11/1 Almanac

On Tuesday, Nov. 1: Manufacturing index.

There are 18 trading days before the November options expire, 46 the December, 81 the January and 109 the February.

On the jump, market stats, econ reports, and the trading calendar . . .

10/31 Covered Calls

This daily posting tracks my covered call plays for November and other base positions.

Covered Calls

sym	phase	trend	adx		200/50	40/10
BIDU
DFS
EWZ
FCX
GMCR
HAL
LVS
NLY
RIMM
SLV
XLF
XOP

10/31 Indicators

The markets this morning...

Stocks

sym	phase	trend	adx		200/50	40/10
SPY
QQQ
VIX

SPY (S&P 500) is trading within an uptrending channel that began Oct. 4.

QQQ (Nasdaq 100) remains within an uptrending channel that began Aug. 9.

VIX (fear index) remains well below a sideways channel that began Aug. 9 but has not established a clear downtrend.

Bonds

sym	phase	trend	adx		200/50	40/10
TLT
JNK

TLT (Treasury long-term debt) is trading within a downtrending channel that began Oct. 4.

JNK (corporate high-yield debt) ha broken below an uptrending channel that began Oct. 4.

Tangibles

sym	phase	trend	adx		200/50	40/10
USO
GLD
JJC

USO (crude oil) is trading within an uptrending channel that began Oct. 4.

GLD (gold) is trading within a narrow rising channel in force from Oct. 20.

JJC (copper) has broken below a narrow rising channel that began Oct. 21.

Global

sym	phase	trend	adx		200/50	40/10
UUP
EEM

UUP (U.S. dollar) remains within a downtrending channel that began on Oct. 4.

EEM (emerging markets) is climbing an uptrending channel that began Oct. 4.

10/31 Forex

Notes on this morning’s forex...

Everything/JPY up sharply after the Japanese government announces intervention to devalue the yen.

USD/JPY rose intraday by 5.2% at its peak, although it has since backed off to a 3.3% rise. The move pushed the price above its 20-day high and broke out of a sideways range in effect since early August.

The EUR/JPY move was more moderate (although still sharp): Up 4.2% intraday, with a pullback to 2.1%.

This is USD/JPY’s first push above the 20-day high since March 31.

The last yen intervention was Aug. 4. It pushed USD/JPY up 4.2% intraday, followed by a pullback to 2.5%. Subsequently, the price declined over three days to a sideways trend at the pre-intervention level.

The August intervention followed by two days a low of ¥76.30, and the Oct. 31 intervention came on a low of ¥75.572.

Looked at another way, the Bank of Japan saw five days of lower lows prior to the October intervention, and 12 days of lower lows prior to the August intervention.

Prior interventions to support the yen: March 1, 2011; Sept. 15, 2010; and before that, nothing for six years.

Every intervention (except, of course, for today’s, so far) has been followed, sometimes within days, by a pullback to lower levels, raising the question in my mind: Why bother?

10/31 Almanac

On Monday, Oct. 31: Trick Or Treat!! Chicago purchasing managers index.

There are 19 trading days before the November options expire, 47 the December, 82 the January and 110 the February.

On the jump, market stats, econ reports, and the trading calendar . . .

10/28 Covered Calls

This daily posting tracks my covered call plays for November and other base positions.

New additions: BIDU, FCX, HAL and LVS.

Covered Calls

sym	phase	trend	adx		200/50	40/10
BIDU
DFS
EWZ
FCX
GMCR
HAL
LVS
NLY
RIMM
SLV
XLF
XOP

10/28 Indicators

The markets this morning...

Stocks

sym	phase	trend	adx		200/50	40/10
SPY
QQQ
VIX

SPY (S&P 500) is trading within an uptrending channel that began Oct. 4.

QQQ (Nasdaq 100) remains within an uptrending channel that began Aug. 9.

VIX (fear index) remains well below a sideways channel that began Aug. 9 but has not established a clear downtrend.

Bonds

sym	phase	trend	adx		200/50	40/10
TLT
JNK

TLT (Treasury long-term debt) is trading within a downtrending channel that began Oct. 4.

