We sold these options May 18 for $1.05, or 303.73 net of commission. We covered today at $.20, or 71.22, net, for a modest profit of $232.51. We will now look for the opportunity to sell more puts to eventually obtain 300 shares, all the while pushing down the cost basis per share.
RGLD
-10 JUL 85 Calls @ 2.00
Covered 10 of the 20 contracts we held on this option. After the close, it became obvious that we would have done well to cover all 20 contracts at $2.00, instead of just 10. It is often better to accept what the market will give rather than what we want. We will see what tomorrow brings in this regard.
We continue to hold the put side of the iron condor with an order pending to cover both the short and the long put at .10, or $200. It is close to triggering but has not done so yet.
VMW
+20 JUL 120 Calls @ .03
-20 JUL 125 Calls @ .13
Finally got a fill to close out this failed iron condor spread. Failed from the standpoint that we never could get a decent fill for the put side so the call side was filled but not the put side. However, we worked the call spread and closed it out at a profit.
We established the call spread May 23rd for a credit of .45, or $900. We bought back the options today to close the spread at .10, or $200, netting a rather modest profit of $700.
COVERED CALLS
By aggressively selling both puts and calls on stocks we own or would like to own, we dramatically change the cost basis per share over time. We maintain a separate report for each stock, ETF or commodity showing each transaction, date, description, total dollars, commission and cost basis per share so we can refer to the report at any time. The cost per share number helps us determine where to place the sold strikes so each subsequent transaction drives the cost per share (CPS) down.
Dividends alone also force down the CPS, but only at a modest rate of 4 to 8% per year, depending on the dividend. Add re-investing dividends and the cost per share advantage increases slightly. We prefer to have dividends each month rather than each quarter. Covered calls can do that for us. Add just covered calls and you push the annual percentage yield up into the 20% range. Add puts and you get up into the 60% range. Add put enhancement strategies and you push the annual yield up above 100%.
Adding a strategy of finding one short squeeze stock per month, or one event stock per month and we will generate cash very quickly, pushing up the annual portfolio yield past 150%.
We have been discussing a strategy of selling covered calls and puts for very short terms, 3 to 10 days out. The rules we set out in a prior journal are not too different than those used for longer term covered calls.
When we get close to expiration, option premium gets very small, but there are some stocks at any time that have sufficient premium to make this a viable strategy. The key here is to find those stocks, while remembering we sell time and we sell volatility.
More next journal.
No fill on 11 Call Partials left over from yesterday. We have a condor of sorts going with 9 calls and 20 puts. A bit lopsided but a condor never-the-less, with $692 collected. We are close to Delta Neutral, but a bit short on premium collection as we like to keep it around $1,000. If we get an opportunity, we will add more contracts to this spread pending Delta.
Margin = $8,037
ROI = 9%
Probability = 87%
Breakeven is 29 and 28% away from the underlying
Annual Yield = 95.5%
Theta = $28.68
Delta = 3.58
Repositioned spreads to shorter term by using weeklies. Net effect is to lower Cost per Share to $56.07, and we are back on track with this one.
CHK
-5 JUN Weekly 18 Calls @ .35
Stock hovered around 17 most of day, closing at $17.33. We had a put order for the new weekly 16 puts @ .35. Close but no fill. We still have tomorrow to complete.
We still hold the 5 short 17 puts sold at .32 last week, which expire tomorrow. If the stock finishes tomorrow at 17 or above, we will collect the premium. If the stock finishes under 17, we will keep the premium and be assigned the stock. That will raise our Cost per Share slightly. It is currently at $15.94, including commissions. In that event, we will simply sell more covered calls and puts against the position.
We model all scenarios to gauge the effect of each transaction. If tomorrow we get completion on the ten lot Jun Weekly 16 puts and:
If the stock stays between 17 and 18 at expiration: We would collect all the short term premium from the 18 calls, the 17 puts and the 16 puts of $685 and look to do it again.
2. If the stock falls between 16 to 17 at expiration: We collect the premium and get assigned 500 shares at 17, or $8,500.
3. If the stock falls to 15 to 16 at expiration: We would collect the premium and get assigned 500 shares at 17 and 1000 shares at 16. Or 8500 + 16000.
4. Our Cost per share drops to $16.17. More importantly, we have from 500 to 1500 more shares on which to sell covered calls and more puts. In any of the above assignment cases, the next round of premium generation will significantly impact our CPS favorably.
5. If the stock finishes below 15 in 37 days, we would get assigned 500 shares from the JUL 15 puts, on which we collected $1.07. That places the price for those 500 shares at $15.00 -1.07, or 13.93 per share. Over the entire position, after all of the above actions, our CPS would be $15.94.
