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New trade – Realty Income (O) – covered call #2

My previous covered call trade against Realty Income stock I hold in my account ended profitable. The trade was a partial return trade, which mean I try to open the trade so the stock isn’t called away from me. I try to collect premiums only and want the call option expire worthless.

Of course, there still is risk that the stock will be called away or it will surpass my strike price and I get exercised. However I am trying to minimize this risk by having a plan for each possible scenario.

Have a plan for each trade, know what to do

PlanIf you know what you need to do or what may happen over time of your trade lifespan and have a plan what to do when that happens, your potential for profits is a lot better. Even when the trade goes against you, with a plan for that situation you can prepare a strategy how to end the trade profitable:

  • You can end the trade with minimum loss or even get out break-even.
  • You can roll out the call.
  • You can unwind the call trade.
  • Or you can even convert it into a different trade such as call spreads, butterflies or similar
  • You can accept assignment and immediately buy the stock back with proceeds, etc.

Just to complete the list I need to add a note or disclaimer that converting your call into a spread will not prevent your position from being assigned. It still can happen.

Whenever you plan opening a trade, sit down a bit and do some planning. Think about all possible outcomes which may happen and think about strategies you would do when those outcomes happen.

If you cannot find anything which would help your trade in each scenario, do not take that trade!

This was the case of Realty Income. I wanted to repeat the covered call and be succesful once again. But the trade didn’t look good to me. The stock was rising and this is a stock which I do not want to lose. So I was waiting for the right time when the stock reverses and panic over mREITs returns.

I believe this time has arrived.

What’s the stock telling me

Let’s take a look at the chart first:

Realty Income

The stock recently broke below its long term trend line. The yellow line represents 5 year trend and a few days ago the stock broke below it. It then reversed and continued back up. It was the time when I was watching this stock wanting to open a new covered call trade.

But I wasn’t comfortable in doing so. The stock was rising and taking a new trade wouldn’t work. It then hit its 5 year long term trend and bounced of it back down.

When the new selling of REITs gained momentum I decided to open a new covered call trade. From the chart above I do not see any buying and it seems that we still may see more selling pressure in this stock (for which I am happy, since I am planning on buying more shares!)

Both arrows in the chart show those moments I am referring to.

Of course, this trade still may go wrong. The stock may reverse and continue back up and I can get assigned prematurely.

What is my plan?

As I wrote above you need a plan what would happen in each possible cases. Here was my thinking:

  1. The stock will continue down, the covered call expires worthless; I keep the premium and will wait for another opportunity.
  2. The stock reverses and circa a week before expiration it stays above call strike. I will review two possible actions to do: unwind the position or roll it over and further in time.
  3. The stock will skyrocket making rollover impossible. I will unwind or take a loss.
  4. I will suffer early assignment. In that case I will collect all gains and buy the stock immediately back.

Trade detail

Knowing what to do I took the trade today:

08/28/2013 10:25:27 Sold 1 O Sep 21 2013 40.0 Call @ 0.7

I collected $70 premium. If the stock stays flat, which is what I hope for by the time of expiration I should have 1.49% profit on this trade (or 25.18% annualized profit). If I get called away, I will suffer a small loss (I will have $71.79 or 1.77% loss).

Let’s wait until September’s expiration day.

2 responses to “New trade – Realty Income (O) – covered call #2”

  1. Sam Gill says:

    Yeah, well said. You need to have proper plan and be prepared for any situations in trading. It is sometimes good to get out break even or go with minimal loss when you sense your trade is going under loss.

    • Martin says:

      Sam, yes, having a plan can help a lot. It makes me confident trading. I not always was trading with a plan which in many cases was a disaster.

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