Thursday, January 18, 2007

NTY - Closed

The NTY Jan07 25 Call was exercised yesterday and the stock was called away for a profit. The following is the trade history and returns, including IB commissions.

Covered Call Results

Stock Investment: $4,414.00
Income Generated: $170.50
Net Profit: $756.50
Percent Return: 17.14%
Annualized Return: 13.90%
Duration of Trade: 450 days

Buy & Hold Comparison

Opening Price: $22.07
Closing Price: $45.70
P/L per Share: $23.63
Shares: 200
Dividends: $0.00
Net Profit: $4,726.00
Percent Return: 107.07%
Annualized Return: 86.84%
Duration of Trade: 450 days

Trade History:

24-Oct-05 - Initial Stock Position - BTO 200 NTY @ 22.07 -
24-Oct-05 - Initial Call Option - STO 2 Nov05 22.50 Call @ 0.49 - Expired
23-Nov-05 - Continued Trade - STO 2 Jan06 22.50 Call @ 0.29 - Expired
23-Jan-06 - Interim Trade - STO 2 Feb06 17.50 Call @ 0.29 - Closed
27-Jan-06 - Buy Back & Roll Out/Up - BTC 2 Feb06 17.50 Call @ -2.31 -
27-Jan-06 - Continued Trade - STO 2 Jun06 25.00 Call @ 0.24 - Expired
26-Jun-06 - Continued Trade - STO 2 Jan07 25.00 Call @ 1.84 - Exercised
17-Jan-07 - Option Exercised - EX 2 Jan07 25.00 Call @ 25.00 -

Unfortunately, this is an example of what can happen when I don't follow my own rules. It also highlights the missed opportunity risk inherent in covered call positions if you don't act to avoid assignment.

I made several mistakes with this trade. This was an old position, before I modified my criteria and return requirements. I started with a 200 share position (now I only start with 100 shares) and received 2.22% cash back (i.e. premium or downside protection. Now I require at least 12% cash back).

The stock chart for NTY during this holding period shows that it dropped after I bought it, went sideways for awhile, and then shot up.

I initially sold the Nov05 22.50 call which expired worthless. I then sold a Jan06 22.50 call which also expired worthless. All was fine up to here. The stock dropped to a low of $15.58 in Jan06 so after expiration I sold the Feb06 17.50 call. As luck would have it, 3 days later the stock shot up past the $17.50 strike price and never looked back. Since the option was ITM I bought it back and rolled out to Jun06 and up to the 25 strike. However, I broke my rule of always rolling out for a net credit, which was my first big mistake. Now, instead of having positive cash flow, I had negative cash flow.

The Jun06 call expired worthless so I sold a Jan07 25 call. In Jul06 the stock shot past the 25 strike and again never looked back. I probably should have rolled the option out/up at this time, but I did nothing. Well, the stock kept climbing and the option was getting deeper and deeper ITM. It was at a point where I couldn't roll it out for a net credit without dollar cost averaging and committing more money to the trade. I decided to just take my lumps and let the stock get called away in Jan07. Even with all these mistakes, I still managed to get about a 14% annualized return.

However, look at the buy & hold return. It was over 100%. The stock had doubled in price since I originally purchased it. Covered calls limit your upside unless you take action to avoid assignment. I didn't and lost out on a great opportunity.

If I hadn't made so many mistakes with this trade I could have gotten a better return and participated in more of this uptrend. Oh well, this was a lesson learned, but at least I made a profit.