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.
Monday, December 18, 2006
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.
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