The Micron Technology Inc covered call order executed this morning. This is another trade utilizing a total return strategy. That means that I want the stock to be called away at expiration or even better be assigned prematurely. If assigned, either early or at expiration, I will realize a nice gain. If not assigned, i can keep the stock and continue selling covered calls as long as the stock gets called away.
I use total return strategy on stocks I do not intent to hold as a core investment in my portfolio. When I was thinking about using covered call strategy against the existing dividend paying stocks I immediately knew that I was afraid to lose my holdings being forced sell them if the stock ends above the strike price at expiration.
Do you want to lose your holdings which pay you a nice dividend? You are building up your ever-increasing money machine, cultivate your holdings, keep up your allocation and enjoy increasing payout anytime you add more shares to your holdings. And all of a sudden you get called away because you sold a covered call contract against the holdings in your portfolio. I didn’t like this potential outcome.
It is recommended using put selling against stocks you do not mind owning at expiration and somewhat discounted price (unless the stock falls away too deep). So why should I use calls to be called away if I do not want such result? The same recommendation goes for covered calls that you should use it on stocks you want to sell.
And that makes for investors two trade styles available: a partial return and a total return trade. A partial return trade is about avoiding your stock being called away. Sometimes to do so, you need to apply all sorts of trade repair strategies such as rolling the strike price out, away and so on.
To have a peace of mind I use buy-write strategy selecting stocks I am OK to own for a short period. But more importantly, I buy stocks just for the purpose of being called away. That’s how I generate an extra income.
One of the stocks I reviewed last night and I liked the outcome was Micron Technology Inc. Micron Technology, Inc., is a global manufacturer and marketer of semiconductor devices, principally NAND Flash, DRAM and NOR Flash memory, as well as other memory technologies, packaging solutions and semiconductor systems for use in computing, consumer, networking, automotive, industrial, embedded and mobile products. In addition, the Company manufactures semiconductor components for CMOS images sensors and other semiconductor products. The Company operates in four segments: NAND Solutions Group (NSG), DRAM Solutions Group (DSG), Wireless Solutions Group (WSG) and Embedded Solutions Group (ESG). The Company’s product include NAND Flash Memory, Dynamic Random Access Memory (DRAM) and NOR Flash Memory. The Company’s manufacturing facilities are located in the United States, China, Israel, Italy, Malaysia, Puerto Rico and Singapore.
From the technical analysis perspective the stock is approaching 3-year high and most likely reach the 10 dollar level and possibly breaks thru. It already broke thru $9 resistance and I would expect the stock staying above this level.
The company acquired Numonyx and Elpida which provides Micron with better diversification and access to phase change memory market, which can be a significant technology in the future.
The stock is however considered a cyclical stock and may experience cyclical volatility. This is why I decided to take longer dated trade to give the stock time to grow.
Most of the analysts are bullish on the stock.
03/20/2013 10:07:54 Bought 100 MU @ 9.21
03/20/2013 10:07:54 Sold 1 MU Jul 20 2013 10.0 Call @ 0.63
|Own 100 shares MU:||$9.21|
|Sold 1 Covered Call:||$0.63|
|Expected Option Assignment:||$1000.00|
|Option Assignment Fee:||$19.00|
|Expected Net Gain:||$114.22|
How do you trade covered calls? Do you trade them at all? If you trade covered calls, do you trade them against stocks you already own or do you trade buy-write, total return trades?