March Option Investing – Covered Calls

March option investing…already?  Really?

My February calls for DRN, EDC, and ERX were exercised, while the FAS calls expired, which means that my shares of DRN, EDC, and ERX were assigned.  That also means January’s focus on improving profitability was a  success!  The paper gains from January are real gains for February, and should show up in my February paper income report.  I say should because I’m still not 100% positive that I am accounting for the capital gains properly.

My basic technical analysis for February showed short-term uptrends had either reached or breached the next level of resistance. For March option investing, I’ll use out-of-the-money (OTM) calls again.

I expect some consolidation of the recent gains, with DRN, EDC, ERX, and FAS showing the potential to head higher.  TMF looks to be range bound, which would normally be ideal for covered calls.  But a broken, long-term uptrend coupled with an inability to have naked options keeps me out of this ETF for March.

I entered orders last Monday, but it took some time for the option prices to reach the price limits I set.

ETFs (Bought)

  • DRN – $63.49
  • EDC – $114.06
  • ERX – $58.91
  • FAS – $90.04 (Purchased on 2/7)

Calls (Sold)

  • DRN – $64.00 call @ $2.35
  • EDC – Open
  • ERX – $60.00 call @ $2.35
  • FAS – $93.00 call @ $1.16 (UPDATE – Expired Feb 24)
  • FAS – Open
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February Technical Analysis – DRN, EDC, ERX, FAS, and TMF

For those of you visiting for the first time, I use basic 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 from the previous month’s analysis.

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”.

Enjoy!

February Market Analysis


What can I say…the market has been unstoppable so far this year. What looked to be the start of a short-lived, weak rally in December has turned into a robust uptrend. Trading volume is still on the low side, but fighting the market is a lesson in futility.

Last week, the US markets picked up 2 distribution days, but we’ve reach price levels unseen since 2007, so some profit taking is to be expected. IBD raised an eyebrow, stating that all the US indexes suffered distribution in two sessions, and the two biggest up days came on falling volume.

February Technical Analysis for DRN


Here were my thoughts on DRN in January:

DRN broke the downtrend started in July 2011, and moved steadily higher to close out 2011. The past few days have seen more upward price movement, bringing DRN to it’s next level of resistance (mid 50’s). This level has been tested several times since last August without success. The recent upward momentum, coupled with a new sideways trend should be good news for option traders, with the next level of resistance is in the mid-60’s.

February’s Chart:
DRN Price Chart for February 2012

DRN powered through the mid-50’s resistance level, so that now becomes the new support level as DRN continues its climb. We did see DRN touch the mid-60’s, were it met resistance as expected (price low’s from April and June 2011). These support and resistance levels ($65 and $57 respectively) create a pretty narrow range, so we could see some sideways price movement over the next month as the markets work to consolidate their gains. For now, the current uptrend remains intact, but as with the markets, DRN’s falling trading volume is cause for concern.

February Technical Analysis for EDC


January’s commentary:

EDC decided to head north to start off 2012, breaking the July downtrend and gaining 35% since my last review. Too bad I’m not focused on capital gains! The remaining trends are still negative, so I’ll be watching EDC to see if it can pass the next test (Sept-Nov downtrend). If so, there is another downtrend to contend with, but not before some impressive gains or another 4 months of sideways price movement.

February’s Chart:

EDC Price Chart for February 2012

EDC passed the next test (Sept-Nov downtrend) and then some. As of this post, EDC sits just below 120, which has been a sticking point since August 2011. 3 attempts to break out, 3 retreats. Going forward, a sustained short-term uptrend and less price volatility (more constructive price action) indicate increased buying pressure. On the other side, a huge obstacle exists in the form of the April-July downtrend. The good news is that EDC should confirm its direction this month, and is the stock to watch (or trade). I have my fingers crossed for a move higher, as the next level of resistance is in the 160’s (another 30% increase).

