Rolled SPY Covered Calls

The Index Covered Call Trading Plan  (aka: ICC) is CCI's approach for managing a position of index ETFs and related covered calls.  The most recent trade against this plan is described below.  A reader can find details about the rational and management of the trades at the ICC trading plan tab on CCI's home page.

UNDERLYING ETF:  SPY   

DESCRIPTION: SPDRs S&P500

TRANSACTION TYPE: Roll the December $143 call to the January $147 call

TRANSACTION RATIONALE: With only two days until expiration and SPY trading above the Dec strike price it was time to roll this position.   The December option trade took a small  which partially offset the unrealized gain in the underlying (i.e. this strategy makes less when the market goes up)

TRANSACTION DATE: Thurs Dec 20, 2012

Action: Buy to Close

Exp. Date: Dec 22, 2012

Strike: $143

Price: $1.91

Action: Sell to Open

Exp. Date Jan 19,2013

Strike: $147

Price: $1.06

 

Net debit: $.85

CISCO Position Closed....Certainly a Winner

Frequent readers will recall that CCI has had a long standing trade on in Cisco (CSCO).  Specifically owning the Jan 14 $10 LEAP and writing calls against the position.  As discussed in this post from late November the last activity was to sell  the Dec $19 calls against this position.

With Cisco trading over $20 this week, CCI closed this position.  The trade benefited from the lucky timing ....(oops I meant my brilliant analysis) of establish the position when Cisco was trading around $16 and watching the stock run up 25% to $20. The leverage from buying the LEAP vs. the stock turned that appreciated gain on the LEAP to a sweet $55%.  The covered calls sold against this position muted those gains by nearly 10%.  However, writing those calls provided some downside protection to the position in the event that the stock had not moved in the right direction.

The closing of this trade marks the 4th time CCI has cycled through this type of position in Cisco. In total CCI has made a very, very nice 83% gain over about the last 20 months. 

Certainly a winner!

CCI currently has no position in Cisco.  If Cisco were to pull back we would consider re-establishing this  this type of trade in the future.

GMCR Straddle....Certainly Not a Winner

As discussed here,  in late November CCI placed a straddle on the Green Mountain Coffee Rosters (GMCR) prior to earnings.  To be a winner the stock needed to stay in the range of $20 and $36 after earnings.  Unfortunately for CCI, GMCR reported good earnings and its price blew past the $36 upper end options strike, the $37 break even point and over $40.  As the stock dipped back below $40 this week, CCI bailed on this loosing trade.

Overall the upper end of the trade lost about $2.40 per contract and the lower end of the trade made a modest $.30 per contract gain.  Combined that was a bad, $2.10 contract loss.  Fortunately, as originally discussed this trade was done for a very small amount as a purely speculative activity. 

 But still......certainly not a winner.

Rolled IWM Covered Call Out and Up

The Index Covered Call Trading Plan  (aka: ICC) is CCI's approach for managing a position of index ETFs and related covered calls.  The most recent trade against this plan is described below.  A reader can find details about the rational and management of the trades at the ICC trading plan tab on CCI's home page.

UNDERLYING ETF:  IWM   

DESCRIPTION: iShares Russell 2000

TRANSACTION TYPE: Roll the December $79 call to the January $84 call

TRANSACTION RATIONALE: With IWM having moved up since the sale of the December call the December option was moving almost in lock-step with the underlying (i.e. delta over 90) and hence this option was no longer effective.  This trade took the loss on the option trade which partially offset the unrealized gain in the underlying (i.e. this strategy makes less when the market goes up)

TRANSACTION DATE: Thurs Dec 13, 2012

Action: Sell to Open

Exp. Date: Dec 22, 2012

Strike: $79

Price: $3.95

Action: Sell to Open

Exp. Date Jan 19,2013

Price: $1.00

 

Net debit: $2.95

A Market Neutral Iron Condor in Apple

Market neutral positions that will profit in a sideways market can provide another aspect of diversification to a portfolio. With last weeks drop in the price of Apple (AAPL), some pundits have suggested this is a buying opportunity for this stock. Another alternative is to use this drop in price as a trigger to establish a market neutral position in Apple. The type of a position that will generate income in a sideways/neutral market, and hence nicely augment a larger portfolio.

With Apple trading around $535 last week one such trade was to

• Sell the Jan $495 put
• Buy the Jan $490 put
• Sell the Jan $580 call
• Buy the Jan $585 call

After commissions this iron condor trade would generate about a $240 credit per contract. That is the maximum gain on the trade, while the maximum loss is $260 per contract. That pricing indicates that conceptually there is just a little less than a 50/50 chance that the stock will be trading between essentially $493 and $582 by January expiration. Potential outcomes if held until expiration are:

• Worse case - the stock falls below $493 and the trade loses $260/contract. Basically, the hope is that buyers might be increasingly motivated to come in if the stock were to fall to below the $500 support level. Hence, the $495 strike is potentially a reasonable level at which to risk losing money.
• Second worse case - the stock rises over $582 and the trade loses $260/contract. The stocks 50 and 200 day moving average will likely be around this level in January. This will potentially provide resistance to the stock rising through this level, and make this a reasonable price at which to risk losing. Further, given its huge weight in the markets, if Apple was to rise this much, it is very likely other more traditional portions of a portfolio will be up as well. Hence losing this trade to the upside can be rationalized as kind of a portfolio hedge.
• Best case - the Apple bulls and bears keep an equilibrium on the stock, and it trades sideways ( in the $85 range between $495 and $580). This would result in a $240/contract winner!

Of course, this trade does not need to be held until expiration. If at some point time, (i.e. early Jan) the stock price happens to vacillate back near the $535 level there will likely be an opportunity to close this position before expiration for a smaller gain. This scenario increases the overall probability of success with this trade.