August Option Investing – FAS Covered Calls

Thank you money management!  My position in FAS fell a little over 50% last month.  Below the all time high of 75%, but not exactly what I was hoping for either.

On the bright side, I was able to trade calls as the price fell, and reduce the damage a little.

While rearching trades last weekend, I noticed that FAS had calls that expired every week in August, and now there were calls expiring August 26th.  At first, I thought this was a typo…the calls were trading at 0.85/share for 1 week of time value, which is 50% of the premium I got in July (which was for 4 weeks of time value).

I decided to enter a trade and see what happened.  I was still sitting on my FAS shares, so I figured it was worth a shot.  Worst case, FAS skyrockets back to $25 and I miss a chance to recoup losses.  Best case, I just trade options every week on FAS and try to make as much money back as possible.

On the 22nd, I sold August 26th calls, with a $12.00 strike, for 0.85.  On Friday, my calls were exercised, mainly due to the rise in the banking sector after Buffet bought into Bank of America.  Now…do I follow Buffets lead and buy back into FAS?  Decisions, decisions.

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August Option Investing – EDC Covered Calls

As mentioned in recent money management post, I reduced my EDC position by 200 shares.   That’s roughly a $15/share loss (~43%).  By trading options as EDC fell, I was able to soften the blow by $5/share, leaving me with only a 34% loss on my overall position.

On August 22, I sold Sept. calls, with a $20 strike price, for $2.55.

August Option Investing – DRN Covered Calls

Hard to believe that last month we were discussing $76-$77 calls…needless to say, those options weren’t assigned.

I was right to expect large price swings on August.  and I’m expecting more of the same in September.  August premiums were ~7% of the strike price.  September premiums are ~12%.  Does this mean we’re in for an even wilder ride?  We’ll see.

On Aug. 22, I sold Sept 17. calls with a $43 strike price for $5.10.

August Technical Analysis – TMF

July Commentary:

As you can see in the graph, TMF has been range bound between $35 and $40 since May. It also looks ready to test the February uptrend again (as it did to kick off July’s trading)…looks like the current premium would cover a test of the $35 mark. The only issue with this fund is the corresponding option volume. During the month of June, only 64 option contacts were traded. Ideally, I want to see 1,000 contacts or more each month. With that level of activity, my trades are less than 1% of the total volume, which is sufficient liquidity to let me enter and exit my trades without influencing prices.

The option premiums were always lower than DRN, EDC and others, but price movement is less volatile too.

TMF isn’t range bound anymore! Talk about a surprise. The US gets downgraded by S&P, and you would expect that investors would start unloading US debt. Instead, demand for treasuries explodes, sending TMF through the $40 ceiling. What does that say about the situation in Europe?! I read a comment somewhere that even with all it’s problems, the US is the “least dirty shirt in the hamper”. Yikes.

August Technical Analysis – FAS

July’s Commentary:

I set a limit for my portfolio risk percentage at 5% or less  per trade, and the largest 1 month drawdown for FAS is 75%.  Those two figures work out to a position size of ~$5,000 or less. With the current price around $25 per share, it was one of the few leveraged ETFs with the liquidity AND option premiums I need to meet my cashflow goals.

Good thing I set a limit to $5,000 per share! I knew that FAS was in a downtrend…I just didn’t expect a massive acceleration. Live and learn. FAS already took out the near term low, so as with EDC, there isn’t too much in terms of support to discuss. There is some resistance around 15, but who knows when we’ll test that level again.

One the plus side, the FAS position was small enough that I don’t have to adjust my position size. FAS will be a good experiment. I want to see how long it will take me to break even, considering the underlying position has lost about 50%.

August Technical Analysis – EDC

July’s Commentary:

EDC passed through the short-term downtrend at $36, got back above the 50 day moving average, and then tried to take out the $40 per share level. In my opinion, EDC ran into some pretty stiff resistance, falling 15% in 3 days.

Technically, EDC is still range-bound between the low 40’s and low 30’s. Event-wise, the credit issues taking hold in Europe are not helping the emerging markets. If the up/down trend continues we could see a low of 30 before EDC heads north again sometime in late August.

A low of 30, huh. We may have seen that for 30 seconds or so. Short term resistance is now at 25, with EDC currently trading around 20 (which is awful close to the near term low). Don’t hold your breath…there isn’t too much (technically speaking) to hang your hat on at this point. We’ll see what happens this month, and hopefully September will have a little more info to go on.

On the plus side, EDC is still within it’s maximum 20-day price decline (%), so no need to adjust my position size based on volatility. However, I am tightening up my max loss rules portfolio-wise (I’m now using a max loss of $3,000 per trade, rather than 10,500). With it’s current price at 20, this means that I need to reduce my EDC position by 200 shares.

August Technical Analysis – DRN

Downtrend my foot…so far August has been a swan dive.

DRN sits well below the 50 and 200 day moving averages, with the 20 day leading the way down.

July’s assessment:

What a month! After finding support from the October uptrend, DRN shot back up and hit a new 52-week high (roughly a 30% move). This was one of those moments where I ask myself, “Why did I sell calls?”. But the market intervened, and DRN fell back to the mid-70’s. We’re now back to the 50/200 day moving averages, so it is anyone’s guess where we’ll be headed.

DRN sits $30/share below its price at July’s option expiration date (almost 40%). The August downtrend is pretty steep, so I would expect some moderation over the next few weeks as DRN tests the near term high around 55/share and fr a near term low around $36.

I also reviewed my position size, and it turns out that an adjustment is needed. DRN surpassed its largest percentage drop over a 20 day period (it was 34%, and now it sits at 54%). Since I downsized my position last month due to my uncertainty about where the market was headed, I only need to get rid of 100 shares.

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