ROLLING ROLLING ROLLING

December 28th, 2010

A lot of people seem to have a problem with the concept of “rolling up.”  Since I just rolled up WAG, this is a good time to use that as an example.  Be sure and sign in and look at “Merv’s Trades” to better understand the following text.

I bought WAG about two and a half years ago at $34 a share.  It was lower than that for a while, then not long ago it came back up to $34 for a while, then moved up in spurts to $39, where it is now.

For over two years I wrote calls against the stock, mostly the $35 calls.  I collected about $1,000 each time, and did it 3-4 times a year.  So I collected about $8,000 in option premiums while holding it during the doldrums.  That turns out to be more than 10% a year return after costs.

Then a few months ago it went over my strike price and I had to roll up to the 37’s.  When I did that I gave back some of the premium I collected in buying  back the 35 calls, but received a new premium for writing   the 37 calls.  The difference was small.

Last week the stock went over my 37 strike price.  So on December 22 I bought back 10 calls of the April 37’s paying $3,600, and sold 10 calls of the July 40’s, collecting in just under $2,500.  So I gave back $1,100.

I did that because if the stock goes to $40 I will have picked up $3,000 (the difference between 1000 shares at 37 vs. 40).  If the stock goes to 40 I will probably let it be called away.

If called away I will have made $6,000 on the stock, and about $7,000 in option premiums over a three-year period, on an investment of $34,000.  That’s a really good return—over 15% per year.  But of course almost half of that is from the stock price.

Not every purchase of WAG has been like that.  I also am managing accounts in which WAG was purchased for $44 a share a little over three years ago.

But even there, assuming a sale in 2011 at $40, the option writing was profitable.  But for the option writing there would have been a $4,000 loss.  With the option writing there will be more than a $4,000 profit.  Instead of just collecting in dividends of $2,000 over the three years for a 1.8% annual yield, the investor collected in   $10,000 ($8,000 in premiums plus $2,000 in dividends) for a yield of about 10%, or 3.3 % a year.

OK, he didn’t “double his yield.”  That would have required a 3.6% annual yield.  But even option writing can’t make up for poor stock selection!

UP UP AND AWAY

December 22nd, 2010

Can the Market just continue to go up forever?  I don’t think so.  So this week I started to take some money off the table, and held on to my S&P shorts (which are losing money so far).

I’m letting Costco go (I sold too early and left money on the table), Conoco, and Walgreen, when and if they are called away.  Conoco was already called away, and my Costco position clearly will be.

I’m waiting for a dip in the market, then will reinvest the cash in ETF’s and write calls against them.  Will advise which of them I pick in future blogs.

Meanwhile, it would be nice to hear from you—please post a reply.

Merv

WHERE ARE WE ON MERV’S TRADES?

December 13th, 2010
  1. We have our January bear put spread on AAPL.  We are short the 300 and long the 290 as a hedge.  With AAPL at 320 this is looking good for a $4,000 profit.
  2. We are short the Feb. BAC 14 put.  We need BAC to stay above 12.60 not to lose money on this position.  If it climbs to $14 or above we can make a $1,400 profit.
  3. We paid $47.50 for BP, and it’s still down around $40.  But we sold the April 45 calls and took in $1,830, and we wrote calls earlier, so overall we are about even so far.  But we will continue to hold the stock and to write calls against it.  We are making a nice return on our $47,000 investment.
  4. We shorted CSCO by selling the April 20 puts.  We have a small gain so far, but it’s a new position.
  5. After holding GE for a long time, and not finding enough option premiums to be able to write calls for income, we sold it and wrote the March 18 puts instead.  The stock is almost at $18, and we took in $2,300 on the put, so if it goes over $18 it will be like a sale at $20 and that’s all I think the stock is worth right now anyway.  It was not a profitable purchase.
  6. We wrote the Feb 16 puts on Nuance and took in $1,700.  The stock has moved up so it looks like another profitable short so far.
  7. Our biggest profit, along with APPL, has been RIG.  We bought the stock at $60, and have been selling calls on it right along. The stock has moved up to $72, and we are short the May 75 calls.  We’ve made money on both the stock and the calls in spite of having to roll it up several times.
  8. Finally, our customary SPY spread.  We remain long the June 135 as a hedge, and just rolled up the Jan 123 to the Mar 126 as the price approached 125.  We made $150 on the trade, but hope that at the end of January we can write something for a substantial premium.  On the other hand, if the market just keeps going up and up, while we won’t make much on the SPY spread our portfolio will go up nicely.

NEW POSITION:  This week, just in case the politicians can’t reach an agreement on the tax cut extension and there is a big sell off, I bought SH, the reverse S&P.  If the market tanks during December this will be very profitable.  Otherwise it’s like a life insurance premium: I lose money on it but I’m glad.

Merv

ROLLING UP

December 4th, 2010

In these times of rising market values, members are asking me questions about rolling up covered call positions.  Those are welcome questions since I’ve been rolling up a lot of my positions lately, so it’s on my mind too.

The basic goal of rolling up is to buy back the original short position at a loss, and sell a new short position at a higher strike price, further out in time so that the new premium is as good or better than the cost to buy back the old position.  Of course you can’t always reach the goal.

Here are some positions I rolled up recently:

  1. I was short the RIG 70 Jan calls.  When RIG hit 70 I bought them back for $3.70.  At the same time I sold the RIG 75 calls for May at $4.53.  This was a particularly favorable result, which arose because of the high volatility of RIG as it continues to move up strongly.  If RIG hits 75 I will roll up again because I think the stock will go to at least 80.
  1. JCI has also been moving up rapidly.  I was short the Apr 36 calls.  When it hit 36 I bought them back at $3.87 and sold the Jul 38 calls for $3.67.  I paid out $.20 per call to roll up 2 points.  If the stock goes up to 38 I may let it be called away at that price, and take a profit on both the stock and the many calls I’ve written against it over the past two years.
  1. I almost always keep a bull call spread on the SPY, the index that tracks the S&P 500.  On Nov 16 I  , I bought the June 135’s at $1.41, and sold the Jan 123’s at $1.57. This was only a credit of $.16.   I don’t usually play it that close, but my goal was just to acquire the 135 long position at no cost.  This will give me a base to write against in December, January, and forward through May, using the long 135 position as a protective hedge.

TIP OF THE WEEK

This week I sold a put on CSCO.  I sold 10 puts of the January 20’s and took in $1.71 or $1,700 net.  CSCO was at about 19 when I sold it.  So I am protected so long as the stock stays above $18.30, and I stand to make $1,700 if it goes up to $20.  If it goes below $19 and I am put the stock I’m OK with that, and I will write a call against the stock and take in another premium, and end up owning the stock at less than $18 a share.  That seems like a very good price to me for that stock.