Apple Jumps 3% Today, Re-establish Covered Call in LSO portfolio

As discussed here, CCI is long the Apple (AAPL) Jan $300 call as a stock replacement and intends to  write shorter term calls against the position.  CCI's primary thesis is that Apple's low valuation will provide a floor under the stock, but margin pressures from lots of worthy competitors will keep a lid on the stock. Hence, there is a good probability Apple will trade sideways for awhile, and this options strategy would capitalize on that situation.

  As discussed here just last week CCI closed the covered call position on Apple with the stated  intent "to add something like June $450 short call if the stock moves up a little more"

Little did I expect that Apple would cooperate and move up 3% today.  Hence today CCI re-initiated the covered call position. Specifically sold the June $460 call for a credit of about $5.00/contract.  Just as with previous covered calls likely scenarios include:

• Apple reversed and goes back down - oops. But this trade lowers the break even point and will provide the opportunity/time to continue this process to further to lower the cost basis.
• in the event that Apple surges over $460 by June expiration- CCI would be "forced" to take the leveraged 25% profits in the position.
• the stock continues trade in the same range as the last quarter - CCI will repeat this process to harvest more option premium.

Rolled QQQ Covered Calls Up and Out

The Index Covered Call (aka: ICC) trading plan 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: QQQ 

DESCRIPTION: Power Shares NASDAQ 100 

TRANSACTION TYPE: Roll

 

DESCRIPTION:   Late last week CCI rolled up and out the covered calls in this position as described below.

 

TRANSACTION DATE: Th. 4/26/13

Action: Buy to Close

Exp. Date:  Apr. 26, 2013

Price: $0.74 

 

Action: Sell to Open

 Exp. Date: May 3, 2013 (out an additional  week) 

 Strike: $69.50

 Price: $0.65

 

Net Debit: $.09/contract  after commissions

Closed Apple Covered Call

As discussed here, CCI is long the Apple (AAPL) Jan $300 call as a stock replacement and intends to  write shorter term calls against the position.  CCI's primary thesis is that Apple's low valuation will provide a floor under the stock, but margin pressures from lots of worthy competitors will keep a lid on the stock. Hence, there is a good probability Apple will trade sideways for awhile, and this options strategy would capitalize on that situation.

Apple reported earnings this week. They seemed about as expected.  The stock moved back up a little. Also, as would be expected, the volatility came out of the options.  Hence the May 10 $460 call that the portfolio was short moved down rapidly.  It was closed at $.33/contract resulting in a profit of $2.57/contract. 

For those of you keeping score at home, that brings the premium collected over three cycles of covered calls to  $8.50 over about 6 weeks.  That is a modest 2% gain against the base price of the stock, but a 6% gain via the leverage of the LEAP.   The intent is to continue this process harvesting premium until hopefully some day the stock price gyrates back towards $450. 

The portfolio does not currently have a covered call position in place, but will be looking to add something like the June $450 short call if the stock moves up a little more.  Stay tuned.

 

Rolled EEM Covered Call Up and Out

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: EEM     
 

DESCRIPTION: iShares Emerging Market Shares

 

TRANSACTION TYPE: Roll - Emerging market stocks bounced back a little over the past weeks, and the covered call was rolled out and up for a small debit as described below.

 

TRANSACTION DATE: Fri. 4/26/13

Action: Buy to Close 

Exp Date: April 26, 2013

Strike: $42.00 

Price: $.40 

 

Action: Sell to Open  

Exp. Date: May 10, 2013 (two weeks out) 

Strike: $42.50

Price: $.44

 

Net Debit/contract: $.04 after commissions

Re-estblish Covered Call in Citigroup

As discussed here CCI has a long position in the financial sector etf (xlf) via the Jan 15 $10 Call, that has usually been hedged via a shorter duration short call in Citigroup (C).


In the last post, the hedge position in Citigroup options was closed prior to earning for Citigroup and other financials.  With financial earnings season mostly in the rear view mirror and larger volatility risks diminished, CCI decided it was time to re-establish a very conservative hedge. Specifically, CCI sold the May 10 $48.50 call for a modest $.20/contract credit.   C was trading around $46.50 at that time.


According to option theory this option has less than a 20% chance of expiring in the money.  Conceptually, the two alternatives are

• the highest probability is that Citigroup will trade under $48.50 at/near expiration and this option will expire or be able to rolled out to harvest a modest premium. 
• less likely,  Citigroup will hit new highs in the next few weeks and this option will start to show a loss. In this situation hopefully that loss should be offset by a gain in the leveraged long ETF position. 
  

Rolled Apple Call Out and Down

As discussed here, CCI is long the Apple (AAPL) Jan $300 call as a stock replacement and intends to  write shorter term calls against the position.  CCI's primary thesis is that Apple's low valuation will provide a floor under the stock, but margin pressures from lots of worthy competitors will keep a lid on the stock. Hence, there is a good probability Apple will trade sideways for awhile, and this options strategy would capitalize on that situation.

