Trade: Eastman Kodak (EK) covered call

October 2nd, 2009 · No Comments

Continuing my series summing up my covered calls done for October expiration, the last trade done was against Eastman Kodak (EK).   I found EK as a result of using TradeKing’s option strategy screener, where the primary filtering criteria was to stay within the limits of the unallocated cash within our GI portfolio, and secondary criteria where profitability vs. risk analysis.

From the old days...

From the old days...

TradeKing’s option strategy screener is probably not the best tool you’ll ever find, but it is definitely much, much, much faster than screening by hand, and probably helps guide beginners (like me) quite a bit.  The tool’s proper name is the “RT Spread Scanner” and it describes itself as:

“RT Spread Scanner service is a professional tool for scanning equity option universe for profit
opportunities. It covers the most popular strategies, from plain naked or covered strategies and
conversions to more sophisticated spreads, straddles and strangles. Intuitive, but flexible interface
makes the service suitable for both novice and advanced users.

One of the nicest things I like about it is that while it launches from a browser window (It’s a Java applet), you can save, as local files, your screening configurations and results and then re-load them next time you need to launch the app.  Perhaps it is just that I haven’t used enough of these tools before and all brokerages offer such a thing?  But it sure is better than reconfiguring Yahoo and Google screeners each time.

That being said, I forgot to save the configuration I used when I found EK.   But as an example of what’s possible, here’s one I might use in the future:

  1. Set to use a short covered call strategy.  (Short means selling the call.)
  2. Show top 50 hits sorted originally by Risk/Reward ratio.  (“Less risky means low max risk to max profit ratio” and “We calculate 2 STD for profit and 2 STD for risk at expiry and use these as proxy for max loss / profit.”)
  3. Scan only DJIA stocks.
  4. Look only for options with next month’s expiration.
  5. The option strike should be near ATM, that is within +/- 10% of the latest trade.

The one critical thing missing from that list that helped me find EK was setting a filter for initial capital required and the number of options to plan for.  Obviously, I had 1 option and a fairly low capital requirement.  After manually screening the top 15-to-20 or so results (many of the top 50 were repeats of the same underlying with different strikes), I settled on EK as a good combination of risk vs. reward.  In the end though, because the stock was trading so cheaply, I was able to do 3 contracts instead of just 1.

Here’s a summary of the trade we completed.  As usual on this blog, I’m including the commissions I have been, or a forecast of what I will be, charged in these numbers and thus the values go out to fractions of a cent.

Critical Dates:
2009.09.25: Initial position: BTO 300 EK @ $4.9265
2009.09.25: Initial call option: STO 3 EK JA (Oct09 $5) @ $0.306967

Summary, if NOT called (static return):
Days position held: 22
Capital investment: $1477.95
Income received: $92.09
Percent return: 6.23%
Annualized yield: 172.60%

Summary, if CALLED at expiration:
Days position held: 22
Capital investment: $1477.95
Net profit if called: $109.19
Percent return if called: 7.39%
Annualized yield if called: 226.27%

I can’t say that I have a super strong feeling about the long term prospects of Eastman Kodak.  It has recently had a nice run-up that appears to have peaked, and I may end up riding downward.   Given the lowered capital involved, this seemed like a good way to force myself into exploring things that don’t cushion my mistakes by shooting upward.  A forced learning experience, if you will.  On the other hand, if it turns out well, its a pretty damn nice APY.

Tags: Options · Trades

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