December Option Investing – FAS Covered Calls – Part 2

The FAS covered calls I sold on November 21st ($54 calls @ $3.20) expired.

I covered those shares again, this time at a $53 strike price.

    FAS – $53.00 calls @ $3.10 (These calls expire Dec. 2nd)

December Option Investing – Covered Calls

A shortened trading week due to the Thanksgiving holiday was still enough time for equities to fall heavily.

Markets were back in a correction as of November 17th, so the decline wasn’t too surprising.

On the covered call front, TMF and EDC calls were exercised…sort of. Remember those EDC1 calls that accompanied the reverse split earlier this month? They were exercised! 60 shares were removed from my account, leaving me with positions in DRN, FAS, ERX, and 40 shares of EDC.

Orders were entered Monday, and here is where I ended up.

  • DRN – $43.00 calls @ $4.10
  • EDC – $79.00 calls @ $5.30
  • FAS – $54.00 calls @ $3.20 (These calls expired Nov. 25th)
  • ERX – $41.00 calls @ $5.20
  • TMF – $72.00 calls @ $4.35

November 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”.


November Market Analysis

During last months analysis, the general markets were still in a confirmed uptrend. That is not the case this month. The market entered into a correction on Thursday (Nov 17) after several days of institutional selling. With the negative outlook, I do not plan to increase the amount of capital “at risk” (i.e. in the market). All of my previous options have expired (as of today), leaving a little more than 50% of my account in the market.

November Technical Analysis for DRN

Here were my thoughts on DRN in October:

… DRN took 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…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.

November’s Chart:

DRN Price Chart through Novebmer 2011

The short-term uptrend was just that – short-term.  As of today, DRN sits just above the 50 day moving average (SMA).  However, DRN reached the high 50’s (resistance level mentioned in October) and then reversed course, appearing to establish a new, longer-term downtrend.  Since I am sitting on a position, in-the-money calls are the order of the day.  Extrapolating the current downtrend could have us testing the October lows by the end of the year.  On the positive side, a large move to the upside could break the downtrend.

November Technical Analysis for EDC

October’s commentary:

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.

November’s Chart:

EDC Price Chart through November 2011

With the 5-1 reverse split, the previous price levels need a bit of adjustment.  EDC the previous resistance level of $100 (formerly $20), but quickly retreated below that level.  Today, EDC is 20% below that level, with another 20% to go before testing the October lows at $60.  A good set-up for naked calls.

November Technical Analysis for TMF

October’s Commentary

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.

November’s Chart:

TMF Price Chart through November 2011

Soon after last months analysis, TMF reversed course and headed north, quickly reclaiming the 20 and 50 SMA levels.  The lows at the end of October established a longer term uptrend for TMF.  On a short-term basis, TMF could test the October highs by the end of the year.  Unlike the other ETF’s I use for this strategy, I may increase my position in TMF given its positive price trend.

November Technical Analysis for FAS

October’s Commentary

The chart…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.

November’s Chart:

FAS Price Chart through November 2011

FAS, like EDC, underwent a reverse split in October, so the price levels need a little adjustment.  FAS did test and then retreat from the July trendline.  It also broke below the 50 SMA, so the next level of support is around $40 (October lows).

November Technical Analysis for ERX

October’s Commentary

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.

November’s Chart:

ERX Price Chart through November 2011

ERX was unable to get past the $50 resistance mark and ERX sits just above the 50 SMA.  And that level seems to have established a new downtrend.  On a brighter note, ERX has a level of support at $40, which is substantially above the October lows.

November Option Investing – FAS Covered Calls – Part 3

The FAS covered calls I purchased last Monday ($14.00 calls @ $0.47) “expired”, leaving me with 60 shares of the new and improved FAS.

With no calls against my position, I added 40 shares at $65.29 and sold a call for the week.

    FAS – $65.00 calls @ $3.60 (These calls expire Nov. 18th)

Reverse Split Affects Positions

Yesterday, I received an email from my broker:

As a result of these splits, my EDC and FAS positions were reduced to 40 and 60 shares respectively. Or at least, that is what the positions should be…the adjusted number of shares haven’t shown up in my holdings yet(!), so I only have EDC currently. Since my options on FAS expire tomorrow, I’m not TOO worried.

On the downside, the reverse split has introduced extra risk into my account. I cannot sell either security online until the official paperwork is received by my broker. A phoned in order is the only trade that can be executed. If there is a large, downward move in either security, I can’t do much about it.

You may be asking yourself why I don’t increase my position sizes to 100 shares and sell new covered calls. Good question.

According to the CBOE:

Pursuant to OCC rules (Article VI, Section 11 and 11A), all outstanding EDC/FAS option series as of Thursday, November 10, 2011, at 8:30 A.M. Chicago time will be adjusted to reflect this 1-for-5 reverse ETF split. All EDC/FAS options will be adjusted to require the receipt or delivery of: 20 shares of the new securities (New “EDC”/”FAS”).

– AND –

Strike prices will remain the same. The option symbol will change to EDC1/FAS1.

Confused? I was too.

Basically, this means that the converted options (EDC1/FAS1) are based on 20 shares (rather than 100). So the calls in my account have changed…sort of. 1 “FAS1” call is a contract for 20 shares of “new FAS” with a strike price of $70.00. In my account, I hold 1 FAS1 call with a strike price of $14.00 (or 1/5 of $70.00).