Today, Apple stock fell to the $400 level. This is certainly not good for this leveraged long position but realistically within "normal volatility" for this type of position.  The movement in the stock price prompted CCI to roll the May 3 $475 call out to the May 10 $460 for a $1.69/contract credit.  The May 3 call trade netted a $2.74/contract gain.  As previously discussed, possible scenarios include:

• in the event that Apple continue downward - more pain. But this trade lowers the break even point by about another .5%, and will provide the opportunity/time to continue this process to further to lower the cost basis.
• in the event that Apple surges over $460 by May - CCI would be "forced" to take the leveraged 20+% profits in the position. Fyi, earnings on April 23 , so this type of surge is possible on good news. This position may need to be adjusted around the time of earnings.
• the stock continues bounces back into the same range as the last quarter - CCI will repeat this process to harvest more option premium. 

Apple reports earnings next week which will likely present opportunities to adjust this position again. 

Adjusting May Covered Call on Small Caps (IWM)

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 Down

A volatile week in the stock market created the environment to take some profits and adjust the covered call on small cap stocks as described below.
 

TRANSACTION DATE: Wed. Apr17 

Action: Buy to close

Exp. Date: May 18, 2013

Strike: $95

Price: $0.25

 

Action: Sell to Open

Exp. Date: May 18 , 2013

Strike: $92

Price: $0.99

 

Net Credit/Contract after commissions: $0.66

Rolled Bond (TLT) 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:  TLT   

DESCRIPTION: iShares Barclays 20+ Year Treasury Bond

 

TRANSACTION TYPE: Rolled Apr $119 Covered Call to May $120 Call

TRANSACTION RATIONALE:  As discussed  here another covered call candidate is the long term bond ETF.   US treasuries have been rising on a flight to quality.  Hence, this covered call was rolled at a loss as described below.

 

TRANSACTION DATE: Tues.  Apr. 16, 2013

 

Action: Buy to Close
Exp. Date: Apr. 20, 2013
Strike: $119
Price: $ 3.03 
 

Action: Sell to Open

Exp. Date: May 18, 2013

Strike: $120

Price: $2.73

 

Net debit: $0.35/contract after commission

Rolled SPY 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:  SPY   

DESCRIPTION: SPDRs S&P500

TRANSACTION TYPE: Roll the Apr $157 Call to the May $158 Call

TRANSACTION RATIONALE:  The market pull back today presented an opportunity to roll one of the ICC covered calls out and up as described below. 

 

TRANSACTION DATE: Mon.  Apr. 15, 2013

 

Action: Buy to Close

Exp. Date: Apr. 20, 2013

Strike: $157

Price: $.57

 

Action: Sell to Open  

Exp. Date: May. 18, 2013  

Strike: $158  

Price: $1.48 

 

Net credit: $.84/contract after commissions.

Rolled QQQ Calls Up and Out

The Index Covered Call (aka: ICC) trading plan 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: QQQ 
DESCRIPTION: Power Shares NASDAQ 100 

TRANSACTION TYPE: Roll

 

 DESCRIPTION:   QQQ continued to rise this week and CCI ran out of time and was forced to roll an option out and up as described below.

 

TRANSACTION DATE: Fri. 4/12/13

Action: Sell to Open

Exp. Date:  Apr. 12, 2013

Price: $1.30

 

Action: Sell to Open

 Exp. Date: Apr. 26, 2013 (out an additional 2 weeks ) 

 Strike: $69

 Price: $1.23

 

Net Debit: $.10/contract  after commissions

Rolled Apple Call in Long/Short Position

As discussed here, CCI is long the Apple (AAPL) Jan $300 call as a stock replacement and intends to  write shorter term calls against the position.  CCI's primary thesis is that Apple's low valuation will provide a floor under the stock, but margin pressures from lots of worthy competitors will keep a lid on the stock. Hence, there is a good probability Apple will trade sideways for awhile, and this options strategy would capitalize on that situation.

Today, with Apple trading around $432 CCI rolled the April 20 $480 call out to the May 3 $475 call for a $3.74/contract credit.  The April call trade netted a $3.20/contract gain. As discussed last time, possible scenarios include:

• in the event that Apple goes down - oops. But this trade lowers the break even point by about 1%, and will provide the opportunity/time to continue this process to further to lower the cost basis.
• in the event that Apple surges over $475 by May - CCI would be "forced" to take the leveraged 30% profits in the position. Fyi, earnings on April 23 , so this type of surge is possible on good news. This position may need to be adjusted around the time of earnings.
• the stock continues trade in the same range as the last quarter - CCI will repeat this process to harvest more option premium.

ICC Q1 Results: It was the best of times, it was the worst of times

It was the best of times:  Stock market performance was exceptional in Q1
It was the worst of times: As often stated in this blog, covered calls are anticipated to  make less in an up market, make more in a sideways market, and lose less in a down market.  The unaudited results for q1 2013 shown an under performance for covered calls for the markets that went up a lot in q1. However, the diversification of indexes used in the combined ICC portfolio provided a  lower volatility, decent, mix of results.