JNK (corporate high-yield debt) is trading within a downtrending channel that began Oct. 4.

Tangibles

sym	phase	trend	adx		200/50	40/10
USO
GLD
JJC

USO (crude oil) is trading within a downtrending channel that began Oct. 4.

GLD (gold) is trading within a narrow rising channel in force from Oct. 20.

JJC (copper) is trading within a narrow rising channel that began Oct. 21.

Global

sym	phase	trend	adx		200/50	40/10
UUP
EEM

UUP (U.S. dollar) remains within a downtrending channel that began on Oct. 4.

EEM (emerging markets) is climbing an uptrending channel that began Oct. 4.

10/28 Forex

Notes on this morning’s forex...

EUR/TRY has bounced off the floor of a sideways trend in force since late September.

10/28 Almanac

On Friday, Oct. 28: Money in, money out.

There are 22 trading days before the November options expire, 50 the December, 85 the January and 113 the February.

On the jump, market stats, econ reports, and the trading calendar . . .

10/27 Covered Calls

This daily posting tracks my covered call plays for November and other base positions.

Covered Calls

sym	phase	trend	adx		200/50	40/10
DFS
EWZ
GMCR
NLY
RIMM
SLV
XLF
XOP

10/27 Indicators

The markets this morning...

Stocks

sym	phase	trend	adx		200/50	40/10
SPY
QQQ
VIX

SPY (S&P 500) gapped sharply above its 20-day high and the ceiling of a sideways trading range in effect since Aug. 9.

QQQ (Nasdaq 100) broke above its 20-day high as it remains with an uptrending channel that began Aug. 9.

VIX (fear index) remains at the floor of a sideways channel that began Aug. 9 after several attempts to break below in recent days.

Bonds

sym	phase	trend	adx		200/50	40/10
TLT
JNK

TLT (Treasury long-term debt) gapped below its 20-day low.

JNK (corporate high-yield debt) remains within an uptrending price channel that began Oct. 14. The price broke above its 20-day high but quickly retreated.

Tangibles

sym	phase	trend	adx		200/50	40/10
USO
GLD
JJC

USO (crude oil) has stalled following a break above the downtrending channel that was been in force from May 2 to Oct. 14.

GLD (gold) is trading within a narrow rising channel in force from Oct. 20.

JJC (copper) gapped up for the second day in a row in a rising trend that began Oct. 21.

Global

sym	phase	trend	adx		200/50	40/10
UUP
EEM

UUP (U.S. dollar) gapped sharply to the downside and remains within a downtrend that began on Oct. 4.

EEM (emerging markets) gapped sharply above its 20-day high in an uptrend that began Oct. 4.

10/27 Forex

Update: On the hourly chart, AUD/CHF in the 9 a.m. Eastern hour is showing a relative strength index bearish divergence. That means the RSI, while above 70, showed a high and then a lower high while the price was rising or sideways. This pattern signals a reversal to the downside.

Notes on this morning’s forex...

Broad drops in the U.S. dollar and the British pound and a rise in the Australian dollar against other majors.

EUR/USD broke above its 20-day high after Euro-zone political leaders agreed on a Greek debt bailout.

Also breaking above their 20-day highs: AUD/USD, AUD/JPY, AUD/DKK, AUD/NOK, NZD/USD, SEK/JPY.

USD/CAD, USD/SEK, USD/NOK, USD/DKK, GBP/AUD, EUR/AUD, DKK/SEK, EUR/SEK, GBP/NOK, GBP/SEK dropped below their 20-day lows.

10/27 Almanac

On Thursday, Oct. 27: Gross domestic product.

There are 23 trading days before the November options expire, 51 the December, 86 the January and 114 the February.

On the jump, market stats, econ reports, and the trading calendar . . .

10/26 Covered Calls

This daily posting tracks my covered call plays for November and other base positions.

Covered Calls

sym	phase	trend	adx		200/50	40/10
DFS
EWZ
GMCR
NLY
RIMM
SLV
XLF
XOP

10/26 Indicators

The markets this morning...

Stocks

sym	phase	trend	adx		200/50	40/10
SPY
QQQ
VIX

SPY (S&P 500) has paused just above the ceiling of the sideways channel in effect since early August.

