Stock options results – January 2009

A month ago I started [tag]investing[/tag] into [tag]stock options[/tag] using the most [tag]basic strategy[/tag] called “[tag]Covered call[/tag]s”. The reason I started learning this strategy was to [tag]protect my investments[/tag] and create a steady monthly [tag]income[/tag]. However, prior investing the real [tag]money[/tag] I opened a [tag]virtual account[/tag] at CBOE for learning purposes. I wanted to try all possible situations, which may occur during the [tag]option[/tag] lifetime. During this month I have learned a lot, but still there is plenty to learn and some other questions raised in my mind, but overall I am grasping how Covered calls work.

Covered calls strategy

If you are a [tag]novice[/tag] as I am, here is the quick review of what Covered calls mean. First of all, the [tag]stock option[/tag] is generally divided to [tag]put options[/tag] and [tag]call options[/tag]. The [tag]call contract[/tag] means that the holder has a right to [tag]buy[/tag] underlying [tag]stocks[/tag] at a specified price for a certain, fixed period of time.
When [tag]writing covered calls[/tag] an investor sells a call contract for a [tag]security[/tag] he already owns. It means if you want to open a call contract, you must own stocks for which you write call contract. If you want to sell 1 call contract, you must own 100 [tag]shares[/tag] of the stock. If you do not own it, you must purchase it at the same time when [tag]selling[/tag] the call contract.
How this [tag]strategy[/tag] can help protecting the [tag]investment[/tag] and [tag]generate income[/tag], which can bring a [tag]profit[/tag] from one to [tag]10% a month[/tag]? This strategy works well (in the way I mean to use it) in a [tag]side way[/tag] or downturn (not panic drop/sell off) [tag]market[/tag]. Let’s say an investor already owns or buys [tag]stocks[/tag] of an XYZ [tag]company[/tag], but the market is slow or moving down and the stock is following the exact same path as the market. She wants to protect her investment by making income (similar to [tag]dividends[/tag]), which will eliminate her losses during the period she holds the stock and/or make some [tag]income[/tag] on top of stock’s [tag]gains[/tag] or before the stock moves up.
My intention was to use this strategy to generate higher gains on any of owned stock. How?

I have bought 100 shares of [tag]AFAM[/tag] and sold one January 09 [tag]call contract[/tag] at $45 [tag]strike price[/tag] (well I have bought/sold more as you would see below, but lets talk about this one contract to explain how it works). By selling one call contract I sold the right to sell my 100 shares of AFAM to the owner of the call contract and the new call contract holder had a right to buy my shares if the price of AFAM would have reached the strike price or got higher. For selling a call contract I received a [tag]premium[/tag], which was my gain. Since the price of AFAM was below strike price, the call contract expired worthless, so I still hold 100 shares of AFAM and next month I can sell another call contract. I made about $360 income for January 2009. The stock is showing a loss right now, but I am about to hold it for longer period so later, when I decide to sell the stock, I may use covered call to do it for me. I will sell a call contract “[tag]In the Money[/tag]” with high premium so the stock will reach the strike or will be way above the strike and will sell at maturity day. I will make money on the stock as well as on the call contract.

  • Do you have any questions about covered call strategy I didn’t mentioned? Post your questions in comments and I will answer or find a response for you.

This strategy can make you money, but it can be quite risky too. You may open a wrong [tag]position[/tag] as well. I came up with some questions such as how I could fix wrong trades or [tag]trade[/tag]s showing losses. However, I will talk about it later.

