 23% the following day after an earnings announcement.
First of all, establishing a covered call trade on or near the day of earnings announcement is risky. It's better to wait until after the announcement to see how the stock reacts.
With that said, let's assume that a position was established on 11/2 using closing prices of that day per OptionsXpress Historical Quotes:
Buy 100 WMFI at $60.13
Sell 1 Dec06 50 Call at $11.59
Stock Investment: $6,013.00
Income Generated: $1,159.00
Percent Income Generated: 19.27%
Net Profit If Called: $146.00
Percent Return If Called: 2.43%
Annualized Return If Called: 20.61%
Days to Expiration: 43 days
The stock dropped $13.86 (23.10%) to $46.26. The break even is $48.54 so the above position is only down $2.28 (3.8%). And there's still 43 days until expiration, so the stock could recover back up to $50 and get called away for the expected profit.
This is just an example and not necessarily what I would have done, but it just shows that it was possible to put on this trade and still make out ok.
Here's how I would have analyzed this trade.
First I start with the company. WFMI is a good solid company. They've had increasing sales revenue and earnings per share for the past 10 years. They've generated free cash flow for the past 5 years. Their return on equity has averaged about 14% per year over the past 10 years. They have a very low debt/equity ratio. And they pay a dividend, which currently yields 1.3%. So, in my view this is a good stock to own for the long term.
Then I read the Morningstar analyst report and compare the stock price relative to the fair value. I try to find companies that are trading at a discount to their fair value. If a stock is overpriced I usually skip it. In this case this stock was undervalued according to Morningstar.
Next I would see if the cost of the stock is within my position sizing limit, which is 5% or less of total capital. So, for example, if I had $100,000 total capital, that limit would be $5,000 per stock position. In this case the total stock cost, including commissions, is $6,013, which is over the limit so I probably would not have placed this trade.
If the stock is within my position sizing limit, I would then look at the options to see if I could place a covered call trade that meets my return and downside protection criteria. For this example I used SysCW's criteria of 15%/15%.
If the trade has passed all of the above I then look at news and company events. I probably would not have placed this trade on this particular day since earnings were going to be announced after the market close. I would have waited a few days to see how the stock reacted.
Now, let's assume I ignored some of my rules and established this position anyway on 11/2. The stock is down about 23%, trading at $46.26, which is below the strike price of $50 with 43 days until expiration.
Now, since I've already determined that WFMI is a good long term stock, I would not close the position and take my loss. I would hold out until expiration. If the stock recovers and closes above $50 I would make my expected return. If not, I would sell another call at that time and may dollar cost average to pick up more shares at a better price.
Update as of 11/21: WFMI is trading at $49, within $1 of the strike price with 24 days before expiration, so it looks like this trade just might work out.
The key is in the stock selection. I only choose stocks I'm willing to buy & hold, so when they drop I don't panic and sell at a loss. These are potential long term holdings. If I'm not willing to hold a stock I don't buy it.
In my opinion, the following 5 assumptions, as described in Options Trading for the Conservative Investor: Increasing Profits Without Increasing Your Risk (Financial Times Prentice Hall Books)
by Michael Thomsett, are critical to successful covered call trading.1. You will limit option activities to stocks you have pre-qualified.
2. You believe that your stocks will rise in value.
3. You accept the premise that fundamental analysis of stocks is an
essential first step in the process of examining options opportunities.
4. In the event of a temporary downward movement in a stock's price, you
would be happy to buy more.
5. You believe that there are an adequate number of available stocks that
meet your criteria.
Monday, November 20, 2006
Current Portfolio
Here's my current portfolio as of 11/20/06. There are 28 open positions with the majority of positions (21) having expiration dates in Jan07. So there won't be much activity for the next 2 months unless any adjustments are necessary. The average holding period for this portfolio is 327 days if all positions are held until expiration.
| Stock | Opened | Expiration | DTE |
| KCI | 08/01/05 | 12/15/06 | 501 |
| KOMG | 03/20/06 | 12/15/06 | 270 |
| ARO | 03/20/06 | 01/19/07 | 305 |
| BJS | 01/25/06 | 01/19/07 | 359 |
| CECO | 09/19/05 | 01/19/07 | 487 |
| DHI | 08/01/05 | 01/19/07 | 536 |
| ELOS | 03/20/06 | 01/19/07 | 305 |
| EXP | 04/24/06 | 01/19/07 | 270 |
| EXPD | 07/26/06 | 01/19/07 | 177 |
| HLX | 01/25/06 | 01/19/07 | 359 |
| JBHT | 02/21/06 | 01/19/07 | 332 |
| NTES | 03/20/06 | 01/19/07 | 305 |
| NTY | 10/24/05 | 01/19/07 | 452 |
| NVDA | 04/24/06 | 01/19/07 | 270 |
| NVT | 10/24/06 | 01/19/07 | 87 |
| OSUR | 03/20/06 | 01/19/07 | 305 |
| PSUN | 11/21/05 | 01/19/07 | 424 |
| RMBS | 04/24/06 | 01/19/07 | 270 |
| SHW | 02/21/06 | 01/19/07 | 332 |
| SNDK | 04/24/06 | 01/19/07 | 270 |
| STLD | 04/24/06 | 01/19/07 | 270 |
| WGO | 07/19/05 | 01/19/07 | 549 |
| ZMH | 02/22/06 | 01/19/07 | 331 |
| BBBY | 11/21/05 | 02/16/07 | 452 |
| PALM | 04/24/06 | 02/16/07 | 298 |
| XXIA | 03/20/06 | 02/16/07 | 333 |
| ISE | 11/20/06 | 04/20/07 | 151 |
| MA | 11/20/06 | 04/20/07 | 151 |
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