QQQ (Nasdaq 100) continues to bounce along an uptrending channel that began Aug. 9.

VIX (fear index) remains at the floor of a sideways channel that began Aug. 9 after several attempts to break below in recent days.

Bonds

sym	phase	trend	adx		200/50	40/10
TLT
JNK

TLT (Treasury long-term debt) has paused just below its 20-day low, dropping back after a decisive breakout on Tuesday.

JNK (corporate high-yield debt) is at the floor of the mid-point of the uptrending price channel that began Oct. 14.

Tangibles

sym	phase	trend	adx		200/50	40/10
USO
GLD
JJC

USO (crude oil) has stalled following a break above the downtrending channel that was been in force from May 2 to Oct. 14.

GLD (gold) has broken above a narrow sideways trend in force from late Sept. 26 to Oct 26.

JJC (copper) has broken above a sideways range in effect since Oct. 6, gapping past its 20-day high.

Global

sym	phase	trend	adx		200/50	40/10
UUP
EEM

UUP (U.S. dollar) has broken below its 20-day low as it trades at the mid-point of a downtrend that began on Oct. 4.

EEM (emerging markets) has paused after breaking above the stall pattern of the past week. The 10-day moving average moved above the 40-day ma.

10/26 Forex

Notes on this morning’s forex...

EUR/AUD has launched sharply off of its 20-day low within a sideways pattern that has been in force since early August. However, the price is well above the A$1.30 floor of the sidewinder, suggesting there’s more downside potential. The ceiling is around A$1.40.

AUD/CZK has rebounded from the ceiling of a sidewinder running from early August. The ceiling is around Kč18.84, and the floor, at Kč17.50, gives plenty of downside room.

Most AUD/--- pairs are showing a pattern similar to AUD/CZK.

TRY/JPY has pushed above its 20-day high, continuing a rise that began Oct. 4.

USD/TRY pushes 20-day low even lower for third straight day, continuing a decline that began Oct. 4..

10/26 Almanac

On Wednesday, Oct. 26: Durable goods, new homes.

There are 24 trading days before the November options expire, 52 the December, 87 the January and 115 the February.

On the jump, market stats, econ reports, and the trading calendar . . .

10/25 Covered Calls

This daily posting tracks my covered call plays for November and other base positions.

New covered call positions: DFS, XLF and XOP.

Covered Calls

sym	phase	trend	adx		200/50	40/10
DFS
EWZ
GMCR
NLY
RIMM
SLV
XLF
XOP

10/25 Indicators

The markets this morning...

Stocks

sym	phase	trend	adx		200/50	40/10
SPY
QQQ
VIX

SPY (S&P 500) has broken above the sideways channel in effect since early August.

QQQ (Nasdaq 100) continues to bounce along an uptrending channel that began Aug. 9.

VIX (fear index) remains at the floor of a sideways channel that began Aug. 9 after two attempts to break below in recent days.

Bonds

sym	phase	trend	adx		200/50	40/10
TLT
JNK

TLT (Treasury long-term debt) has paused just below its 20-day low, dropping back after a breakout. The 10-day moving average has dropped below the 40-day ma.

JNK (corporate high-yield debt) has pulled back to the mid-point of the uptrending price channel that began Oct. 14.

Tangibles

sym	phase	trend	adx		200/50	40/10
USO
GLD
JJC

USO (crude oil) has broken above both a week-long stall pattern and its 20-day high into an uptrend, decisively ending the downtrending channel that was been in force from May 2 to Oct. 14.

GLD (gold) continues its third week in a relatively narrow sideways trend.

JJC (copper) has remains near the ceiling of a sideways range in effect since Oct. 6.

Global

sym	phase	trend	adx		200/50	40/10
UUP
EEM

UUP (U.S. dollar) remains at the mid-point of a downtrend that began on Oct. 4. The 50-day moving average has risen to merge with the 200-day ma.

EEM (emerging markets) broke above the stall pattern of the past week, breaking above its 20-day high. Today it has pulled back from its peak. The 10-day moving average has moved above the 40-day ma.

10/25 Forex

Notes on this morning’s forex...

