As I was worried last week how to deal with my covered call trade I opened on Realty Income – see the trade here, this trade has changed into what I wanted in the first place. See the original trade here.

As I wrote in my previous reviews of the trade I mentioned that every investor or trader must have a plan before he places a trade. I tried to describe my plan in regards to this trade.

The plan is actually either a written or mental procedure of what you would do in each situation should that situation happen. With having this plan perfectly in place for each situation you won’t panic when that happens not knowing what to do.

I had a plan for a situation that the trade would go against me and that made me calm down. I actually was able to see some benefits of this trade going against me and you know what? I actually wanted this trade to go bad, because I liked the idea of taking the loss for tax purposes and significantly improve my cost basis of this stock.

This was a tight trade and tough one. Until the very last moment I didn’t know how the trade would end up. On Friday 10 minutes before 2 pm (MST) I was sitting in front of streaming chart having my finger on the “buy” button being ready to buy back the call. The reason why I decided not to let the covered call being assigned was that its price at the end of the day was only 15c (although the option was in-the money) so it was better to buy it back than let it being assigned. But literally a few minutes before close, the stock price dropped below strike and remained there making the option worthless.

By that I collected 100% gain or $61.21 for the flat trade (1.49% gain or 25.18% annualized return). Not bad if repeated every month, right?

So what will be next? Shall I open another trade?

I am planning on opening another covered call for October or November 2013, but right now I will be in a waiting mode. The reason that I do not want to jump in another covered call trade is that I do not know what the stock may do and I am receiving different signals.

 

 

From the chart above I can see the following signals:

1. The Chaikin Money Flow index indicate money flowing out of the stock – investors are heavily selling. It is of course apparent from the price action chart – negative
2. The price of the stock just bounced off of the long term (the yellow line) trend. The yellow trend line indicates more than 5 year trend, so this is a significant bounce – negative.
3. As the price bounced it also created a new lower high confirming the downtrend with no signal for reversal – negative.
4. And here comes something what makes me unsure of the trend continuation – the trade volume spiked way above average. That may actually indicate a capitulation or end of the trend (trend reversal). It may not happen right away, but will this trend continue until the October expiration?
5. This price action is confirmed by Bollinger bands which are getting narrower. That typically means that the stock is ready for a significant price action. Unfortunately, the Bollinger Bands won’t tell you which direction that price action would be, whether up or down. And these are the two reasons why I decided to wait and take action later upon confirmation of either a trend continuation or reversal.

When I will be sure which direction the stock will go, I will either sell another put or covered call contract. Until then I am waiting for my trade.