Index                Buy and Hold          Covered Calls            Relative Perf
SPY                        10.5%                        7.9%                         -2.6%
IWM                       12.2%                        4.9%                         -7.3%
QQQ                        6.1%                        6.6%                          0.5%
EEM                       -4.2%                       -0.7%                          3.5%
TLT  (bond)             -2.8%                       -0.8%                          2.0%

• A portfolio consisting of equal weighting of these ETFS (i.e. 80% equity/20% bond) results would be
•  4.4% for buy and hold
•  3.6%  for covered calls
• Q1 Performance for PBP the Powershares ETF for the S&P BuyWrite was 4.6%.  That was substantially less than the SPY or CCI's covered call approach.   I guess that is either because of the way the covered calls are managed and/or extra fees, but it is interesting how similar strategies can generate different results. 
• It would seem the 10-12% performance of SPY and IWM is an excellent quarter for a broad market index.  While the actual results of a covered call approach are impacted a lot by the volatility of the market in additions to its performance, it is hoped that this might be about as bad of under performance this approach will generate...but as they say "past performance is no guarantee of future results"
  

  
  

A Speculative Options Positon in Japan (EWJ)

Japan and their new aggressive monetary policy has been in the news recently. Let me be clear that CCI is not a currency expert or trader, and also is not bullish on Japan over the longer term.  However, common sense seems to indicate that a dramatic change in their monetary policy might create some speculative trading opportunities around the Japanese market.

CCI has most often seen the Wisdom Tree Japanese Hedged Equity ETF (dxj) as the recommended way to play this macro development. That made sense to me, and in full disclosure, I established a position in this etf in my core account awhile ago. It has indeed performed nicely.  It might have some more room to move, but I'll be inclined to take profits if  that trades gets too much more publicity and/or moves too much higher. I'd also expect the Bank of Japan to get international pressure to move slower, and hence the hedging aspect of this etf might become less useful in the future.

However, CCI was also looking for a more speculative way to have some leveraged exposure to the market in Japan in the event it continues to pop.   The following position was established over the course of this week.  Unfortunately, current conditions may not allow readers to establish a similar position, but hopefully it provides the reader some food for thought and/or awareness to consider establishing this type of  position if opportunity does represent itself.

Early in the week with the ishares Japan index (ewj) had a sell off and was trading around $10.50.  At that time, CCI sold the Jan 14 $10 put and bought the Jan 14 $11 call.  This was established for a modest $.09 credit/contract.   This risk reversal position was essentially a synthetic long position in the stock with a slight reduction in total risk capital and even less buying power consumed.  Fortunately, later in the week based on the actions of the Bank of Japan  EWJ jumped to near $11.  At that time CCI spread off both sides of the position by buying the Jan 14 $9 put and selling the Jan 14 $13 call for a $.04/contract debit. 

This leaves CCI with very little capital at risk, and a 2:1 speculative profit potential based on a significant move in  EWJ's price by the end of the year. (all gain/loss are per/contract)

• $8   (down about 27%) - lose $100
• $9   (down about 19%) - lose $100
• $10 (down about 9%) - make $5
• $11 (flat) - make $5
• $12 (up about 9%) - make $100
• $13 (up about 18%) - make $200
• $14 (up about 27%) - make $200

Now it is time to sit tight for awhile, and see how this settles out after the news cycle moves on.

Rolled EEM Covered Call Out and Dow

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: EEM    

 

DESCRIPTION: iShares Emerging Market Shares

 

TRANSACTION TYPE: Roll - Emerging market stocks fell this week.  Hence, the current covered call was essentially worthless and it was time to roll out and down the EEM covered call position as described below.

TRANSACTION DATE: Fri. 4/5/13

Action: Buy to Close 

Exp Date: April 12, 2013

Strike: $43.00 

Price: $.02

 

Action: Sell to Open  

Exp. Date: Apr. 26, 2013 (two weeks out) 

Strike: $42.00 

Price: $.28

 

Net Credit/contract: $.25 after commissions

Closed Short Call in Citigroup (C)

As discussed here, CCI has a long position in the financial sector etf (xlf) via the Jan 15 $10 Call, hedged via a shorter duration short call in Citigroup (C).

* * *  

As discussed in this post from March 23 CCI held the April 12 $44.5 call.  With today's pull back, especially in financials, CCI closed this position at $.14/contract.  C reports earnings on Apr 15, and CCI will wait until around that event before re-establishing the hedge portion of this trade

Since the position was established on Jan. 8 the approximate performance numbers are

• 5.4% - simply holding xlf
• 11.9% - holding the Jan $15 Leap (due to the increased risk/reward of the leverage)
• 12.8% - the combined long/short position described here

Obviously, this long/short position is performing as desired.  Superior returns with lower risk ...the holy grail! However, there is plenty of time left on the position (Jan 15) ...so anything can still happen.  Stay tuned.

Rolled IWM Covered Call Down and Out

he 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

Small cap stocks have stalled recently.  With this minor pull back, CCI rolled the covered call position to harvest a modest approx 0.6%  option premium. 
 

TRANSACTION DATE: Tues. Apr 2

Action: Buy to close

Exp. Date: Apr. 20, 2013

Strike: $99

Price: $0.11 

 

Action: Sell to Open

Exp. Date: May 18 , 2013

Strike: $95

Price: $0.97 

 

Net Credit/Contract after commissions: $0.78