AUD/NZD in a solid rise above its 20-day high, and pushing it higher in an uptrend that began Sept. 16.

EUR/TRY drops back into its sideways channel, in effect since Sept. 21, and is trading around the mid-point in a narrow intra-day range.

10/25 Almanac

On Monday, Oct. 24: Consumer confidence.

There are 25 trading days before the November options expire, 53 the December, 88 the January and 116 the February.

On the jump, market stats, econ reports, and the trading calendar . . .

10/24 Covered Calls

This daily posting tracks my covered call plays for November and other base positions.

Today is the first day of a new covered calls month. See my weekend postings for October results and the November pick list.

Covered Calls

sym	phase	trend	adx		200/50	40/10
EWZ
GMCR
NLY
RIMM
SLV

Weekend Posts

I posted three items over the weekend in connection with the transition from October to November covered calls.

• Results from my October covered calls, with a critique identifying what went right and what went wrong.
• Analysis of potential November covered calls, with a pick-list from which I'll be selecting my plays.
• A discussion of methods for insuring against declines in the value of covered-call positions.

Enjoy!

10/24 Indicators

The markets this morning...

Stocks

sym	phase	trend	adx		200/50	40/10
SPY
QQQ
VIX

SPY (S&P 500) has broken above the sideways channel in effect since early August, and is also trading above its 20-day high for a second day.

QQQ (Nasdaq 100) continues to bounce along an uptrending channel that began Aug. 9.

VIX (fear index) remains within a sideways channel that began Aug. 9.

Bonds

sym	phase	trend	adx		200/50	40/10
TLT
JNK

TLT (Treasury long-term debt) has paused just above its 20-day low.

JNK (corporate high-yield debt) has resumed its rise after breaking below the uptrending price channel that began Oct. 14, moving above its 20-day high into bull phase. The 10-day moving average has moved above the 40-day ma.

Tangibles

sym	phase	trend	adx		200/50	40/10
USO
GLD
JJC

USO (crude oil) is stalled above the downtrending channel that has been in force since May 2.

GLD (gold) continues its third week in a relatively narrow sideways trend.

JJC (copper) has gapped sharply upward to near the ceiling of a sideways range in effect since Oct. 6.

Global

sym	phase	trend	adx		200/50	40/10
UUP
EEM

UUP (U.S. dollar) is trading at the Fibonacci 61.8% retracement of the rise from Aug. 29 to Oct. 4. The 10-day moving average has moved below the 40-day ma.

EEM (emerging markets) is stalled after a breakout above a declining price channel that began Aug. 1. The 10-day moving average has risen and merged with the 40-day ma.

10/24 Forex

Notes on this morning’s forex...

EUR/AUD has pushed sharply and persistently below its 20-day low as it declines in the latest leg of a sideways pattern that began in early August.

Otherwise, it’s an advance and retreat sort of day...

EUR/USD broke above its 20-day high but quickly (and substantially) retreated to the sidewinder range of the past seven days.

EUR/HKD pushed above its 20-day high but retreated.

USD/DKK broke below its 20-day low and retreated.

November Covered Calls

When choosing covered call prospects, I first want to have some opinion about where the market will be when the options expire. Since no one can foresee the future, it is generally a fruitless activity. Even so, it helps me make the basic decision about choosing covered calls: How far should the option strike price be from the stock purchase price, and in what direction?

The rule of thumb for traders is to sell in-the-money calls in a down market, out-of-the-money calls in an up market, and at-the-money calls in a sideways market.

To form my opinion of the market's course, I look at several things: The leading economic indicators report, the volatility of the S&P 500 (the VIX), the 40/10- and 200/50-day moving averages on the S&P 500, and the index's support and resistance levels. I give greatest weight to Elliot wave analysis, as done by Robert Prechter and his team at Elliott Wave International.

(To learn about Elliott waves, read Prechter's book Elliott Wave Principle: Key To Market Behavior. The Elliott Wave International newsletters are excellent.)

(It would be an interesting study to determine market direction and strength by a roll of the dice, and see how that affected trading results.)

