Rolling a call option

My covered call position in EEE was deep in the money, so I took a look at the numbers to see if I could/should sell out the position early. The stock traded today in the range of $10.01 to $10.49, closing at $10.48. I have 200 shares and had sold 2 contracts of the Feb $7.50 calls. These calls were trading with no or very little time premium.

After much calculation and test trades, I put in a spread trade, buying back my Feb $7.50 call and selling a Mar $10 call for a net debit of $1.30 + commissions. The trade was filled paying $2.94 for the February call and getting $1.64 for the March call.

I only did one contract, due to low cash in the account, thus not enough for a pair of contracts. Besides I feel pretty good holding onto some of my deep in the money position for 3 more weeks.

Using the share closing price to figure the return, the closed option position earned 16.6% for 43 days, converting to a 143% annual return. The new call position has a projected return of 11.8% for 47 days if called.

My investment in EEE has done very well for me. But this is a very volatile stock, swing 5% or more on many days. Fortunately, I bought in-the-money calls, and the stock has stayed in the money the whole time. The company does have a good story for clean energy, but isn’t making any money yet.

Covered Call Trade

I had some cash in the account, so I went looking for another good trade opportunity. I went through the same drill as I outlined yesterday, and found a trade I like with MED.

I purchased 100 shares at $9.75 and sold the Mar 10 call for $.95. This gives a return to expiration of 8.1% for 54 days if unchanged and about 12% if called.

A trading note: When I placed the trade MED was at $9.85 bid and the option was $1.00 bid and $1.20 asked. I put in my trade at a limit of $8.80 net debit to try to push up the bid. Well, I got filled as listed above for the net $8.80 cost. This dropped my expected return if unchanged from 9.0% to 8.1%. If called the return remains the same, because the same amount was invested.

Sold IIG put

IIG has fallen nicely for the last 3 days and I sold the put today for a nice profit. This type of trade is uncomfortable for me because I do not like holding positions that have a good probability of going to $. I would much rather sell them. So, I may have left some money on the table, but my comfort level is back up.

Step by Step investment strategy

Since I was exercised out of my position in GRA, I now had cash to invest. Over the last month I have been experimenting with the options scanner at Trade King to find the kinds of opportunities that coincide with what I am trying to accomplish. So here is an outline of the steps I went through to find today’s investment.

  1.  With the options scanner my main criteria is implied volatility. I have found that I need options trading at greater than an IV of 50 to get the returns I am looking for. So I entered a range of 50 to 70 for the IV. I picked a stock price range to keep me in the amount I wanted to invest. Moneyness from 5% out to 20% in and March call options. I selected to show 20 possibilities in ascending order of IV.
  2. I then punched each of the resulting stocks into the Motley Fool CAPS to get an idea of what and how the company was doing. This weeded out a few obvious bad eggs.
  3. Next was comparing the stock price to option strike prices and value. I entered each stock into Trade King and called up the option chain for March. I eyeballed each for time premium, moneyness, open interest and price spreads. This narrowed the list down to about half a dozen.
  4. Back to Yahoo and MF CAPS to review recent price trends, news and predictions. At the same time I am entering the stock and option prices into my option calculator to calculate the expected returns. I ended up with a couple of stocks right at the money with good call premiums.
  5. I attempted to place a trade for FRG but could not get it filled at the price I wanted. Right at the end of the day I put in an order on CHINA which was filled. CHINA trades at a much higher volume so was easier to get filled at the price I wanted.

Even though I was looking at March contracts I ended up buying CHINA at $9.99 and selling the Feb10 call for $.55. This works out to 4.5% expected return for 26 days. The annualized return for the March contract was about the same, so I elected for the shorter term call.

Item of interest: It appears a implied volatility of 50 equals about a 5% per month option premium for at the money calls. I will be looking at different volatility levels to see if there is a correlation.

Position called away

My position in GRA was called over the weekend. My total return on the covered call trade was 7.5% for 32 days.

This is the first of my covered call trades that I have held to expiration. The lesson learned is to let the plan work, and not bail out early. The early bail increases the cost in commissions and time premium paid for. If the stock is down at expiration, another call can be sold, or the stock sold at that time and the proceeds reinvested.

So today I have cash to reinvest. The plan is to put some of the lessons I have learned to use to pick the next position.

Seems like easy money

While doing some research with the option scanner at Trade King I did some quick research on IIG. It has big volatility and looks like it is in for some bad news. They have an earnings release on February 6.

So I bought a Feb25 put. This is not what my strategy is for this account, but it seems like a no brainer. Will know in a couple of weeks whether I have a brain!

Depending on what happens next week, I may still be able to buy the stock, sell a call and lock in a bunch of time premium. I haven’t quite worked out the math yet.

From my years in Las Vegas this would be like trying to take the middle when betting on a game.

Here’s to easy money!

End of the Week – Position expiring

Today is the last trading day for my position in GRA. I bought 100 shares at $19.74 and sold the Jan $20 call for $1.30. The stock is currently in the money at $20.95 so my position should be called for a return of 5.5% for 32 days.

It is nice to have a trade come in as planned, especially after the fiasco with ENCY. Next week I will be researching new trades and posting what I find.