We covered our 5 sold put position. We harvested the puts because 80% of the premium has been earned and it is always wise to take risk off the table when the remaining premium gets to 20% and the risk reward ratio gets lopsided, with risk remaining and potential reward very low.
We originally sold these puts May 8th, for $1.00, or $500. After today’s transaction, we book a profit of $400, before commissions. Our goal remains to acquire 500 shares of the stock. Almost as soon as we sold the puts the stock came out with good news and has been trending higher ever since.
We will look for opportunities to sell more puts, but with the uptrend in place the setup required may be a while in the making.
CHK
We tried to sell weekly puts but the option premium never quite got to our required amount. Had we placed a limit order we most likely would have gotten filled, but because the Market Makers seem to like to play games with orders, instead we planned to ambush them when the bid got to .40+. The problem was that with many other things to do we missed the mark and did not get an order off in time. It would have been much better if we had at least set up an alert, queued up the order ready to pull the trigger. Even better, placing a limit order would have done it. Sometimes simple is best. No matter how long we have traded we still learn new things every day. Sometimes it is the elementary things that trip us up.
COMMENTARY
For each stock or commodity, it is ESSENTIAL to write out a plan wherein we state our goals, such as we want to acquire 500 shares of a particular stock. We document resistance and support zones, pick the strikes for selling options, check and document if the volume today is 10% over the average, check off that underlying is moving toward resistance or moving toward support, determine that momentum is fading. Limit risk. We have developed rules for all of this.
Each additional transaction requires a WRITTEN update to the plan, showing the effect of the transaction of the CPS.
One possible modification to the above could be that we BUY 500 shares at the outset, plus all the rest as stated. Our overall objective is to set up a teeter-totter of sorts and 1) as the underlying moves toward resistance, sell calls and buy back sold puts; 2) as the underlying moves toward support, sell puts and buy back sold calls. We use some variations on the theme involving selling twice as many puts than we want of the underlying or selling in tranches. Example: CHK
We almost never sell more calls than we have underlying as we could get caught being called without enough underlying to cover our position. An exception to that is in the commodity side where we write naked strangles under different rules.
In our trading plan it is necessary to run out three basic scenarios to model the effect on our position should the underlying increase, stay the same, or decrease beyond the strike price. While we mostly use sophisticated software to do that, we can also grind it out on an Excel spreadsheet and get the same answer.
When selling options such as covered calls or cash covered puts, it is essential to know the up to the minute Cost per Share of the underlying in order to determine if a proposed sell transaction increases or decreases the CPS. We should only sell if it decreases the CPS or sets us up so the follow-on transaction decreases CPS.
After we have sold options and as our position ages and the underlying meanders around, the original determination should set up for a profit. Should we get ideas to change, adjust or defend the position, whether the proposed transaction increases or decreases the CPS will dictate whether we buy back an option, buy back an option and write a new option or just hold the original position to an assignment or a call, when the market moves toward our sold strike . A simple yes or no, black or white, go or no go. That is what we want and that is what we get with this type of report.
Since options are primarily a game of mathematics the questions yield very nicely to mathematical solutions and we use a number of software programs to do various tasks based on mathematics, such as scan the stock universe looking for setups, or certain characteristics we find useful in determining setups. We find Excel spreadsheets to be useful, which we use in combination with other software; however, the spreadsheets by themselves are extremely useful, particularly in the area of calculating CPS and we have often traded with just spreadsheets.
Anyone who thinks trading is either easy or like falling off a log is very misinformed. It is a business and needs to be run like a business…if we want to have success that is.
We didn’t get a fill on the second half of our strategy of covering the about to expire calls and replacing with later dated calls containing more premium. Just as we completed the buy back, the premium in the later dated calls fell off a cliff. We were not able to sell a new position in the weekly(9). We will look at it tomorrow.
RGLD
-2 JUL 77.5 Puts @ 2.85
Stock closed at 75.94, so we are in the money at this point. That is okay as our objective is to get the stock. If we are put the stock, it will be at $77.50, less the premium of 2.85, or $74.65. Then we will sell calls against it.
GG, RGLD, VMW
FROM THE LOG: Wednesday, June 13, 2012
GG
+3 JUL 32 Puts @ .20
We sold these options May 18 for $1.05, or 303.73 net of commission. We covered today at $.20, or 71.22, net, for a modest profit of $232.51. We will now look for the opportunity to sell more puts to eventually obtain 300 shares, all the while pushing down the cost basis per share.
RGLD
-10 JUL 85 Calls @ 2.00
Covered 10 of the 20 contracts we held on this option. After the close, it became obvious that we would have done well to cover all 20 contracts at $2.00, instead of just 10. It is often better to accept what the market will give rather than what we want. We will see what tomorrow brings in this regard.