All in all, I'm slightly bearish the market, but not with a lot of conviction and I don't expect a huge decline. So I'm going slightly in-the-market with my strikes, but not as far as I did for the October positions.

I select my strikes as a multiple of the 10-day average true range (ATR), which measures how far the price of a stock moves each day. This gives me an adjustment to match the volatility of individual stocks. For October I was bearish and went four times the ATR in the money. For November, at present, I plan to go two ATR in the money (and Monday's trading might alter that opinion).

For November, I'm selecting from a universe of stocks with average volume of 5 million shares, a price of $15 or greater, return on equity of 15% or greater and a near-term rating of hold or better from the analytical house Zacks.

I've eliminated stocks with earnings announcements 20 days or less from the last trading day, which is Nov. 18.

The result is 18 stocks. Their premium returns range from 15% to 10%, and their if-exercised returns are all 2%, 3% or 4%.

The stocks are, in descending order of the premium percentage: CLF, BIDU, HAL, FCX, WYNN, LVS, UAL, MOS, HPQ, STX, DFS, JBL, POT, SWN, CAT, AFL and VALE.

BIDU has the highest if-exercised return, at 4%.

CAT announces earnings on Oct. 24; AFL and VALE on Oct. 25; and CLF, BIDU, WYNN, LVS, POT and SWN on Oct. 27. I'll wait until after the announcement before opening a position.

Also, some of these shares go ex-dividend during the November options period: WYNN on Oct. 31, and MOS, STX and JBL on Nov. 1.

In addition, this month I'm looking to add some exchange-traded funds (ETFs) to the mix. They generally have lower returns than individual stocks, but they also are harmed less by earnings surprises and other black-swan events; the pain is spread because most are already diversified.

That diversification also means I can put more money on a single position, reducing the total number of positions in my portfolio and making them easier to manage. (Span of control is always an issue in trading, unless you have a vast staff of minions on your payroll.)

For the ETFs, I looked at the top-volume offerings, and then selected those having the highest premium returns and if-exercised returns greater than 1.5%. I excluded bear funds and funds having multiples of the underlying.

The dozen ETFs that made the cut, in descending premium-percentage order: XOP, SLV, XLF, EWZ, IWM, FXI, GDX, USO, XLB, EEM, KBE and XLE.

The premium return ranges from 12% to 8%, and the if-exercised returns are 3% and 2%.

Finally, I have one lone holdover from October. The covered calls on GMCR were not exercised and expired worthless, leaving the shares in my portfolio to cover more calls that I shall sell.

Holdovers present a tricky problem. They are held over because their prices fell. Most likely, the current price is below what the trader paid, and if future covered calls are exercised at that lower price, it could wipe out profits from earlier months. So my strike selection will need to consider my basis as well as the factors I'm using for new positions.

That's the lot. I'll be making final decisions and placing trades this week, and shall report my holdings in the daily Covered Calls report.

About my trading methods

Read a detailed explanation of my analysis method, including trading rules.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

The trader’s greatest sin is inaction. Sleeper, awake! Seize the Nietzchean moment. Roll out of bed and trade.

Covered Call Insurance Rules

One certain way to lose money on covered calls is to close an unprofitable position before expiration. The losses are always magnified.

Rather than taking the loss, I choose to mitigate it by retaining the position and placing off-setting trades against the underlying stock.

It's a form of insurance, paying a premium so that I won't be harmed if the prices of my stock holdings move against me.

The problem of insurance breaks down into two questions: 1) When do I need insurance; I don't want to spend money needlessly, and 2) what strike price and month should I select when buying insurance?

When to buy insurance?

I shall use a 10-day and 40-day moving average cross to trigger insurance purchases and sales.

For existing holdings, if the 10-day moving average crosses below the 40-day moving average, then I shall open an insurance position.

For new holdings, when I open the position, if the 10-day moving average is below the 40-day moving average and is trending downward, then I shall open an insurance position.

I'll use a trailing stop/loss to close the insurance positions, setting it at twice the 10-day average true range above the lowest low attained since the insurance position was opened. Get in a like a turtle and exit like a jack-rabbit.