You can check out the official statement from Direxion here:
Reverse Split Q&A (PDF)

And here is the CBOE press release:
Direxion Daily Emerging Markets Bull 3x Shares 1-for-5 Reverse ETF Split (PDF)

November Option Investing – FAS Covered Calls – Part 2

The FAS covered calls I purchased last Monday (Shares at $15.43 / $15.00 calls @ $0.84), as well as the buy-back trade ($14.00 calls at $0.35) expired over the weekend, allowing me to sell another set of calls for the week.

    FAS – $14.00 calls @ $0.47 (These calls expire Nov. 11th)

Cashflow Report – Paper Income during October 2011

Welcome to my Investing for Cashflow Report – October 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 (actually making money)
  4. Get your feedback on ways to improve


October 2011 Overview

Coming into the month, the markets confirmed the beginning of an uptrend (October 4th), although all signs pointed to a pretty weak (i.e. short lived) rally. I was worried this would be another month of no cashflow, because the previous rally attempts had ended a few days after beginning. Instead of trading, I deposited my first month’s worth of expenses into an online checking account.

By mid-month, with the uptrend still going, I took the plunge with some October calls, reasoning that this would put my money at risk for a short period of time (~2 weeks). Technical analysis had revealed we were approaching some key resistance levels, but that there was some upside and therefore room for further covered call trades. I also added the ETF ERX to my portfolio.

Heading into November, the markets encountered selling pressure, as the key resistance levels began to show themselves.

What I learned in October

In September, I did not make any trades because I feared the market was headed south. Without the ability to sell naked calls, I felt the risk of loss from my underlying positions was higher than the potential gain from option premiums. So let’s see how that worked out for me.


  • Purchase price of shares = Closing price for each ETF on September 19th
  • Option premium for each call = Closing price for a call option just in-the-money (i.e. strike price just below ETF’s closing price on September 19th)
  • Positions sizes carried over from August (least accurate assumption from a trading system perspective)


Purchase 300 shares of DRN @ 51.20
Sell 3 $51 calls @ 5.00
= $1,500 in cashflow less commissions

Purchase 300 shares of EDC @ 19.11
Sell 3 $18.58 calls @ 2.50
= $750 is cashflow less commissions

Purchase 400 Shares of TMF 61.84
Sell 4 $61 calls @ 5.5
= $2200 in cashflow less commissions

Purchase 200 shares of FAS @ 13.06
Sell 2 $13 calls @ 2.00 ($2.00 is an estimate – I could not find a price)
= $400 in cashflow less commissions

Potential Cashflow = ~$4,850
These trades would have generated a cashflow of ~$4,850 less commissions and fees. So in theory, I would have met my cashflow goal. However, all my option positions were exercised in August, so per my money management rules, I would have (hopefully) recalculated my positions sizes. The volatility in price for these ETF’s would have resulted in smaller positions in DRN, EDC, and TMF.

Adjusted Trades:

Purchase 100 shares of DRN @ 51.20
Sell 1 $51 call @ 5.00
= $500 in cashflow less commissions

Purchase 200 shares of EDC 19.11
Sell 2 $18.58 calls @ 2.50
= $500 in cashflow less commissions

Purchase 100 Shares of TMF 61.84
Sell 1 $61 call @ 5.5
= $550 in cashflow less commissions

Purchase 200 shares of FAS @ 13.06
Sell 2 $13 calls @ 2.00
= $400 in cashflow less commissions

Adjusted Potential Cashflow = ~$1,950
The adjusted position sizes would have generated a cashflow of ~$1,950 less commissions and fees. In this case, I would not have met my cashflow goal. I did remove $3,600 from my account to pay the bills, so I wonder what the overall impact would be to the purchasing power of my portfolio.

Overall Impact
On October 21st (expiration day for October Options):

  • DRN closed at $47.53, so the $51 call expired and my theoretical DRN position would have been down $3.67 per share ($367)
  • EDC closed at $17.18, so the $18.58 calls expired and my theoretical EDC position would have been down $1.93 per share ($386)
  • TMF closed at $59.21, so the $61 call expired and my theoretical TMF position would have been down $2.63 per share ($263)
  • FAS closed at $13.62, so the $13 calls would have been exercised and my theoretical FAS position would have been down $0.06 per share ($12)

$1,950 + ($1,028) = $922 profit + ($3,600) = ($2,678)

The $922 profit would have reduced the “catch-up” cashflow I now need to generate, but is less substantial than I had originally thought.

For Grins
Had I thrown caution to the wind, my cashflow of ~$4,850 would have been reduced by $2,477 for a net profit of $2,373.

Cashflow Report – Paper Income During October 2011 – Breakdown:

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

Premiums = $852.00
Dividends = $0.00
Commissions/Fees = ($6.35)

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

Premiums = $435.00
Dividends = $0.00
Commissions/Fees = ($22.56)

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

Premiums = $667.00
Dividends = $0.00
Commissions/Fees = ($11.26)

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

Premiums = $370.00
Dividends = $0.00
Commissions/Fees = ($18.26)

ERX-Direxion Daily Energy Bull 3X Shares(ETF)

Premiums = $1014.00
Dividends = $0.00
Commissions/Fees = ($11.28)

Net Cashflow – October 2011 = $3268.28

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.

The Road Ahead

My hindsight calculations provided yet another indication that a balance high enough to trade naked calls is necessary to protect my investing capital and create a robust cashflow for financial independence.

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