Sunday, November 20, 2011

December Covered Calls

Three of my November covered calls expired worthless on Saturday. They are BIDU, LVS and RIMM. So I still hold the shares and will need to figure out how to place them for the December cycle.

Here is my planning for December covered calls in my own account, with the usual caveat: This is my planning, and everyone else should go do their own planning, and therefore make their own mistakes. Another caveat, the strike price and returns must be re-calculated before opening a position. I failed to do that for one November play, causing a small loss as tuition for that particular learning experience.

For December, I have selected at-the-money strike prices. I also did a calculation for in-the-money strikes by the amount of the average true range, with little difference in returns.

The at-the-money calculation provides a mini-max return whether the covered call is exercised or not. The in-the-money is skewed toward greater returns on the option premium, with no reference to the stock.

Here is a run-down of the universe from which I'll be selecting my December covered calls, with if-exercised returns rounded to the nearest percentage point.

My criteria for inclusion is that the stock be ranked strong buy on the Zacks website, that it be free of earnings announcements through December options expiration, that the combination of the premium and the if-exercised return be 5% or greater, and that the if-exercised and premium-only returns each be 2% or greater.

I give preference to stocks that are new to the Zacks top rank, to those having dividends during the December option period, and to those having lower price/sales ratios.

In the following tables, sym is the stock symbol, strike is the covered call strike price, prem is the return from the premium received from selling the call, and if-ex is the return if the covered call is exercised or assigned.

Monthly Positions

BC 17 3% 3%
DDS 49 3% 3%
QCOR 43 3% 3%
HAR 40 2% 3%
SCSS 20 3% 3%
SNDK 49 3% 3%
CTL 37 3% 3%
NTES 46 3% 3%
RL 145 3% 2%

Two stocks -- LULU and SIG -- were eliminated because of earnings announcements.

NTES and SCSS were added to the Zacks' top rank prior to October, which makes them a bit old.

QCOR has a price/sales ratio of 15 (!) and NTES has one of 6, which makes both very expensive on the market. The others round to a price/sales ratio of 2 or less.

Exchange-traded funds aren't ranked by Zacks, so selection is all about the percentages.

Exchange-traded Funds

UNG 7 5% 10%
XLF 12 3% 5%
SLV 31 3% 4%
XLY 37 3% 4%
XLV 32 2% 4%
RSX 29 3% 3%
FXI 35 3% 3%
VWO 39 3% 3%
EWT 12 2% 3%
EFA 49 3% 3%
EPI 17 2% 3%
XRT 51 2% 3%
EWZ 59 3% 3%
XLB 33 2% 2%
XOP 53 3% 2%
GDX 57 3% 3%
IWM 72 3% 2%
XLE 68 2% 2%

All three of my holdover stocks have weekly options as well as the standard monthlys.

In the monthly calculations, the returns on LVS alone fail to make the grade according to my criteria for new stocks. And all three holdovers are ranked too low by Zacks to be attractive. But, I own them, and so I've got to play them.

Holdovers - December calls

BIDU 125 4% 3%
LVS 45 2% 1%
RIMM 18 7% 4%

In addition, BIDU and RIMM have earnings during the December option period. One way to avoid that risk is to use weekly options, and skip covered calls for the earnings announcement week.

The returns on the weekly calls have been placed on a monthly basis in order to be directly comparable with the December options.

Holdovers - Nov. 25 weeklys

BIDU 125 9% 5%
LVS 45 7% 4%
RIMM 18 6% 5%

All three holdovers, assuming all the weeklys are played, meet my criteria for returns. However, with weeklys there is an increased chance that the options will be exercised or assigned, reducing the monthly profit.

All of the returns in this report are reduced by the amount of the trading commission and fees, and also by a tax rate.

I've assumed the following: $10 for each stock commission, $10.75 for each option contract commission, $20 for exercise and assignment fees, and a 34% income-tax rate, federal and state combined.

The actual impact will vary considerably from these assumptions, depending upon the brokerage and actual federal and state tax rates.

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