Covered Call Adjustment

Over the last two days I have changed my position in my holding of MED. I bought back the March $10 call, which I had sold at $.50, for $.10. Today I sold the June $10 call for $.75. This is a 7.7% premium on the current share price.

I have collected a net total of $195 of option premium less commissions of $28 on 100 shares (single option contract trades) of MED. I originally purchased the shares for $9.75 and they are currently trading for $8.43, so I am pretty close to even. I still think it is a good stock and I have upside to the strike price of $10.

The volatility of MED has allowed me to trade in and out of the options for good premium. However, trading a single contract at a time causes commissions to eat up a good portion of possible gains.

Option Trading Ideas

1 Option Trading is having a open house of the website and premium trading service. If you scroll down you can link to his actual recommendations for 3 levels of service.

It is interesting to see how difficult it is even for a seasoned professional to be consistantly profitable trading options. Makes me feel a little better about some of my trades that do not go the way I want.

China stocks getting hammered!

Chinese stocks are down across the board today.  Shares & ETFs are off 7-9%. One of my holdings, Gigamedia Ltd. (GIGM) is off about 5% to $12.44.

The good news is that I bought in at about this level and sold the March $12.50 call for about a 6% premium. I would not be unhappy at all if the stock stayed below $12.50 until expiration and I was able sell another call. I had better be careful for what I wish for!

Actually, I expect the stock will rise back above the strike price before expiration. GIGM appears to be a company going somewhere.

Sold a call

Today I sold a call against my position in SLW. I purchased the stock earlier in the week but was not thrilled with the option prices at that time.

The stock has moved up the last couple of days, and today I was able to sell an April $12.50 call for $.35. This gives me about 2.3% income against my stock position, but leaves me a lot of upside for the stock itself. If the stock is called at expiration I will realize a 17% return for less than 2 months.

SLW is primarily a play on silver prices. I really like the prospects for this company.

Effect of Commissions

In my previous post, I gave the details of a recent covered call trade. If you add up the commissions for a called covered call trade, the total commission for a 100 share/1 option trade is $15.50.

To diversify my account I am making trades in the $1000-$1200 range, to give me up to 4 open positions at any one time. This makes the commissions approximately 1.5% of of each round trip trade. If I average trading the portfolio 9 times a year (50% one month trades & 50% two month trades), my total commission costs are 13.5% of the portfolio value.

Obviously it is important to figure all trades net of commissions to see if the profitability is acceptable. A 3% raw gain reduced by half becomes unacceptable.

If a stock is not called and I can write another call on the same stock the cost for that round trip is reduced by 1/2%.

The biggest thing I can do to reduce the negative effect of commissions is to trade in larger dollar amounts. Trades in the $2000 range reduce the commission drag on gains by half. So as my account grows, the results should improve just by the lower percentage that will be taken by commissions.

Covered Call Trade

Yesterday I also did a buy/write covered call trade on 24/7 Real Media – TFSM -. I bought the stock for $9.98 and sold the March $10 call for $.45. This will give a 3.4% return if called in 25 days.

For those of you interested in the nuts & bolts of the trade: I use the covered call trade screen at Trade King to put in the stock symbol and quantity and option symbol and quantity. I specify a limit debit, $9.53, in this case. The trade screen will show a bid and ask price for the complete trade. I usually set my limit 5 or 10 cents below the ask price, depending on the option spread. The stock will usually have a 1-2 cents spread, but the options will have 10 to 20 cent spreads. I have found 5 cents back of the bid will usually be filled fairly quickly, any more may take some time. Commissions at Trade King are $10.55 total for 100 shares and 1 option. Additional round lots only adds $.65.

The math here is fairly simple: $9.53 x 100 + $10.55 = $963.55 total cost. If called I will get $1,000 – $4.95 commission for a $31.50 profit.

Stock Trade

I purchased 100 shares of Silver Wheaton Corp (SLW) this morning for $10.56. I like the short term prospects of the company, but not the current option pricing, so I did not sell a call yet.

The price of SLW has moved up to around $10.90 so I am weighing a couple of call writing options. The March $10 call is almost up to a point where I realize a 4% return with 25 days to expiration. I would really like to sell the April $12.50 call, but would like to see a little more premium. I hope the stock continues up for a couple of days, then I will sell a call and lock in some gain.

I am finding that for me the optimum by/write combination is when the share price is just below (0-5%) a strike price. Then I look for option premium to give 4-6% per month return until expiration (1 or 2 months out). Then 3 things can happen:

  1. The stock rises and is called away at option expiration. I keep the option premium and make some profit on the price increase up to the strike price. Good outcome.
  2. The stock treads water or falls somewhat. I keep the option premium and sell another call for more option premium. Good outcome.
  3. The stock fall precipitously. I still own an much cheaper stock and there is now premium to sell another call at the same strike price. The losses of this outcome can easily exceed the projected profits of the 1st 2 outcomes. Thus, I need to continue fine tuning my stock picking process for buy/write opportunities.

Number 3 above is the Achilles heel of my strategy. To get the aggressive option premium returns I want I have to trade in high volatility stocks. Stay tuned and see if I can make this work.