Now, there are some judgment calls implied by all of this. Sometimes a moving average cross is weak, as when the averages are moving sideways. So, I'll want to treat crosses as a signal only when they show some conviction. I won't define conviction, but I'll know it when I see it.

What strike and month to buy?

The most straightforward sort of insurance is to buy put options. But the straightforward approach raises difficulties, because none of the choices are really good. Deep out-of-the-money puts, with deltas of less than 20, are dirt cheap, but they don't move much when compared to the shares. Deep in-the-money puts can move as much as $1 for every dollar the stock moves, a highly leveraged relationship. But they're quite expensive.

Of even greater importance is the question of time decay. A long option loses value with the passage of time; the technical term is "negative theta". The November at-the-money puts on the exchange-traded fund SPY, at present, lose $7 a day on each contract. And that's not just trading days. It's every day on the calendar. Go out a month to December, and the loss is $5 a day. And of course, the further out the option, the greater the cost.

That level of time decay doesn't sound too awful but it is. An at-the-money put option on SPY goes for $365 per contract, so a $7 time-decay hit works out to 1.9% per day, or 57% per month. Annualized the daily loss works out to 694%, an usurious rate. Inflation, stock-market crashes, interest on Greek bonds -- they all pale in significance in comparison to relentless time decay.

An alternative would be to sell bear call spreads. The position consists of selling a call option, and then buying one that's further out of the money. The net position is short. That means you get money up front because you're selling, and time, rather than causing the value to fall, instead causes it to increase. Theta, in other words, is positive. And as a trader, I've learned to love positive theta as way to increase my edge in the markets.

The trade-off is that the spread limits the profit. The limit can be controlled by adjusting the strike prices of the spread.

So under my new rules, I'll sell near-term bear call spreads for insurance against declines, with the strike prices both above the current price (a conservative strategy).

One characteristic of spreads is that they have very little movement in relation to the stock -- "low delta" is the term of art. One way around this is to sell spread contracts at a multiple of the covered call contracts in the portfolio; e.g., 1 covered call contract and 5 bear call spreads.

Insuring Lost Opportunity

A covered call limits the profit on the underlying stock to the covered call strike price. So, a rising stock represents a missed profit opportunity for the trader. To insure against that lost opportunity, I'll open insurance positions against my holdings when the 10-day moving average is above the 40-day moving average. Instead of bear call spreads, I'll use bull put spreads.

For the perplexed...

Here's some recommended Wikipedia reading for anyone needing to catch up on covered calls and vertical spreads, such as bear call spreads and bull put spreads.

Covered Call.

Bear Call Spread.

Bull Put Spread.

About my trading methods

Read a detailed explanation of my analysis method, including trading rules.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

The trader’s greatest sin is inaction. Sleeper, awake! Seize the Nietzchean moment. Roll out of bed and trade.

Covered Calls: October Results

For the past month my daily Covered Calls report has been tracking my positions that expire in October.

The options expired on Saturday, and I've tallied up the net results.

sym	strike	x	return
BIDU	100	x	0.7%
CAR	10	x	0.3%
CNX	36	x	-14.5%
COG	55	x	0.4%
CVI	22.5	x	1.0%
GMCR	90		21.0%
HAL	30	x	-0.5%
JNJ	57.5	x	-4.3%
KEG	10	x	-0.2%
MCO	27	x	58.4%
NOV	55	x	1.6%
SPRD	17	x	-1.3%
TKR	30	x	0.2%
TPX	35	x	0.6%
-----	-----	--	-----
Total			3.9%

Key to the table:

• sym: Symbol of the underlying stock.
• strike: Strike price of the call that was sold.
• x: If marked, the option was exercised or assigned.
• return: Percentage return on the stock and option combined.

The overall return, which exceeds my 3% benchmark, relies on two big gainers. Without them, there would have been a 0.5% net loss.

One gainer, MCO, has been in my portfolio for several options cycles, and so had a good capital gain on the shares.

The other, GMCR, wasn't exercised, so the return represents the options premium, but with no offset from the shares (since I don't use theoretical losses in calculating my monthly returns). If the GMCR option had been exercised, then the gain would have been 1.6%.

