August 28th, 2010


I’ve been laying low for the past few weeks, watching the bad economic information.  I have a number of stock holdings, many of which are down from my cost, but which are providing me with some income from my writing covered calls against, them generally y each quarter.

There are a few stocks which look good to me for those of you who don’t already own them.  For example: RIG, COP, BK, GS, JPM, HPQ, MFFT, AMGN, MDT.  These are stocks I wouldn’t mind buying if I had a lot of cash, and writing calls against at 5-10% out of the money (above purchase price) if I can get $1 or  more in premium.

Last week I bought back my Nov calls on Medronic with a $40 strike price, for ten cents, taking a nice profit, and I bought back my Oct calls on Costco with a $62.50 strike price for nine cents, also taking a nice profit. Then I sold a new January call on Costco with a $60 strike price for $1.15.  I usually do 10 positions at a time, on 1000 shares, so I took in $1,125 net on this sale.

Last week I was put 1000 shares of RIG from my recent sale of a naked put (when the oil spill hit) and the stock is down a lot more than I had expected, but I’m still very optimistic about it.  While I’m waiting for it to recover, I sold 10 calls of the Nov 57.50’s for $3 and took in just under $3,000 in premium.  Since I also took in about $3,000 in premium from the sale of the put, that puts me in an overall position of about $3,000 under water.  I will either recover that, and more, from a recovery of the stock, or from the sale of more calls in December.  Because the premiums are so high (typical of volatile stock) an investment in RIG (Transocean) with covered calls seems very safe to me.

These are all my typical monthly trades.  But I did so something a bit different this week:  I got tired of waiting for Bank of America stock to go up—and even more tired of watching it go down.  It no longer pays a dividend, and there are insufficient option premiums to make it worthwhile to write calls on it.  So I sold half of my holdings (and may sell the other half soon) and used the cash to buy 500 shares of Enbridge energy (EEP).  I bought it at $54.78, for a total of $27,400.  Then I sold 5 calls of the April 2011 55 calls and took in $2.70 each for a total of $1,325.

EEP is paying a dividend equal to about 7.4%.  With the call premium I’m now getting over 8% on my money.  If the stock is called away at $55 I’ve earned that amount while owning it and I’m not hurt by the call.  If the stock goes down I get the same return, and I’m hedged for a downside of a point and a half anyway from the call premium.  It’s hard to see the stock going down much further with that kind of dividend, unless something unusual happens.

Now I’m looking at doing the same thing with my GE stock.  It too isn’t moving in the right direction, but Altria is paying a 6.5% dividend.  I might do the same kind of trade there.  More later.  mlh


August 21st, 2010

With Atria stock (MO) selling at $22.70, the $1.40 dividend is 6.1%.  That’s a really nice dividend, unless you lose it back if the stock goes down.  With that kind of a dividend I usually look for an opportunity to buy the stock and put on a “collar.”

A collar is typically a short put and a long call.  I buy a put just under the price of the stock to protect me from a decline in the stock.  I sell a call above the price of the stock to take in a premium to pay for the put.  This kind of collar is called a “no-cost” collar since you are hedged at no cost.  Of course, you are giving up the upside if the stock rises.  But that’s OK in this situation because you are not buying for the upside, you are buying to capture the dividend.

For example, in this situation you can buy the December 20 put for $.38, and sell the Dec 23 call for $.36—maybe with some luck you can do both at $.37.  Your risk of loss is less than $2,000 on 10 positions.

And that points up the problem in finding a good collar.  Ideally we would want some chance on the upside if we are taking some risk on the downside, but the premiums available for MO don’t seem to permit this, even going out as far as Jan 2011.  The puts, that we want to buy, seem to be more expensive than the calls, that we want to sell, suggesting that the market does not value the stock highly.

And so if I want to take advantage of this dividend I probably would elect just to sell a put.  I can get $1.43 for the January 22.50 put, which means I’m safe down to about $21.50, and if I am put the stock at $21.50 I can immediately write a call against it and probably pick up another dollar.  So if I end up with the stock at just over $20 a share the dividend will be closer to 7% and I’ll just keep writing calls on it.

Mlh August 21

writing naked puts on Transocean (RIG)

August 18th, 2010

Take a look at our RIG positions in Merv’s Trades.  When a stock goes down because of an event that is primarily psychological in nature as opposed to financial, it’s a time to write naked puts.  We wrote puts when RIG (Transocean) first went down, then when it went down further (to my surprise) we wrote again.  Since then it’s bounced up nicely.  While the first write is still at a loss, the second write is nicely in a profit position and the net position is up about $800 so far.  I think RIG will continue to go up as the psychological negativism fades and the true value of the company is again recognized.  More later.