November Option Investing – Covered Calls

The markets showed surprising life today, and I decided to put a little more money into my option plays before the end of the month.

DRN was a little too far above the 50 SMA, so I decided to leave that position alone. And TMF is going to continue to fall as long as the market rallies, so I’ll buy back my options when they’re cheap enough.

      EDC – Shares at $21.47 / $22.00 call @ $1.60
      ERX – Shares at $53.05 / $53.00 call @ $4.28
      FAS – Shares at $15.56 / $16.00 call @ $0.60 (These calls expire Nov. 4th)

November Option Investing – Covered Calls

Markets are still in an uptrend, so I’m back in…not so sure I should have been out, but I’ll cover that later in October’s cashflow report.

My EDC calls were exercised over the weekend, leaving me with only my TMF position. With the markets marching higher today, buy/write orders were fairly easy to execute, with the exception of TMF. Here’s where I ended up:

    DRN – Shares at $49.26 / $49.00 calls @ $4.26
    EDC – Shares at $18.23 / $19.00 calls @ $1.52
    ERX – Shares at $47.80 / $48.00 calls @ $4.86

Update-October 25th

    TMF – Existing Shares / $60.00 calls @ $4.50

I also purchased FAS, with the expectation that selling options every week will create a great stream of paper income. Using today’s premium, a back-of-the-napkin calculation for 4 weeks of trades is a whopping 20% return.

    FAS – Shares at $14.09 / $14.00 calls @ $0.71 (These calls expire Oct. 28th)

October Technical Analysis – DRN, EDC, TMF, FAS, and ERX

For those of you visiting for the first time, I use technical analysis to help make trading decisions related to a covered call strategy. Each month, after options expire, I review price and market action since the previous option expiration date, as well as my commentary.

As I say in my monthly cashflow report, every investor and trader should review their trades on a regular basis, and this effort helps me improve my ability to “read the tape”.


P.S. This month, I decided to use one post for all the analysis. Let me know if you like it this way, or if individual posts are better. Thanks!

October Technical Analysis for DRN

Here are my thoughts on DRN in September:

I assumed DRN would break through the $55 or the $36 floor “soon”. The catalyst for either move being Fed action/inaction. We didn’t pierced the $36 floor last week. Unfortunately, I don’t see much support above the $30 level. We’ll have to wait and see what Monday/Tuesday have in store for us.

October’s Chart:

Price Chart for DRN through October 2011

You can see in the chart that DRN did take out the August low of $36 and found support near $30 per share at the beginning of October. Since then, DRN rose 50% (!), retaking the 50 day moving average on Friday.

DRN is showing strength in the short-term (by retaking the 20 SMA and breaking the trendline) and mid-term (by retaking the 50 SMA). The next point of price resistance looks to be the high $50’s. With the markets in an uptrend (per IBD), I will execute November covered calls using DRN for October cashflow.

October Technical Analysis for EDC

September’s commentary:

As of last weekend, EDC was still in a long-term downtrend, but looked like it had found short-term support around ~20.00. The next price support is around $5.00 (!), which was set back in early 2010. We’ll have to wait and see what Monday/Tuesday have in store for us. Hopefully, we won’t see a reverse split anytime soon.

October’s Chart:

EDC Price Chart through October 2011

EDC couldn’t find it’s footing at the $20 level, but didn’t sink to $5 either. The short-term trend looks good, and the downtrend line was broken, but we’re still looking for EDC to retake the 50 SMA. $20 is the new resistance level, but November calls look to be a good play for EDC since the general markets are in an uptrend. That said, Europe is still a wild card, so I will keep my position small.

October Technical Analysis for TMF

There was no technical analysis for TMF last month. The last time I traded TMF (July 2011), it was range-bound between $35 and $40. After my calls expired in mid-August, TMF was trading in the 50’s. I was waiting for the price to establish some sort of trend (other than straight up). That support was established in the beginning of September. I missed that signal, and then decided not to trade in September. The rest is history.

October’s Chart:

TMF Price Chart through October 2011

Earlier in the month, TMF took out short-term support (20 SMA) as it came back from a high of $80 per share. On Friday, TMF broke mid-term support of the 50 day moving average. With the 200 SMA around $40 and the next level of price support at that same $50 mark, I will not increase my TMF position for October cashflow using November calls at this time.

October Technical Analysis for FAS

I also did not have any technical analysis for FAS last month. A few months ago, I used FAS as a way to generate the few hundred dollars in cashflow I needed to reach a monthly goal. Unfortunately, FAS was and still is in a LONG downtrend, and I decided that continuing to trade it was a bad idea. Once my shares were exercised, I did not buy back in.

October’s Chart:

FAS Price Chart through October 2011

The chart above shows short and mid-term strength (FAS retook the 20 and 50 SMA), but still hasn’t broken the July trendline. We may see the July trendline become the next level of resistance (and then the $15 price level), so November covered calls could be a good cashflow play.

October Technical Analysis for ERX

ERX is an ETF that I’ve used in the past for this type of covered call strategy. With the amount of volatility in the markets, I decided that it would be good to start incorporating ERX into the mix for correlation purposes. I don’t track the beta/alpha of my holdings, but as I increase the size of my portfolio, I will need to add new assets to the mix. Better to start now, while things are still ramping up.