My strategy for the October options was based on an expectation that the market would decline. I chose fairly deep in-the-money strike prices for my options. By deep I mean that I multiplied the 10-day average true range by four, and then selected the nearest strike price.

With that strategy, the big money comes from retained option premiums, and there are very small gains to be had if the options are exercised or assigned.

The market turned against me in October, rising far enough to ensure that all but one of my stock holdings would be yanked away at a moderately large loss when the options were exercised.

That I made a good return in a difficult market is a tribute to the money-making potential of covered calls.

One position, CNX, had quite a sharp loss, more than 14%. It commanded the smallest premium of the bunch as a percentage of share price: 13%. The other holdings ranged from 15% to 25%, with nearly half being above 20%.

The size of the premium matters -- a lot.

My insurance operations -- buying out-of-the-money puts to make up for declines in stock prices -- was moderately successful, adding 0.7% to the return, raising it to 4.5% overall.

However, I wasn't pleased with the insurance operations. I was buying deep out-of-the-money puts, because they are inexpensive, but that also limited the insurance plays because the options moved only 25¢ or so for each dollar the stock moved.

Also, I was managing entries and exits based on near-term price trends, which gave the whole operation a jack-rabbitty quality that felt pretty amateurish. I'm in the midst of drafting more coherent rules for insurance options and shall post those here, perhaps later today or, failing that, during the coming week.

Another critique: October straddled part of the earnings announcement season, and several of my holdings announced earnings while I held covered call positions. Although earnings surprises can be mitigated by insurance plays, the best strategy would be to avoid opening positions that have earnings announcements prior to options expiration.

That's it. I'm in the midst of formulating my strategy and analyzing prospects for the November covered calls, and I'll be posting a look ahead after I've completed that work.

About my trading methods

Read a detailed explanation of my analysis method, including trading rules.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

The trader’s greatest sin is inaction. Sleeper, awake! Seize the Nietzchean moment. Roll out of bed and trade.

10/24 Almanac

On Monday, Oct. 24: Chicago Fed national activity index.

There are 26 trading days before the November options expire, 54 the December, 89 the January and 117 the February.

On the jump, market stats, econ reports, and the trading calendar . . .

10/21 Covered Calls

This daily posting tracks my covered call plays for October and other base positions.

Today is the last day October covered calls can be traded. At current prices, the options on JNJ, MCO and GMCR will expire worthless, meaning I keep the premium and the shares. The rest will be exercised.

MCO is within 50¢ of the strike price. It will take only a small rise in today’s trading to put it in the exercised column.

Covered Calls

sym	phase	trend	adx		200/50	40/10
BIDU
CAR
CNX
COG
CVI
GMCR
HAL
JNJ
KEG
MCO
NOV
SPRD
TKR
TPX

BIDU drops to the Fibonacci 38.2% retracement level of the decline from Sept. 20 to Sept. 30.

CAR has paused at the Fibonacci 78.6% retracement of the decline from Sept. 16 to Oct. 4.

CNX is trading above the Fibonacci 61.8% level as it retraces the declines from Aug. 31 to Sept. 6.

COG is trading at the mid-range of a sidewinder channel that began Aug. 9.

CVI is dropping from near the ceiling of a sidewinder channel that began Aug. 1.

GMCR’s sharp decline has brought it to levels last seen in an extended sideways pattern last April. It is now trading near the lower boundary of a downtrend channel that began Sept. 20.

HAL has stalled at the Fibonacci 23.6% level as it retraces the decline from July 25 to Oct. 4.

JNJ is trading in the middle of a gently declining downtrend channel that began Aug. 31.

KEG has stalled at a Fibonacci 23.6% retracement of the decline from Aug. 1 to Oct. 4.

MCO has dropped below the floor of an uptrend channel that began Aug. 23.

NOV is trading just below both the 20-day high and the Fibonacci 50% retracement of the decline from July 26 to Oct. 4.

SPRD is trading in the upper third of an uptrend channel that began July 29.

TKR is trading at the ceiling of a sidewinder channel that began Aug. 9.

TPX has again broken above its 20-day high and pierced the ceiling of a sidewinder channel that began Aug. 19.

Other Base Positions

• None.

10/21 Indicators

The markets this morning...

