Covered Calls: A difficult season

'Tis the season for covered calls! (Fa-la-la La-la-la and all of that.)

And a difficult season it is. The January calls expired Saturday, and I'm moving my money over to the February calls, which expire Feb. 17.

What's difficult?

First, it's a short options month, expiry to expiry -- 27 days rather than the ideal 30. So that's three less days of theta gain on the short options.

Second, it's an earnings month and a very significant one, since this is being thought of as the earnings season that determines whether the recovery is in fact catching fire. Earnings disappointments are certain to meet with strong reactions from traders.

Third, volatility is way, way low. The VIX, which measures the volatility of S&P 500, is at a pathetic 18.16% about 75 minutes before the close. At the start of last November, it was double that, at 37.53%. So the short options are returning much less than they were when volatility was higher.

My analysis over the weekend uncovered 11 stocks that I considered to be reasonable covered call plays. They are, in descending order of return (at the time of my analysis): LVS, ESRX, STX, LULU, CAT, DOW, AAPL, MYL, CBS, MON and LRCX.

(The return can change dramatically with market moves, so I always recalculate before trading.)

I didn't even bother to screen exchange-traded funds, which always have lower volatilities than stocks do.

My criteria are volume of around 3 million shares or more, price of $20 or more, an option premium of $1 or more, and a return, if the option is exercised, of at least 3%. I had to fudge the premium and the return in order to find any covered calls this trip out.

Also, I picked from a pool of stocks ranked buy or strong buy under the Zacks system, which is heavily titled toward analyst opinion.

I opened a few positions for my account today, and will leg in with a few more over the next couple of days. But honestly, it's arguable that traders will do better with instruments other than covered calls in the present environment.

It's also arguable that buying prior to Wednesday is pure foolishness. The Federal Open Market Committee makes its rates announcement on that day, Fed Chairman Ben Bernanke holds a news conference, and the FOMC members, for the first time ever, release their individual forecasts of future rates.

So the cautious trader will stand back until late or Thursday. My thought was that the FOMC's actions will most likely be surprise free, and that growing confidence in an economic recovery will continue to dominate, so I threw caution to winds. I shall soon find out if it was an act of sheer brilliance or one of total stupidity.


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.