Trade: Intel (INTC) covered call

September 29th, 2009 · No Comments

Last Friday, I initiated three new covered call trades using our GI portfolio.   I’m getting more and more nervous that we’re going to have a downward correction soon, but I decided to gently push things one more time for October expiration given that it was only 3 weeks away.  I also decided to purposefully try exploring a few different situations in making covered calls.

How many of these can Intel "flip"?

How many of these can Intel "flip"?

The exploration decision really came about because I came up empty after doing my now typical scan for a Dividend Aristocrat or Dividend Achiever that was likely to pay a dividend prior to October expiration.  The time premiums on everything that fell out of my screen were just quite low, with quite a few coming under a 1% return for near-the-money calls.  I didn’t find anything over a 2% return that also didn’t have a huge spread between strike prices, i.e. anything where I felt the gap could be overcome by expiration, or where the premium from the call decently covered the fact that I’d have to sell the underlying for less than I had bought it at.

On the one hand, I took this as a sign that the market thought prices weren’t going to move much over the next 3 weeks.  After all, option prices are related to volatility, so if prices are low than the market is predicting volatility to be low too.  Thus, I should perhaps tame my worries about a near-term correction.  But then I had two following thoughts.  First, most of these stocks I was looking at had fairly low options volume, so it’s quite possible the pricing numbers I was seeing were skewed from reality.  Second, why should I blindly trust the market consensus?  Perhaps the low premiums are a sign that, as a newbie, I should sit this month out and see what happens?

On the theory that I learn best by having some skin in the game, I decided to search elsewhere, but keep my bias toward being conservative.  I next checked over at the latest week’s posting on ETFCoveredCalls.com but didn’t find anything I felt too good about trading there.  For one thing, I was looking prior to the weekly Friday post and thus looking at things at least a week old.   Second, I’m still not feeling comfortable with most of the leveraged ETFs, nor with a number of sector ETFs, and these are what make up the majority of the top listings.

Instead, I decided to try my hand at searching through the tech industry for opportunities, starting of course with some of the larger companies in that space.  It didn’t take long until I found myself being interested in a situation with Intel.  This was primarily due to my own feelings about how the industry is doing recently (I work in tech), analyst forecasts of INTC increasing EPS for the rest of 2009, corresponding analyst buy recommendations, a forward P/E exactly at industry standard, and a lack of much tech exposure in our other portfolios.   All of which balanced out some of the volatility the market is forecasting, thus helping me feel confident that INTC could bridge the few dimes to the next strike.  And stay above that mark at Oct expiration.

Here’s the summary of the trade so far.  As usual, I include the commissions I’m paying at TradeKing and thus some numbers go out to fractions of a penny.

Critical Dates:
2009.09.25: Initial position: BTO 100 INTC @ $19.5195
2009.09.25: Initial call option: STO 1 NQ JD (Oct09 $20) @ $0.4139

Summary, if NOT called (static return):
Days position held: 22
Capital investment: $1951.95
Income received: $41.39
Percent return: 2.12%
Annualized yield: 41.64%

Summary, if CALLED at expiration:
Days position held: 22
Capital investment: $1951.95
Net profit if called: $84.49
Percent return if called: 4.33%
Annualized yield if called: 101.99%

Keep in mind, because I’m still leaning conservatively, I’m not swinging for the fences here (at least I don’t think I am,) but instead am looking to capture a decent gain while minimizing losses.  Thus I didn’t go for a higher strike on INTC, where I’d end up with a higher cost basis as well.   With my entry, I’ve actually lost nothing (but commissions) if I can get out before INTC drops below $19.11.   While this means I need to watch INTC fairly closely over the next 3 weeks, I’m also investigating how to place triggered trades at TradeKing to see about buying back the call.  It looks like I can easily place a contingent order on NQ JD’s ask dropping below a threshold I set, but I can’t seem to figure out how to have that trade also trigger a STC of the underlying.

Tags: Options · Trades

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