We continue to hold the put side of the iron condor with an order pending to cover both the short and the long put at .10, or $200. It is close to triggering but has not done so yet.
VMW
+20 JUL 120 Calls @ .03
-20 JUL 125 Calls @ .13
Finally got a fill to close out this failed iron condor spread. Failed from the standpoint that we never could get a decent fill for the put side so the call side was filled but not the put side. However, we worked the call spread and closed it out at a profit.
We established the call spread May 23rd for a credit of .45, or $900. We bought back the options today to close the spread at .10, or $200, netting a rather modest profit of $700.
COVERED CALLS
By aggressively selling both puts and calls on stocks we own or would like to own, we dramatically change the cost basis per share over time. We maintain a separate report for each stock, ETF or commodity showing each transaction, date, description, total dollars, commission and cost basis per share so we can refer to the report at any time. The cost per share number helps us determine where to place the sold strikes so each subsequent transaction drives the cost per share (CPS) down.
Dividends alone also force down the CPS, but only at a modest rate of 4 to 8% per year, depending on the dividend. Add re-investing dividends and the cost per share advantage increases slightly. We prefer to have dividends each month rather than each quarter. Covered calls can do that for us. Add just covered calls and you push the annual percentage yield up into the 20% range. Add puts and you get up into the 60% range. Add put enhancement strategies and you push the annual yield up above 100%.
Adding a strategy of finding one short squeeze stock per month, or one event stock per month and we will generate cash very quickly, pushing up the annual portfolio yield past 150%.
We have been discussing a strategy of selling covered calls and puts for very short terms, 3 to 10 days out. The rules we set out in a prior journal are not too different than those used for longer term covered calls.
When we get close to expiration, option premium gets very small, but there are some stocks at any time that have sufficient premium to make this a viable strategy. The key here is to find those stocks, while remembering we sell time and we sell volatility.
More next journal.
BE BLESSED
AGQ, JPM, CHK
FROM THE LOG: Thursday, June 14, 2012
AGQ
-20 JUL 30 Puts @ .35
+20 JUL 25 Puts @ .15
Net Credit = .20
No fill on 11 Call Partials left over from yesterday. We have a condor of sorts going with 9 calls and 20 puts. A bit lopsided but a condor never-the-less, with $692 collected. We are close to Delta Neutral, but a bit short on premium collection as we like to keep it around $1,000. If we get an opportunity, we will add more contracts to this spread pending Delta.
Margin = $8,037
ROI = 9%
Probability = 87%
Breakeven is 29 and 28% away from the underlying
Annual Yield = 95.5%
Theta = $28.68
Delta = 3.58
JPM
+2 JUL 34 Calls @ 1.81
-2 SEP 32 Puts @ 1.95
-2 JUN Weekly 35 Calls @ .59
-4 JUN Weekly 22 Puts @ .45
Repositioned spreads to shorter term by using weeklies. Net effect is to lower Cost per Share to $56.07, and we are back on track with this one.
CHK
-5 JUN Weekly 18 Calls @ .35
Stock hovered around 17 most of day, closing at $17.33. We had a put order for the new weekly 16 puts @ .35. Close but no fill. We still have tomorrow to complete.
We still hold the 5 short 17 puts sold at .32 last week, which expire tomorrow. If the stock finishes tomorrow at 17 or above, we will collect the premium. If the stock finishes under 17, we will keep the premium and be assigned the stock. That will raise our Cost per Share slightly. It is currently at $15.94, including commissions. In that event, we will simply sell more covered calls and puts against the position.
We model all scenarios to gauge the effect of each transaction. If tomorrow we get completion on the ten lot Jun Weekly 16 puts and:
BE BLESSED
BGS, CHK
FROM THE LOG: Friday, June 15, 2012
BGS
+5 AUG 20 Puts @ .20
We covered our 5 sold put position. We harvested the puts because 80% of the premium has been earned and it is always wise to take risk off the table when the remaining premium gets to 20% and the risk reward ratio gets lopsided, with risk remaining and potential reward very low.
We originally sold these puts May 8th, for $1.00, or $500. After today’s transaction, we book a profit of $400, before commissions. Our goal remains to acquire 500 shares of the stock. Almost as soon as we sold the puts the stock came out with good news and has been trending higher ever since.
We will look for opportunities to sell more puts, but with the uptrend in place the setup required may be a while in the making.
CHK
We tried to sell weekly puts but the option premium never quite got to our required amount. Had we placed a limit order we most likely would have gotten filled, but because the Market Makers seem to like to play games with orders, instead we planned to ambush them when the bid got to .40+. The problem was that with many other things to do we missed the mark and did not get an order off in time. It would have been much better if we had at least set up an alert, queued up the order ready to pull the trigger. Even better, placing a limit order would have done it. Sometimes simple is best. No matter how long we have traded we still learn new things every day. Sometimes it is the elementary things that trip us up.
