Sunday, October 23, 2011

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.

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.


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.

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