Covered Call Thornburg Mortgage

If you have been following the hot stock stories this week, or visiting my other blog, you know Thornburg Mortgage TMA has been on a roller coaster. From being a $26 stock two weeks ago it dropped to as low as $7.50 earlier this week.

I am a long time holder of TMA in another account, but as the stock started falling I started buying. My purchase prices ranged from $22 down to $10.50, leaving me with an average cost of about $17. Today I sold the Oct $17.50 call for $1.10. If the stock is called away that will be a 24% return from today’s price.

I do not think this is a trade for the conservative covered call investor. I, however, have a strong belief that this company with thrive in the upcoming mortgage market so I am comfortable with this trade.

Bought back call on SLW

On July 31 I bought back the Aug $12.50 call I had sold on my position in Silver Wheaton SLW and sold a Sept $15 call. Today I bought the Sept call back for a dime plus commission.

The whole sell/buy/sell/buy ended up costing me $67.50 net loss on the options. The stock ran up to almost $15 in July and I did not want to have it called away. In fact it looks like my original sold call will finish out of the money.

I still own SLW and think the stock will do great over the next year. My lesson learned is it is probably better to let a stock be called away, then buy some back when the seemingly inevitable price pull back comes.

Rolling a call option

I rolled the call option on my position in Silver Wheaton SLW today. In June I had written the August $12.50 call on the stock. Today I bought back the call and sold the Sept $15 call for a net debit of $.90 plus commissions.

The closed position gave a return of 20.35% for 40 days, using today’s closing stock price. The new covered call position will return 4.3% for 53 days if unchanged, about 15% if called away.

I like SLW as a longer term holding, while making some good option premium along the way. They are releasing earnings on Friday, so I am considering buying a put as insurance against any surprises.

Stock Market Falls! Stock Option Sold!

In my opinion, markets like this are especially hard on covered call writers. The covered call writing strategy works best in flat or slowly rising markets. Rapidly falling stock prices have the covered call writer replacing expired positions with lower strike prices, often below the original stock purchase price, trying to recover lost ground.

I did exactly that today, I wrote an August $12.50 call on my position in GIGM for $.45. I had originally purchased the stock in May for $14.54 and sold the July $15 call. The share price has been on a serious slide and is trading at about $11.40 today.

I still believe this company is an excellent prospect for growth and expect the shares to trade in the $18 to $20 range soon. (One year maybe!?). Now I want to earn some option income and try to avoid having it called away before a nice run up. Time will tell.

Cash to invest

As I posted last week here, my position in SPIL was called away, so I have some cash to invest.

I am trying not to invest during the first couple of days after expiration. A lot of call writers are trying to sell contracts, so I think that holds down premium pricing.

My sold call on Gigamedia GIGM expired out of the money. The share price on this stock has been quite ugly for the last two months. I still think the company has great future prospects so right now I plan to hold on. They should have an earning release next month, so I am looking for an anticipatory price run-up to sell a call into. Will keep you posted.

Cost of Covered Call Strategy

One of the harder things for me to see is when my covered call positions go deep in the money and I don’t participate in the share price gains. I understand this is what happens, but it makes waiting to expiration a little tough sometimes.

I purchased SPIL after the May expiration at $9.91 and sold the July $10 call for $.55 for a nice 5% gain for 2 months. The stock was up $.56 today to $12.07. The good side is the trade will be profitable exactly as planned.

I discussed Silver Wheaton SLW in my last post. From a low this week of about $11.60 the stock closed today at $13.17, up 68 cents today alone. I have sold the August $12.50 call on this stock so it has also moved in the money. Depending on where the option premium goes the next several weeks I may roll this option out to a $15 strike in September or October. The growth prospects and the option premium to be sold make this stock one that I will want to stay with for buy/writes.

Covered Call Option Sold

While I was on vacation the call I had sold on Silver Wheaton SLW had matured out of the money. I was able to sell the August $12.50 call for $.55 for 57 days. This is a 4.7% return if uncalled.

I bought 100 shares of SLW in February for $10.56 and have sold the $12.50 call 3 times for a total of $103.20 in option premium after commissions. The shares are currently trading around $12.

This is the type of trade I am most interested in at this time. A company I really like for the growth prospects, yet I can earn another 20% per year in option premium.