October’s option expiration was this past weekend, and like last month, we had three covered calls in play that ended with this month’s expiration. Two of those got assigned (AIG and Intel) and one simply expired (Eastman Kodak), thus we did reasonably well in matching our maximum profit. But before I provide that summary, let me digress with a little summary of what we’ve learned so far in trading covered calls.
As a reminder, we’re doing covered call trades in our GI income portfolio for two purposes: first, to earn current income and second, to learn more about options trading and strategies. We believe that, in the long term, options trading could be a very good way to bump up our income while traveling, and could do so in a mostly passive activity sort of way. Which, after all, is what our Geographic Independence goal is all about.
We’ve been mostly focusing on covered call trading because, for one thing, our broker allows us to do it. Even though our GI portfolio isn’t a tax-advantaged, retirement account, most brokers still restrict the types of strategies you may use based on factors such as liquid net worth, years of experience in trading options, and the type of margin you have. In our case, TradeKing rates us at “options level 2” which allows little more than covered calls. Secondly, we’d been using that strategy because there is a lot of literature available (in books and on the ‘Net) recommending it as a good way to start trading options. I’ll admit, at first glance the risks aren’t too great from simply buying and holding the stock. However, as I’ve found out, you’re trading large potential upside for immediate income, which could also be thought about as insurance from minor losses. The net result is that covered calls aren’t the best strategy to use in a rapidly rising market.
Unfortunately, that is almost exactly what we’ve had since March. Which means that our GI portfolio hasn’t grown as much as it might have otherwise. On the other hand, we’ve learned quite a bit about options in the progress, so I’m thinking of the money we left on the table as if it were tuition. All in all, a pretty fair trade in my opinion.
So, how about that summary of our options expiring this month? As usual, I’m including the commissions we’ve paid and thus some numbers go out to fractions of a cent.
AIG & IKG JK: Critical dates and Summary
2009.09.25: Initial position: BTO 100 AIG @ $43.7095
2009.09.25: Sold call option: STO 1 IKG JK (Oct09 $37.00) @ $8.7037
2009.10.17: Assignment: STC 100 AIG @ $36.9495
Days position held: 22
Capital investment: $4370.95
Net Profit: $194.47
Percent return: 4.45%
Annualized yield: 105.90%
Note that, with the AIG trade, we aimed for decent profits while trying to protect ourselves as much as possible from a downward trend in the underlying. We were able to find a situation (mostly due to high IV) that earned a 100% APY but had a cost basis that would have provided some profit all the way down to $35.01 — a drop of 19.81% in the underlying. AIG never went below our strike during our holding period, though it did get close, so I’d say we got lucky. I was watching for an exit sign of a net credit quote near $33, but I never saw that come up.
EK & EK JA: Critical dates and Summary
2009.09.25: Initial position: BTO 300 EK @ $4.9265
2009.09.25: Sold call option: STO 3 EK JA (Oct09 $5.00) @ $0.30697
2009.10.17: Expired: 3 EK JA
Days position held: 22
Capital investment: $1477.95
Net Profit: $92.09
Percent return: 6.23%
Annualized yield: 172.60%
This EK trade was found using TradeKing’s option strategy scanner software with a focus on staying within my capital and looking for a decent risk vs reward situation. While my position ended with unrealized losses (EK closed at $4.27 on Friday), I may end up selling new Nov calls on it. Though, I may also cut my loses and sell out the position for a loss. I don’t have strong feelings about EK, so it primarily matters on what is happening in the market once it opens. Friday’s closing bid/ask midpoint ($0.175) for the Nov09 $5 call certainly isn’t all that attractive.
INTC & NQ JD: Critical dates and Summary
2009.09.25: Initial position: BTO 100 INTC @ $19.5195
2009.09.25: Sold call option: STO 1 NQ JD (Oct09 $20.00) @ $0.4139
2009.10.17: Assigned: STC 100 INTC @ $19.9499
Days position held: 22
Capital investment: $1951.95
Net Profit: $84.83
Percent return: 4.33%
Annualized yield: 101.89%
The INTC trade came about primarily because I’m still expecting a correction in the market, but felt, from my own experience in working in tech, that things there were going well enough to balance my fears of the correction. I was also underweight in tech exposure in all of my portfolios, so this felt like a good time to force myself to pay attention to the industry a bit more.
So, if we ignore unrealized losses, this month we brought in $370.89 on invested capital of $7,800.85. That’s a return of 4.75%, or an annualized yield of 116.11%. If we do end up having to sell out of EK for a loss, using Friday’s closing bid of $4.27, things would come down to $173.94 in income or 2.23%. An annualized yield of 44.18%. Oh, and this doesn’t include my experiments with short-term, long, put trades on AIG that I started this month. I’ll write about that a bit more soon.