March Option Investing – EDC Covered Calls – Update

Increased March income today with an EDC position (40.14/share) and sold calls ($40.35 April Calls @ $1.70), based on EDC’s break above the short term (Jan – Mar) downtrend and recent strength in the general markets.

Actually, I wanted to pull the trigger last week. But with the general markets still in a correction (with confirmation from my timing program), my rules prevented me from adding to my position.

Gross Cashflow: ~$340 USD


March Paper Income – EDC Dividend

Direxion Daily Emerging Markets Bull 3X Shares (EDC) announced a short term capital gains distribution of $.64151 and a long term capital gains distribution of $0.01095 per EDC Share. The record date is March 22, 2011; payable date is on March 29, 2011.

March Option Investing – EDC Contract Adjustment

Effective March 22, 2011, EDC announced long and short term capital gains distributions to shareholders.

Those of you following the option chains may have noticed that the strike prices also changed.

Per the Options Clearing Corporation, EDC strike prices were reduced by .65246, rounded to the nearest penny.

March Option Investing – EDC Covered Calls

My small EDC position made it through the month. I’m still hedging to the downside though.

I did not enter orders before the market open (as I did with DRN). EDC is more liquid, so the spreads are not as high and that creates smaller arbitrage opportunities. Instead, I basically upped the strike price from last month by $1, selling $36 April calls for $2.30.

For those of you keeping score, that’s about a 10% reduction in premium from last month for at the money calls.

Gross Cashflow: ~$460 USD

March Option Investing – DRN Covered Calls

With DRN shares in hand, I entered $62 calls before the market open. Sometimes, there are open orders that people forget to close or entered incorrectly before the weekend. A properly set limit, along with a little luck, and you could be awarded a nice arbitrage bonus in the form of a few hundred dollars.

I entered sell orders for $62 April calls with limits at $3.50 and $4.00. I did not plan on the nice little bump in the markets today, so my 3.50 limit order got executed almost immediately. My $4.00 limit executed by the end of the trading session. Not exactly as I planned, but no complaints here.

Granted, I could have waited, sold $63 calls and captured another dollar of capital gains. But that defeats the purpose of trading for income and cashflow. Since the overall market is in a downtrend, a little extra downside insurance is a good thing.

Gross Cashflow: ~$2250 USD

March Technical Analysis – DRN and EDC

All of my options expired over the weekend, although EDC tried its best to get above the $35 dollar make and help me out. The good news is that by hanging onto my shares, I did not have to pay any commissions.

With the market in a correction, now is not the time to double down or buy new positions. My rules for selling covered calls change slightly in order to hedge against losses.

I default to strike prices below the current market price (“in-the-money”). This should give me downside protection (i.e. the premium from the option will offest some of the losses if the market price continues to drop), while still providing some upside if DRN or EDC decide to rise in price between now and April 15.

Since the goal is to create income regardless of market conditions, I will still enter trades this month. Lets take a look at my underlying positions:

DRN is still in an uptrend, but testing longer term support levels.

EDC has moved sideways for most of 2011, and broke some key support levels recently.

Right now, I’m looking at $60 strikes for DRN and $34 strikes for EDC. As always, I will be opportunistic. If there are greater profits from higher strike prices or arbitrage opportunities, I’ll pull the trigger.

Market In Correction (via Invest Safely)

With all the volatility in DRN and EDC this week, I figured something was up.

Needless to say, with the market in a correction, I have a feeling my options will expire (which is the good news).

The bad news is that I actually wanted them to be exercised so I could try something a little different in March-April.

I've been traveling this week…so wouldn't you know that the market decided it was time to make a change. Another reason to practice safe investing; you don't have to be at the wheel every single second. At the end of the trading day on March 7th, market action dictated that we have entered a correction. Sure enough, "The Big Picture" column in IBD started with the headline "Stocks Fall as Market Picture Worsens". The column went on to say:The c … Read More

via Invest Safely

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