Good questions, Jennifer

Jennifer’s question from my previous post: LINK

There is the rub of writing covered calls: What if the stock price goes down. The answer is: depends. Primarily on what you think of the stock/company at that time. Is it down because of company news? Is it down because the market in general is down? Do I think it will recover?

I have gone through all of these over the last 5 months that I have been writing this blog. I have developed a couple of rules of thumb:

  • I try to buy slightly out-of-the-money (3-5%) covered call positions and make 3-5% per month on the option premium, 1 to 2 month options, net of commissions.
  • If the stock is called I make a little extra, if not called I want to be able to write a call again at the same strike price and make a decent return. I will not cry if I get to sell several contracts before the stock is called away.
  • If the stock falls to the point that there is little to no premium at your strike price for the forseeable future (4-5 months), seriously consider buying back the option and selling the stock.
  • Your opinion of the underlying stock/company plus what the overall market action has to determine whether you keep a falling stock on the belief it will recover or you sell and reinvest elsewhere.

Having said all of that, I believe I have held on to my losers to long in the past and try to make an early decision to sell.

As to the actual trading, it is not hard. You can go to the Trade King website and click through the screens to see what they show. Once you have an account open you can enter trades in the screens and see how they work. You get a preview before the trade is sent in so you can cancel if you want. You can also easily cancel pending trades.

Start small, pick out a trade you would like to make and see if you can get it filled at a price that works for you. If you have a stock in mind let me know and I will review some trade possibilities for you. Your questions give me good stuff to write about.

Parker Drilling Announces New Contracts for Six Rigs in International Markets: Financial News – Yahoo! Finance

Uneventful Expiration

Yesterday, Friday, was pretty good for me. My stock positions are starting to move in a positive direction and my two open calls expired worthless. On Monday and Tuesday I will be looking at the April and May options for new opportunities for income.

The recent pullback in the market has me thinking about the quality of the stocks I am writing covered calls on and what I can do for downside protection. My strategy is to write covered calls on stocks with high implied volatility, thus higher option premiums. I have learned I need to be very diligent about learning all I can about the near term prospects of these companies. One bad decision can eat up the profits of 3 good ones.

As far as downside protection, I think my account is still too small to be able to take any cost effective action to protect the values. Anything I could do would be just guessing. I am interested at this point in how much option premium I can earn until the stock prices recover to early February prices.

Expiration week

I start the week with 2 stocks up and 2 down. MED & TFSM continue to fall at a rate that makes me wish I sold them two weeks ago. To me, both of these companies still have good fundamentals, and I am perplexed as to their rapid fall.

GIGM has risen above the strike price of $12.50. It has fallen as low as $10.94 during the recent dip, but recovered nicely.

SLW is starting to recover. This is a nicely profitable company whose stock price is reflective of silver prices. I currently have an April call sold on it and no plans to make any changes.

My account value has been abused pretty good over the last two weeks. However, I do not plan on changing any positions until the May options come out next week. I will then be looking to sell some option premium to start my recovery.

I like the bounce!

Great to see the market come back today. The four stocks in my little portfolio here rose between 2.5% and 7.75%. The big gainer was GIGM, the Chinese Internet games company. At this rate the stock will reach the stock price of $12.50 by expiration, a week from Friday.

Excellent commentary: One Option Trading Blog

Option Trading Gurus Created A Big Market Decline! | One Option | Option Trading Blog

Great comments from one who has been through this before.

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.