Stocks

sym	phase	trend	adx		200/50	40/10
SPY
QQQ
VIX

SPY (S&P 500) is trading near the ceiling of a sideways channel in effect since within a sideways channel from about $123.54 to $112.25.

QQQ (Nasdaq 100) continues to bounce along an uptrending channel that began Aug. 9.

VIX (fear index) remains within a sideways channel that began Aug. 9.

Bonds

sym	phase	trend	adx		200/50	40/10
TLT
JNK

TLT (Treasury long-term debt) has paused just above its 20-day low. The 10-day moving average has mergd with the 40-day.

JNK (corporate high-yield debt) has resumed its rise after breaking below the uptrending price channel that began Oct. 14, moving above its 20-day high into bull phase. The 10-day moving average has mergd with the 40-day.

Tangibles

sym	phase	trend	adx		200/50	40/10
USO
GLD
JJC

USO (crude oil) is stalled above the downtrending channel that has been in force since May 2.

GLD (gold) continues its third week in a relatively narrow sideways trend.

JJC (copper) is trading within a sideways range as it retraces a decline from Aug. 2 to Oct. 5.

Global

sym	phase	trend	adx		200/50	40/10
UUP
EEM

UUP (U.S. dollar) is trading at the Fibonacci 50% retracement of the rise from Aug. 29 to Oct. 4. The 10-day moving average has moved below the 40-day ma.

EEM (emerging markets) is stalled after a breakout above a declining price channel that began Aug. 1.

10/21 Forex

USD/JPY dropped below its 20-day low before pulling back a bit.

GBP/USD rose decisively, breaking past its 20-day high and continuing the uptrend that began Oct. 7. The pair had been stalled for a week.

USD/CHF broke below the 20-day low, continuing a decline that began Oct. 6.

AUD/SGD broke above both its 20-day high and the ceiling of a sideways trend that has been in force since mid-August.

Four days ago, AUD/THB broke below the uptrend channel that began Oct. 4, and today the pair resumed its rise, but below and parallel to the old channel.

EUR/THB broke above both its 20-day high and a sideways channel that began in mid-September.

10/21 Almanac

On Friday, Oct. 21: Fedster trifecta.

This is the last day October options will trade. There are 29 trading days before the November options expire, 58 the December, 93 the January and 120 the February.

On the jump, market stats, econ reports, and the trading calendar . . .

10/20 Covered Calls

This daily posting tracks my covered call plays for October and other base positions.

Friday is the last day for trading October calls.

Covered Calls

sym	phase	trend	adx		200/50	40/10
BIDU
CAR
CNX
COG
CVI
GMCR
HAL
JNJ
KEG
MCO
NOV
SPRD
TKR
TPX

BIDU drops below the Fibonacci 50% retracement level of the decline from Sept. 20 to Sept. 30.

CAR has paused at the Fibonacci 78.6% retracement of the decline from Sept. 16 to Oct. 4.

CNX is trading at the Fibonacci 61.8% level as it retraces the declines from Aug. 31 to Sept. 6.

COG is trading at the mid-range of a sidewinder channel that began Aug. 9.

CVI is dropping from near the ceiling of a sidewinder channel that began Aug. 1.

GMCR’s sharp decline has brought it to levels last seen in an extended sideways pattern last April. It is now trading at the lower boundary of a downtrend channel that began Sept. 20.

HAL has stalled at the Fibonacci 23.6% level as it retraces the decline from July 25 to Oct. 4.

JNJ is trading in the middle of a gently declining downtrend channel that began Aug. 31.

KEG has stalled at a Fibonacci 23.6% retracement of the decline from Aug. 1 to Oct. 4.

MCO has dropped below the floor of an uptrend channel that began Aug. 23.

NOV is trading just below both the 20-day high and the Fibonacci 50% retracement of the decline from July 26 to Oct. 4.

SPRD is trading in the upper third of an uptrend channel that began July 29.

TKR is trading near the ceiling of a sidewinder channel that began Aug. 9.

TPX has broken above its 20-day high and pierced then retreated from the ceiling of a sidewinder channel that began Aug. 19.

Other Base Positions

• None.