COMMENTARY
For each stock or commodity, it is ESSENTIAL to write out a plan wherein we state our goals, such as we want to acquire 500 shares of a particular stock. We document resistance and support zones, pick the strikes for selling options, check and document if the volume today is 10% over the average, check off that underlying is moving toward resistance or moving toward support, determine that momentum is fading. Limit risk. We have developed rules for all of this.
Each additional transaction requires a WRITTEN update to the plan, showing the effect of the transaction of the CPS.
One possible modification to the above could be that we BUY 500 shares at the outset, plus all the rest as stated. Our overall objective is to set up a teeter-totter of sorts and 1) as the underlying moves toward resistance, sell calls and buy back sold puts; 2) as the underlying moves toward support, sell puts and buy back sold calls. We use some variations on the theme involving selling twice as many puts than we want of the underlying or selling in tranches. Example: CHK
We almost never sell more calls than we have underlying as we could get caught being called without enough underlying to cover our position. An exception to that is in the commodity side where we write naked strangles under different rules.
In our trading plan it is necessary to run out three basic scenarios to model the effect on our position should the underlying increase, stay the same, or decrease beyond the strike price. While we mostly use sophisticated software to do that, we can also grind it out on an Excel spreadsheet and get the same answer.
When selling options such as covered calls or cash covered puts, it is essential to know the up to the minute Cost per Share of the underlying in order to determine if a proposed sell transaction increases or decreases the CPS. We should only sell if it decreases the CPS or sets us up so the follow-on transaction decreases CPS.
After we have sold options and as our position ages and the underlying meanders around, the original determination should set up for a profit. Should we get ideas to change, adjust or defend the position, whether the proposed transaction increases or decreases the CPS will dictate whether we buy back an option, buy back an option and write a new option or just hold the original position to an assignment or a call, when the market moves toward our sold strike . A simple yes or no, black or white, go or no go. That is what we want and that is what we get with this type of report.
Since options are primarily a game of mathematics the questions yield very nicely to mathematical solutions and we use a number of software programs to do various tasks based on mathematics, such as scan the stock universe looking for setups, or certain characteristics we find useful in determining setups. We find Excel spreadsheets to be useful, which we use in combination with other software; however, the spreadsheets by themselves are extremely useful, particularly in the area of calculating CPS and we have often traded with just spreadsheets.
Anyone who thinks trading is either easy or like falling off a log is very misinformed. It is a business and needs to be run like a business…if we want to have success that is.
BE BLESSED
CHK, ETP, PM, RGLD
FROM THE LOG: Monday June 18, 2012
CHK
5 JUN 17 Puts Expired
Sold 6/7 for .32, or $160. Cost per share now down to $16
No fill on -5 Oct 13 Puts @ 1.02
ETP
-4 Jun 45 Puts Assigned
Buy 400 shares @ $45, or $18,008.95
We get to keep the premium, which brings down our Cost per Share to $44.40. Now we are looking to sell calls and more puts when our criteria are met.
PM
-1 Jun 85 Put Expired,
We keep the premium
RGLD
-20 Jul 50 Puts @ .06
+20 Jul 55 Puts @ .11
We still have 10 Jul 85 Calls to sell.
BE BLESSED
CHK, RGLD, JPM, CLNE, PM, PAA
FROM THE LOG: Thursday, June 21, 2012
CHK
+5 Weekly(2) 18 Calls @ .85
-5 Weekly(9) 18 Calls @ 1.30 (No Fill)
We didn’t get a fill on the second half of our strategy of covering the about to expire calls and replacing with later dated calls containing more premium. Just as we completed the buy back, the premium in the later dated calls fell off a cliff. We were not able to sell a new position in the weekly(9). We will look at it tomorrow.
RGLD
-2 JUL 77.5 Puts @ 2.85
Stock closed at 75.94, so we are in the money at this point. That is okay as our objective is to get the stock. If we are put the stock, it will be at $77.50, less the premium of 2.85, or $74.65. Then we will sell calls against it.
JPM
+2 Weekly(2) 35 Calls @ 1.51
-2 Weekly(9) 35 Calls @ 1.71
Bought back the weekly(2) and sold the weekly(9) for a slight advantage.
CLNE
-3 Dec 12 Puts @ 1.50
Cost per share = $24.74
PM
-1 Jul 80 Put @ .32
Covered our long protective put.
PAA
-2 Nov 75 Puts @ 3.20
Opening a new line of share acquisition in this class A pipeline.
BE BLESSED
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