Selling January Puts to Generate Income

With the market slumping into the holidays it seemed like another  potential opportunity to generate some income via selling some puts on stocks with higher implied volatility. This article at seeking alpha describes two potential trades in January options for Walgreens (WAG) and Corning (GLW).

HPQ - Continuing to Trade the Range

Hewlett Packard traded back towards $26 with this week's market pull back.
It looks extremely like the Dec $28 covered calls will expire tomorrow resulting in a $1.56/share profit which continues to take a bite out of the loss on this trade.

CCI continues to beleive HPQwill be stuck in a trading range for awhile.  Based on that belief, CCI reestablished a  ratio call spread.  Specifically bought one lots worth of Jan $26 calls and sold 2 lots of Jan $28 calls for a non-materiel, net credit.    Hopefully, CCI will be right and HPQ will drift back toward $28 and we can harvest option premium gains.....again.

CISCO - Closed Covered Calls

The market and tech stocks continued to get hammered today, and CSCO fell back under $18.  CCI used this "opportunity" to closed the Jan $19 CSCO covered calls.  Made a $.51 profit on this covered call trade.  The portfolio continues to be long the Jan12 $10 calls.  Will look to exit or roll these calls if/when CSCO rebounds.

2012 Sector Plan

The end of the year often provides the catalyst for investors to  adjust their portfolio via tax loss harvesting and general rebalancing. While performing these activities, one key consideration that drives  the performance of an equity portfolio of  is sector allocation.   A great  illustration of this point can be found at S&P's spdr website which states "Sector returns can vary widely – over the last 10+ years the average difference between the best performing and worst performing sectors has been more than 40% per year."

Clearly this gives a good indication of  how important it is for an investor to consider sector allocation. 
In that regard, CCI spent some time thinking about sector allocation for 2012 and documented those thought in the following more general opinion article
http://seekingalpha.com/article/313449-sector-weightings-what-is-the-right-benchmark-for-you

MMM - Rolling Calls Again

MMM pulled back towards $80 with the overall market today.  CCI took the opportunity to roll the Dec $77.50 calls out to January $77.50.  Net credit after commissions was $1.45 or 1.86%.  Nothing too exciting here, but we have been able to squeeze out modest gains via option premiums while the stock continues to go sideways.

Intel - About those Covered Calls.

What a difference three days makes. INTEL  was trading at $23.30 on Monday and near $25.00 today. Not sure that anything material has changed in the fortunes of the company, but if Mr. Market can change its mind so quickly, "rationally" and "efficiently" so can CCI....lol.
 
After buying back one  lots worth of $25 calls on Monday, sold one lots worth today.  CCI decided to go all the way out to February this time for a few reasons. 

• The premium of $1.25 ( 5%)  driven by an IV of 28 seemed significant enough to pursue.
• This date is after the next earnings announcement and x-dividend date both of which could shrink volatility.
• The overall portfolio already has several Jan option positions and wanted to start to create some date diversification.

Scenarios

• The stock rockets upward. One lot of the position will be called away at an effective price of $26.25 and the remainder of the lots owned will be up quite nicely.
• The stock retraces some of its recent gains or just stall out around this level, and there should be an opportunity to harvest some of this premium in the near term.

Boeing - Takes Off - Mid course Correction to Options

Boeing (BA) was up about 4% today and about 15% this week to over $70.  Possible "explanations"  include rumors of a new large airplane order, favorable union relationship developments, etc.

CCI has not special insight to these moves, but while remaining bullish in Boeing, it seemed prudent to try to take advantage of this rapid upward move in some way.  So, we decided to cover the $50 Jan 13 put sold in late September to reduce the capital requirements and downside risk of the position.  The September transaction was documented in the last Boeing post here.    The  summary of that transaction was the Jan 13 $50 puts were sold to finance the purchase of Jan 13 $65 puts.

Overall the timing of that transaction was great.  The trade was put on for a $.50credit/contract, the call is currently up nearly $6.00/contract and the puts are in the money by about $3.50/contract.  That is a total of $10 gain/contract.  The worse case risk capital required was $50 so that is a nice 20% gain.   

With today's move, we considered just taking the profit and waiting for a pull back to re-add a lot.  However, we decided to keep the $65 Jan 13 call as platform to sell some shorter term covered calls against to try to milk some more profit from the trade.  So today we covered the Jan 13 $50 put and sold the Feb $75 call.  This cost us $1.21/contract of the profit made to-date.   If the stock continues to rise we would have better off just closing the lot, but we are anticipating that some sort of consolidation will occur in the next weeks and there will be an opportunity to harvest some gains from this covered call.

ANR - Let's Try That Again

Alpha Natural Resources (ANR) was up a "modest" 14 % today to nearly $24.  Of course that is after an even larger percentage fall the weeks prior. Yet another example of "rationale/efficient" markets.

Readers will recall our last activity in this stock was to establish a Nov $23-$25 1 by 2 ratio call spread for no cost against one of the lots of stock held in the account.  If you need  a refresher on that activity it is documented here.   The stock had bounced back nicely towards my price target of $25-$26.  It looked like this strategy had worked perfectly.  However, the stock reversed right before expiration,  and the trade expired with no impact on the p/l.   Rats.

With today's gain and my calculations of adjusted, tangible book value still over $25, CCI put on the same trade for December options.  Specifically, bought 1 lot of Dec $23 calls and sold 2 lots of Dec $25 calls for a net debit of $.09 after commissions.   Obviously we need the stock to stay over $23 to make money and the best case is for it to climb over $25.    With the way this stock moves that can happen very quickly.