My first stock options results

Here is my record of the first covered calls:

Date Action Qty Symbol Description Price Cms Net Amount
12/15/2008 Buy 100 AFAM ALMOST FAMILY $45.79 $14.95 -$4,593.95
12/15/2008 STO 1 .KQAAJ AFAM JAN 2009 50 Call $0.05 $4.99 $0.00
12/16/2008 Buy 100 AFAM ALMOST FAMILY $44.98 $14.95 -$4,512.95
12/16/2008 STO 1 .KQAAI AFAM JAN 2009 45 Call $3.60 $14.95 $345.04
12/16/2008 Buy 100 C CITIGROUP $7.60 $14.95 -$774.95
12/16/2008 STO 1 .CAQ C JAN 2009 7.5 Call $1.050 $14.95 $90.04
12/16/2008 Buy 100 C CITIGROUP $7.60 $14.95 -$774.95
12/16/2008 STO 1 .CAI C JAN 2009 9 Call $0.470 $14.95 $32.04

Cms = [tag]Commission[/tag]
STO = sell to open
BTO = buy to open
STC = sell to close
BTC = buy to close

To summarize it; I [tag]invest[/tag]ed into [tag]Almost family[/tag] and [tag]Citigroup[/tag]. Except the first call contract all others expired worthless (which is what I wanted), because the price of the stock dropped or remained below the strike price of the contract.
This means that I have collected $345.00 on AFAM trade (+7.6%) and $122.08 on both Citigroup trades (+7.8% total) for the first month. I still hold the very first call contract, which was a mistake and I was trying to get rid of it by rolling the contract over. However I found that rolling the contract over won’t help at all. You would roll your mistake over and over.

  • Rolling a bad call contract over wont help, [tag]buy[/tag] it back and [tag]sell[/tag] the new one.

What traps are waiting for you?

It seems to me that if the contract goes wrong or you realize that you opened wrong call as I did the very first time, the only way how to fix it is buy wrong contract back (and you probably make money on it) and sell the new one. It also seems that if the stock is going to hit or exceed your strike price and you want to avoid selling your shares, you would need to buy such contract back, which may eliminate your premium completely or get you into a [tag]loss[/tag], but you keep shares of your security and you can open another call contract with higher strike price and collect a new premium.
To avoid your stock hitting the strike price you need to open a call contract which is “[tag]Out of the Money[/tag]”. Look for the contract, which is at least on the second position above “In the Money” [tag]chain[/tag]. I will talk about this later when opening new [tag]positions[/tag] for February.
When you do so, you may notice that the premium is very low on such contracts and it makes no sense selling such contract, because commissions will eat up all your premium. This happens at the beginning of the month (or a period) and when the contract is getting close to its [tag]maturity day[/tag]. If you are at the beginning of the month, the premium will be very low. It happened to me with the first AFAM contract. At the beginning of the month (I am talking about a period or month prior expiration) the call contract was worth $0.05, but during the lifetime of the contract the price rose up to $1.20 per contract (by waiting for this time I could collect $120 on this contract). Waiting for this time could save me losses on fees on worthless contract as well. The lesson from this is that it is not necessary jumping into a trade as soon as possible. There will be plenty of time to open new positions for better price later. So wait, watch the contract and open it when it shows a good potential of solid premium. Don’t be greedy. I will talk about this again when opening new contracts for February.

Options Picks 12/16 – 01/16

No [tag]new picks[/tag].

No new picks.

Existing holdings:

Symbol Qty Last Gain($) Gain(%)
[tag]AFAM[/tag] 200 $38.82 -$1,313.00 -14.50
.KQABJ -1 0.60 $15.00 N/A
[tag]C[/tag] 200 $3.50 -$820.00 -54.00

NOTE: all trades mentioned above are virtual, no real money are invested

Contribution this month: $20,000.00

Starting account value = $25,779.20

Account value = $23,838.66 (without margin)

Buying power = $38,573.32

Collected premium this month = $467.08

Portfolio Gain/Loss = -7.50%

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2 responses to “Stock options results – January 2009”

  1. Margarette Debo says:

    Its amazing to me how many ways one might go about investing your money. I’ve found for me that best solution is both risky and low risk stocks. I normally put about half of my investments into low risk mutual funds that grow over time and the other half in high risk high gain stocks. I recently got into day trading and I found that software stock picks are the most reliable as they can automate a process that I cant do quickly enough. The fellows over at PrometheusFinancials.Com have a fantastic system. You need to check them out!

  2. kate says:

    anyone test this out

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