January Option Investing – Covered Calls

The first two trading days of the new month provided some pretty large price swings; Monday was down, then Tuesday prices went back up.

My December calls for DRN, ERX, and TMF were exercised and the EDC and FAS options expired.

Basic technical analysis shows that we should see confirmation of downtrends or the start of something new.  Rather than trying to guess where prices are headed, I in-the-money (ITM) and out-of-the-money (OTM) calls based on profit.

Here’s a quick example:

Assume that DRN was trading at 48.50. The first ITM call would have a strike price of 48 and the first OTM call would have a strike of 49.

  • Jan $48 call sells @ 3.50
  • Jan $49 call sells @ 3.20

In this example, DRN is selling at 0.50 above the strike price, so I lose 0.50 if the call is exercised and the equivalent price is $3.00.  I would sell the $49 call.

I entered orders on Monday, and here is where I ended up.

  • DRN – $49.01 calls @ $3.30
  • EDC – $72.00 calls @ $7.00
  • TMF – $73.50 calls @ $4.00
  • FAS – $59.00 calls @ $2.10 (These calls expired Dec 24th)
  • ERX – $43.00 calls @ $3.70

Premiums were lower across the board (compared to October and November), with the exception of EDC.


About T. Knight
Blogging about my journey to financial independence via investing for cashflow.

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