October’s Chart:

ERX Price Chart through October 2011

ERX has followed a similar pattern to DRN, with the difference being resistance prices. ERX could run into selling pressure around $50, while DRN’s resistance is closer to $60, even though both are currently trading at $47 and change.

ERX also broke its downtrend trendline earlier than the other ETFs, so it may serve as a bellwether for short-term direction of the markets when it gets to $50. I will check out the option premiums tomorrow and decided whether to place a buy/write on this one.

October Option Investing – TMF Covered Calls

As I mentioned in the previous post for EDC option investing, the markets showed some life last week.

Long term treasuries are the lesser of all evils at the moment (in that they’re the only thing that’s been showing strength through the choppy market action). TMF has been moving in the opposite direction of EDC for the last few months, so I figured it was a good hedge, price movement-wise

I ended up with TMF shares at 61.23, and an October call option with a $62 strike for $2.17.

October Option Investing – EDC Covered Calls

Believe it or not, the markets confirmed an uptrend last week (dating back to October 4th). Based on the strength of the rally, I also think that the uptrend will be short-lived. With option expiration next Friday, I decided to put a toe back in the water with some small covered call positions using a buy-write.

This resulted in an October option trade with EDC shares at 17.95 and 18.58 calls sold for 0.93.

EDC shares dropped to 15.00 on October 20th, and my 18.58 calls traded at 0.05. So I bought back the 18.58 calls and sold calls with a $16.00 strike price for 0.35.

Cashflow Report – Paper Income during September 2011

Welcome to my Investing for Cashflow Report – September 2011 Edition!

Every month, I create a “cashflow report” to review the paper income I’ve created from trading covered calls. Analyzing trades is something every investor/trader should do on a regular basis, and I use these reports to do the following:

  1. Help me track my progress towards financial independence
  2. Maintain my focus on increasing paper income and meeting my goals each month
  3. Provide an example of creating an income from investing/trading
  4. Get your perspective


September 2011

Coming into the month, the markets seemed to be on an upswing. But that trend didn’t last long. Highs were set at the beginning of the month, and prices went downhill from there.

The ETF’s I use were still above the strike prices, so all my options were exercised. I wanted this to happen, as the option expiration date was just prior to the Fed meeting on the 20th. Fed meetings are wildcards; until they are held and the markets react, nothing is for certain.

The outcome of the meeting was unremarkable (Operation Twist was flogged long before the Fed even held the meeting). And across the pond, Europe flailed about ineffectually as various nations tried to assure everyone that Greece will avoid defaulting on its debt.

And then we entered a correction per IBD on September 22nd.

September was the second straight month of higher volatility, so there was definitely potential for high cashflow’s. There were several times during the past two weeks that “in-the-money” EDC call options (one price level below the strike price) were selling for a ~20% premium! But on the flip side, leveraged ETFs can move that much in a few days, damaging my ability to create cashflows in the future.

And with that, let’s take a look at September’s cashflow.

Cashflow Report – Paper Income During September 2011 – Breakdown:

DRN-Direxion Daily Real Estate Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00
Commissions/Fees = ($0.00)

EDC-Direxion Daily Emerging Markets Bull 3X (ETF)

Premiums = $0.00
Dividends = $0.00
Commissions/Fees = ($0.00)

TMF-Direxion Daily 20+ Yr Trsy Bull 3X Shares (ETF)

Premiums = $0.00
Dividends = $0.00
Commissions/Fees = ($0.00)

FAS-Direxion Daily Financial Bull 3X Shares(ETF)

Premiums = $0.00
Dividends = $0.00
Commissions/Fees = (0.00)

Net Cashflow – September 2011 = $0.00

Goal Not Achieved

Paper Income from Covered CallsGOAL: Execute a covered call trading strategy that creates cashflow greater than $3,600 USD per month, and deposit $3,600 USD per month into an expense account, for 3 months straight.

Not a lot going on last month from a trading perspective. Conditions weren’t right, and I kept my money on the sidelines. And let me tell you, sitting out is hard work when your goal is cashflow every month. In order to recover, I need a monthly cashflow of $7,200 at some point.

What I learned in September

Broke Monopoly ManEven with a trading system, there are periods of time with such high levels of uncertainty that investing and trading on a monthly timeframe isn’t practical. In hindsight, one can always say what they should or shouldn’t have done, but there is no way to protect yourself for that length of time. I’ve written about naked options before, and September was another month that having that ability would have enabled me to safely generate cashflow.

And how about that Thursday/Monday syndrome? Just goes to show you that past performance is not a guarantee of future results. It is another data point to be considered in the overall context of investing and trading.

Rather than focus on the things I can’t control (like the market or current trading limitations), I spent time working on my process. To that end, I opened a separate, online checking account, specifically for my monthly cashflows.

I also need a mechanism to guard against months with zero cashflow. Something Peter Drucker said comes to mind; that companies do not report profit correctly. A profit this year does not guarantee a company stays in business the next year. To that end, a company truly makes a profit after covering all of its current expenses, as well as next year’s expenses. This type of operating process would shield me from months with zero cashflow. In that case, my prior month’s trades need to cover two months worth of expenses…or $7,200 per month. Sounds like a good, longer-term goal.

The Road Ahead

Volatility; great for option premiums, no good for capital preservation. Judging from the price performance since September option expiration, my account balance would have taken another hit, so I’m glad that I didn’t trade. But no trading means no cashflow.

This is the tug of war that I face if I’m going to use options to generate cashflow…especially during secular bear markets.

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