Paper Trade Followup

This is a followup on the paper trade experiment started last month. There were two paper trades for EBAY & WLL, one a front month (Aug) covered call (CC) and one a second month (Sep) CC. Here are the results for the Aug positions.

EBAY - Paper Trade #1 (Aug)

The Aug 32.50 Call was in-the-money (ITM) on Friday so this position would have been called away for a profit. This ends this paper trade.

Stock Investment: $3,258.00
Income Generated: $94.00
Net Profit If Called: $86.00
Percent Return: 2.64%
Annualized Return: 45.88%
Duration of Trade: 21 days

Trade History:

27-Jul-07 - Initial Stock Position - BTO 100 EBAY @ 32.58
27-Jul-07 - Initial Call Option - STO 1 Aug07 32.50 Call @ 0.94

EBAY - Paper Trade #2 (Sep)

27-Jul-07 - Initial Stock Position - BTO 100 EBAY @ 32.58
27-Jul-07 - Initial Call Option - STO 1 Sep07 32.50 Call @ 1.64

Stock Investment: $3,258.00
Income Generated: $164.00
Percent Income Generated: 5.03%
Annualized Income Generated: 32.81%
Net Profit If Called: $156.00
Percent Return If Called: 4.79%
Annualized Return If Called: 31.21%
Days to Expiration: 56 days

EBAY - My Real Position

27-Jul-07 - Initial Stock Position - BTO 100 EBAY @ 32.95
27-Jul-07 - Initial Call Option - STO 1 Sep07 32.50 Call @ 1.84

Stock Investment: $3,294.50
Income Generated: $184.00
Percent Income Generated: 5.59%
Annualized Income Generated: 36.40%
Net Profit If Called: $139.50
Percent Return If Called: 4.23%
Annualized Return If Called: 27.60%
Days to Expiration: 56 days

WLL - Paper Trade #1 (Aug)

The Aug 70 Call was out-of-the-money (OTM) in Friday so it would have expired worthless. A new Sep 70 Call was sold using the open price on Monday.

20-Aug-07 - Continued Trade - STO 1 Sep07 40.00 Call @ 1.99 -

Stock Investment: $4,164.00
Income Generated: $433.00
Percent Income Generated: 10.40%
Annualized Income Generated: 67.78%
Net Profit If Called: $269.00
Percent Return If Called: 6.46%
Annualized Return If Called: 42.11%
Days to Expiration: 56 days

Trade History:

27-Jul-07 - Initial Stock Position - BTO 100 WLL @ 41.64 -
27-Jul-07 - Initial Call Option - STO 1 Aug07 40.00 Call @ 2.34 - Expired
20-Aug-07 - Continued Trade - STO 1 Sep07 40.00 Call @ 1.99 -

WLL - Paper Trade #2 (Sep)

27-Jul-07 - Initial Stock Position - BTO 100 WLL @ 41.64
27-Jul-07 - Initial Call Option - STO 1 Sep07 40.00 Call @ 2.99

Stock Investment: $4,164.00
Income Generated: $329.00
Percent Income Generated: 7.90%
Annualized Income Generated: 51.50%
Net Profit If Called: $165.00
Percent Return If Called: 3.96%
Annualized Return If Called: 25.83%
Days to Expiration: 56 days

WLL - My Real Position

27-Jul-07 - Initial Stock Position - BTO 100 WLL @ 41.02
27-Jul-07 - Initial Call Option - STO 1 Sep07 40.00 Call @ 2.99

Stock Investment: $4,102.00
Income Generated: $299.00
Percent Income Generated: 7.29%
Annualized Income Generated: 47.51%
Net Profit If Called: $197.00
Percent Return If Called: 4.80%
Annualized Return If Called: 31.30%
Days to Expiration: 56 days

For EBAY, the Aug CC produced a better annualized return, but lower dollar profit then the potential for the Sep CC. One criteria that I use is the amount of profit in dollars. I prefer to make at least $100 profit per position. Since the Aug CC offered less than $100 profit, I chose the Sep CC for my "real" position.

For WLL, because the Aug call expired and a new Sep call was sold, the potential annualized return and dollar profit is greater than the original Sep paper trade. So, in this case the Aug CC would have been the better choice, in hindsight. However, the original dollar profit was also below my $100 limit, so again I chose the Sep CC for my "real" position.

This proves that front month calls usually offer a better annualized return, but I already knew that. However, the further out calls offered more initial downside protection when measured in dollars (i.e. a lower cost basis). Either choice provides good returns so it comes down to how much downside protection you feel more comfortable with. There's no right or wrong here. You should do what you're most comfortable with. Don't get greedy and just look at the potential returns, think about risk also, and decide which is better for YOU!