Conservative Moves

by Jeff on March 4, 2010

No, I’m not talking about politics (don’t even get me started!). It’s really about some rolls and changes I did on the Conservative Account and why I did them. Here’s the detail… (also click on the Conservative Account tab for trade detail)

Kraft (KFT)

Many times during my days of trading Buy/Writes (Covered Calls), I would have my short Call exercised early. Most of the time the reason was the DivEx date, which is the date that you must be holding the stock in order to collect the next dividend. When that date is close to expiration and the stock is ATM or ITM from your short Call strike price, there’s a good chance the person holding your Call will exercise it if the time value is low or almost non-existent – especially if it’s less than the dividend.

Normally, in my Buy/Write World this is fine with me – I just book the profit a few days early. But when I want to hold on to the stock I need to do something to avoid possible assignment and having my shares called away.

Kraft has not notified the world about their DivEx date yet, but 3 months from the last one is around mid to late March with payment the first half of April. This could put their DivEx date prior to my existing MAR 29 Call 3/19 expiration date.

As a safeguard, I decided to roll the MAR 29 to APR 29 and take an additional 20¢ credit. Then, when the dividend is paid in early April, I collect another (est) 29¢ for each share for a total cash gain on this move of $98. Makes me wish I had a couple thousand shares!

NYSE Euronext (NYX)

This is a slightly different story. In the last week this has blown past my Naked Put at 26 and is currently at 28.10. Their DivEx date is 3/11 and I want to own the stock on that date, so here’s what I did:

I bought back my short Puts for 13¢ for a realized gain of 56¢. Because of day trading rules in an IRA, I have to wait for tomorrow for the second part which will be a Buy/Write to buy the stock and sell APR 28 Calls for (around) 95¢ and collect the dividend of (confirmed) 30¢ for a total of (est) 1.25 on this trade. Of course, the picture may be different tomorrow and the dividend may be already priced into the stock, but I still plan to do some sort of Buy/Write tomorrow anyway.

If you are interested in Covered Calls, don’t forget to check out CallWriter’s services and lists.

AT&T (T)

Thanks to its flat price, my calendar spread is starting to make some money: ⋲$5 as of today. Woohoo!

February Results

Last but not least (well, it is something but not much) I have updated the Closed 2010 page with the February monthly results. Not a lot to brag about there, but I am still beating the S&P 500.

Coulda/woulda/shoulda subject: PCLN. I back tested it and if my rules didn’t state NOT to hold through earnings we would have made over $1,200! :(

“Well Tonto, looks like we are surrounded by Indians.” “What you mean ‘We’, Kemosabe!”

Spread Account

This week I adjusted AMZN and OEX to account for the recent Bull moves on both of them. The adjustment did cost me some capital, but it put the price into the middle of my risk tent and still in line to make some nice change.

I may have to make an adjustment on GS too, since it’s almost at the break even.

◄ Jeff ►

Tagged as: buy-write, Call Writer, Covered Call, Naked Put, options

  • Decker
    Hello Jeff, my name is Sean and I happened to stumble upon your videos on youtube which directed me here. Although I have a little over a year of stock trading experience, I'm an options novice. I only started trading them since last week, starting simply with holding ITM Calls or puts (around 2-3 months out) for a few days and I've been making some encouraging progress. I plan on moving into hopefully more enticing income generating set ups like bull put spreads, naked puts and covered calls once I get more comfortable with the options environment.

    My first big shock and worry with options is the time and uncertainty involved with having your orders filled. I attach a stop and limit orders to my trades yet it's hard to tell if an order will execute despite having the trigger value within the bid/ask spread. Maybe I'm just spoiled with having fast fills on my orders when dealing with stocks. Is this relatively normal for options or am I just choosing options with poor liquidity? What advice would you give or what materials would you suggest I read? [Eating the bid/ask spread too often leaves a bad taste in my mouth].

    Again, thank you very much for taking your time to put your knowledge on the internet. I will be coming here often to hopefully bolster my education and eventually, income.

    Yours Sincerely,
    Sean
  • Sean,

    Welcome to the Option Guru's blog. You seem to be experiencing many of the same things I did when I started out. I would like you to answer a few questions but first here is some general information you could use:

    To get the best price you need liquidity. You should not trade any options that don't have at least 500 Open Interest at your strike. I used to run scans and ended up trading stocks with low volume, low open interest and very wide bid/ask spreads. Stay away from those. I have a watch list that I exclusively use for all my option trades - all of them very popular, more volatile than the market average and heavy trading on options. My list is about 50 securities, ETFs and a few tradeable indexes.

    If you are just doing Calls and Puts right now, then you should look at strikes with a delta of at least ±0.80. This will give you the most movement in relation to the underlying. It also means you will probably be deep ITM and it will cost you a bit more, but it will be worth it.

    As soon as you can, start to 'practice' with spreads. Although they limit your gain, more importantly they limit your risk. There is no magic book or seminar or set on-line courses that will make you a good option trader. Only time, practice and documenting what you are doing and analyzing the result will do it. My two favorite authors are Jeff Augen for the mechanics and Mark Douglas for the psychological. Both have authored several books in their field.

    Questions:
    1. Who is our broker? I have used InteractiveBrokers, optionsXpress and thinkorswim - all give me almost instantaneous fills if my limit is reasonable. InteractiveBrokers often gave and additional price improvement.
    2. When you say stop and limit order, do you mean on your entry order?

    Let me know as soon as you can.

    ◄ Jeff ►
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