Bought Calls on GIGM

Since February I have owned and written calls on Gigamedia GIGM. Recently the stock has taken a serious tumble, losing about 1/3 of its value. This is a very profitable and growing company and I see no reason for the price fall except market fears and the current pull back in both the U.S. and Taiwan markets.

The company has an earnings release scheduled for next Tuesday, August 14. Today I bought some Sept $10 calls for $.95. An earnings surprise to the upside should give a nice boost to the stock price.

Projected earnings are $14 per share for the 2nd quarter. Last year the company earned $.18 in the second quarter, while projections then were only a nickel.

For a profitable growing company the stock price of Gigamedia has taken way too much abuse. IMO!

SLW: Summary for SILVER WHEATON CORP

SLW: Summary for SILVER WHEATON CORP – Yahoo! Finance

SLW is one of my covered call holdings. I wanted to post a few thoughts on this company stock.

The company buys silver from mines that produce silver as a by product at a preset price of about $4 per oz. and sell on the open market. The company appears to be growing, highly profitable with low overhead (I think there are 6 employees).

The stock has run up nicely the last 4 days to about $11.75. My sold option is the June $12.50. There should be a quarterly earning release the end of June, so a pre-release price runup would not surprise me. If the stock gets called away I will wait until after the earnings number before considering another buy-write.

Comment answer

Jennifer asked a question on getting started trading covered calls. Thought I would post my answer again:

Jennifer,
I hope reading through this blog helps you get some understanding about covered calls. I have been reading about option trading for years, and finally wanted to give it a try so I opened an account using the funds from a small IRA I had in a mutual fund. I started with about $4000.

I think the best way to learn is to just open an account and make some trades. Once you have an account (I use Trade King) you will find trade screens set up for the different option strategies. There will also be research tools to help you find trades. I use an option screener to find stock in the volatility and price ranges I am interested in.

I have found that I am developing a strategy that works for me and my temperament. Everyone that trades has their own style. Read the blogs in my blog roll and read others that you find interesting.

Panic vs Profit

Over the past 30 days I have cost myself some hefty profit, probably 3-4% of my account value by selling out of positions when prices fell, or conversely trying to increase profits by rolling my option contracts.

For what I am trying to do, and the size of my account, trading out of a position early is usually costly in terms of commission and spreads. After reviewing what I have done over the last several weeks, I believe that in almost all cases it would be better to wait until option expiration before I make any changes.

My investment strategy is to try to capture what I believe is excessive time premium in the option prices. This leads me to trading quite volatile stocks. I have to remember this and just sit on my hands when I get the urge to bail out on something. What looks like crap this week could be smelling like roses next week. I do need to review and make sure there is no significant change in the company’s prospects, but the plan is to stand pat until option expiration.

Current case, I have a covered call position in MED. It has been falling for the last few days. (Jeez, just checked it again, down some more!)  However, I have sold a March option contract on the stock, so selling out now would just lock in a loss, while I have 40+ days for a different outcome.

Investment Philosophy

The Dividend Guy wrote a comment to my post on researching my trades concerning what type of stocks I am looking for.

To paraphrase: He asked if I was looking for stocks as good investments to write calls against, or was I looking for option premium.

I think his strategy of buying stock in companies with increasing dividends, reinvesting those dividends, thus earning more dividends, is an excellent strategy. (I hope I got that correct, Mr. Dividend Guy). If your income stream continues to grow, the ups and downs of the market do not affect the strategy or your mental health.

If you Google covered call strategies, you will find most of them recommend buying stocks you want to own long term, then sell calls against them. I do not follow this advise for a couple of reasons:

  • The types of companies I would like to own stock in do not have much in the way of option premiums. I like steady dividend paying stocks without too much volatility.
  • It would such to have a stock you really like called away because it climbed above the strike price. Or paying good money to buy the option back so you can keep the stock.

My strategy is more of a short term, capture time premium and dividends, while limiting downside risk. I care very little about the underlying stock in my trades, other than the market thinks it is going somewhere in a hurry and is willing to pay a lot for the options on the stock. I try to lock up and overly large time premium or dividend for 30 to 60 days so that my profit is certain through a wide price range of the underlying stock.

Since I have been at this for a very short time, two months now, it will be interesting to see how my strategy works over a longer period of time.

Reseach & Trades

It would be best to read my previous post before starting this one. This is a follow on to how I made my investments this week.

Since I was unable to ferret out any good trades using my “catch a dividend” strategy, I used some other techniques I have learned or discovered while researching stocks, options, and some of the tools available to me.

Trade King has an option scanner tool from ivolatility that is very useful for finding trading opportunities. I screen for expensive (i.e. high volatility) calls at or preferably in the money. I then research the ones that look promising through Yahoo Finance and Motley Fool caps. I then plug the various stock and option prices into a option calculator spreadsheet that I have downloaded and try to make a decision based on the projected return and what I believe the risk is.

Using the strategy above give a list of high volatility tech and pharma stocks. On Monday I placed a trade for 200 shares of EEE at $8.16 and sold 2 Feb $7.50 calls for $1.80. This gives an expected return of 14.6% for 61 days and downside break-even to about $6.60. In the last two days the share price has fluctuated between $7.80 and $9.50, so it may be wild ride for the next two months.

On Tuesday I purchased 100 shares of GRA for $19.74 and sold a Jan $20 call for $1.30. Static projected return is 5.5% for 31 days, higher if called. Downside is covered to $18.60. I made this trade based on good rating on the Motley Fool Caps and good expected return for a short term trade.

Where to reinvest?

Yesterday I started the day with 75% of my account in cash due to the NFI being called. So I started to research where to trade next.

First, I went through my list of high dividend stocks with dividends being paid in the next 30-60 days. The theory is that I can bump up my return by capturing a dividend as well as option time premium. I found the theory is tough to put into practice. To work I would like the trade to meet the following criteria:

  •  Quarterly dividend of at least 2%. It is surprising how many stocks are paying 8% plus annually. Most are in shipping, natural resources, mortgages and business financing.
  • The price is at a point where there is a call available that is in the money by at least the projected dividend. This is the tough one: If you sell an at-the-money call, the share price will drop when it goes ex-dividend, and you may be stuck with shares at a lower price than you paid. Too far in-the-money and you do not have enough time premium to justify the trade.
  • The time premium must be enough to cover the commission costs plus provide an additional 1% plus of profit. Most of the high dividend stocks do not have enough volatility to generate that much time premium. Also, I am trading only 100 or 200 shares at a time so the commissions are a higher percentage cost than if I could trade 500 or 1000 shares.

After going through the above criteria with about 10 high dividend stocks, I could not find any trades that made sense. My next post will cover the follow on research and the trades I did place.