Stay tuned.

Intel - Bought Back Covered Calls

Intel (INTC) traded back around $23.30 today.   I read a few things that attempted to  tie the fall in price to some analyst concerns about the impact of flooding in Thailand on Intel.  Flooding may or may not be a short term impact, may or may not be a longer term impact, but CCI took it as an "opportunity" to close the previously established Dec $25 covered calls at $.16 including transaction costs.  Profits on these calls will boost returns on one lot of Intel by a modest 1%. 

Still bullish on Intel. Will look to  re-establish a covered call position if the stock moves back up to provide a smidgen of protection for the position.

Downgrade Portfolio - Thanksgiving Status

CCI has been busy with Thanksgiving holiday travels and hence only watched last week's market train wreck from afar. I thought that a good way to get back into the mood of the markets was to do an end of November review of the “downgrade portfolio” a few days early.

Readers will recall that about the time S&P downgraded US debt in early Aug, CCI put some dry-powder to work on the simple assumption of “buy when others were fearful”. The specifics of those trades and update status can be found at this google doc and are described below under the trade status heading. 

Overall, this basket of 9 diverse positions is essentially at break even.  Up .2% to be exact. With last weeks drop the S&P is also at basically break even over the same time frame. Certainly nothing too spectacular to report, but the mix of results may be illustrative for readers.

• 4 trades are closed at gains of 0.9%, 5.5%, 9.1%, and 4.6% respectively
• 4 trades are open with current gains of 3.9%, 7.7%, 4.5%, and 1.4% respectively
• 1 trade is open and currently down 22% percent. Down 8% last week while I was out..ouch
  
  

Frankly, this distribution of trades disappointingly represents classic problem with more active trading where big losers overwhelm modest size winners in a portfolio. Most observers would say that, CCI should have cut losses in the the loser earlier. Certainly true, and I do currently have “traders remorse” over not selling the position earlier. However, this also represents the only position of the nine that did not have an option oriented, hedge associated with it. So I really, really have a severe case of “hedgers

remorse”. There was plenty of opportunity to lower the cost basis in this stock via covered calls that were not taken. I will try not to let that happen again too often, and it is good lesson for readers to think about having hedges in places. (especially while taking time off and not watching positions)

Oh well, overall this portfolio is tracking the market so certainly not a terrible situation.

Trade Status

Bank of New York (BK) is down 22%. CCI felt this somewhat different banking stock might behave better than most other financial services stocks if the sector was once again hit by a wave of selling. Instead it is under-performing the poor performance of the financial sector. I will have to do a little digging to see what the rationale for that might be. While doing that fundamental research, hopefully $18 will hold as the chart support level. (Yes...hope can be a strategy...lol)

Three long positions and associated covered calls

Ford (F) - Bought a lot of stock at $10.18. Sold and then subsequently covered a lot of $11 Sept calls against the position for a gain of $.35. Did the same thing again with November $11 calls for a gain of $.49.

After last weeks sell off the stock is trading at 9.75. With option premiums collected to-date the break even on the position is $9.34. Still generally bullish on Ford at these prices. Willing to hold for awhile longer and re-establish yet another covered call position on any bounce.

Waste Management (WM) - Sold Aug $30 puts for $.70, and the stock was put to us at an effective purchase price of $29.30. Closed trading Friday at $30.31 for about a $1 capital gain. Over the past months, sold calls against the position for a $.63 gain and collected a $.34 dividend. Overall the position is up 7.7% and the stock goes x-dividend for another $.34 (1.1%) this week.

Will likely look to establish another round of covered calls on a bounce.

Utilities ETF (XLU) – Originally bought the etf at $31.72 and sold Jan $32 calls against it for $1.23.

The intent was for this conservative group of utility stock to stay stable through the end of the year and pocket both the option premium and two dividend cycles. The etf close trading today at $34.85. The original plan remains in place. We plan to hold through the dividend cycle and assuming it is still trading above $32 will likely exit the trade at near a 7% gain.

Four short puts trades were made. All were closed for a profit..

• Japan ETF (EWJ) $9 put – closed for a profit of .9% in a little more than a week.
• Health Care Sector (XLV) Jan $29 puts – closed at $.39 for a gain of 4.6% in about 2 months
• Bank of America(BAC) – first the Sept $7 puts and then the $6 Oct. puts for a gain of 5.5% in about 2 months.
• Corning (GLW) – Initially sold Oct $13 puts for $.75 cents. Those expired worthless and put the same trade on for $13 puts in November for $41 cents. Covered that position after the earnings move at $.08 for a gain of $33. In total $1.08 (9.1%) gain in about 3 months.
  

Materials ETF (XLB) – As previously described. Initially the Dec $31 puts were sold and those proceeds were used to buy the Dec $34 calls. Zero out of pocket costs. When XLB was trading higher we were able to finance the covering of the short Dec $31 puts by selling the Dec $37 calls. Received a very small credit. In option language, that was starting with a risk reversal and converting it to a vertical call spread. In common sense language that was risking less ($31) to now have a can't lose shot at making $3 or about 10%.It is nice to be sitting in a place where we are now essentially playing with the houses money.

XLB has fallen off the cliff this week. Down to $31.40. At this time, it certainly looks like this shot at a larger gain is going to expire worthless, but who knows. With these option strikes now 10% out of the money, will be looking for ways to re-position the strikes or exit the trade.