February Technical Analysis for ERX


January’s Commentary

ERX broke the downtrend, but wasn’t able to make as much progress as the other ETFs (excluding TMF). The mid-50’s are a key test, but ERX appears to have a solid, short-term uptrend powering it higher.

February’s Chart:

ERX Price Chart for February 2012

It took most of the month, but ERX finally reached the mid-50’s. Hopefully, the short-term uptrend will continue, with the mid-50’s become a new support level and ERX challenging the next resistance level in the low 60’s. A long term downtrend (May to July 2011) still exists, but ERX is still 20%-25% below that level.

February Technical Analysis for FAS


January’s Commentary

FAS broke the July downtrend, and is poised to take out the both the low-80’s resistance level AND the uber-long downtrend dating back to the spring of 2011. Past those levels, FAS could see 110 before running into any problems.

February’s Chart:

FAS Price Chart for February 2012

$110 here we come! Looking really long term, the April 2010 – February 2011 downtrend is at ~150, so there is some room to run this year.

February Technical Analysis for TMF


January’s Commentary

Economic turmoil remained front and center, but TMF did not continue higher like I said it would. Instead, it broke the long-term uptrend and is now looking for support in the low 60’s.

February’s Chart:

TMF Price Chart for February 2012

TMF’s downturn appears to have accelerated, indicated by the “lower high’s” (~75 in December, ~72 then ~70 in January, and ~66 in Feb). TMF also spent a majority of February below it’s 50 day / 10 week moving average. Zooming out to a 2 year timeframe, the next level of support is the low 50’s!

February Option Investing – Covered Calls

Better late than never…

After posting my January cashflow report, I realized my February option post wasn’t up…probably caused some confusion if you saw me meeting goals without any trades!  My bad.  The following will get everyone back on the same page.

My January calls for DRN, EDC, ERX, and FAS were exercised, and the TMF call expired.

My basic technical analysis for January confirmed that the longer-term downtrends (broken in December) were complete, and we were about to see whether an uptrend was truly underway or we were still directionless.  TMF broke through its uptrend, so I was forced to sell my shares.  Better to take a small loss now than a larger one later.

Since I’m trying to improve profitability in 2012 by monitoring capital gains, I decided to use out-of-the-money (OTM) calls.

I entered orders on Monday for the ETF’s, but sat on the shares because of that day’s strong upward price action in the general market.

  • DRN – $57.27
  • EDC – $98.94
  • ERX – $51.97
  • FAS – $82.22 (UPDATE – Assigned on Feb 3rd)
  • FAS – $90.04

Even though sitting on the shares cost me some time value, the leveraged ETFs more than make up for it due to their exaggerated intra-day price movements.

  • DRN – $63.01 call @ $2.00
  • EDC – $110.00 call @ $3.30
  • ERX – $53.00 call @ $2.35
  • FAS – $83.00 call @ $0.62 (UPDATE – Expired Jan 27)
  • FAS – $85.00 call @ $1.00 (UPDATE – Exercised Feb 3)
  • FAS – $91.00 call @ $1.36

 

 

Cashflow Report – Portfolio Income during January 2012

Welcome to my Investing for Cashflow Report – January 2012 Edition!

Every month, I create a “cashflow report” to review the portfolio income (i.e. 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 – hopefully!)
  4. Get your feedback on ways to improve

Enjoy!

January 2012 Overview

The stock marketing continued to move higher despite the “weakness” associated with the start of the rally, Greek debt, etc. With DRN, EDC, ERX, and FAS testing or breaking through longer-term resistance levels, I decided not to fight the trend, sit on my hands, and try to capture some capital gains before locking into any covered call positions. I also decided to sell out of my TMF position because it broke long term support.

Lessons Learned in January

I’m still experimenting with the best way to report cashflow AND capital gains. Options include balancing my books based on an ETFs closing price at the end of the month, the strike price of the covered call, or avoiding reporting an capital gains until they are booked.

Right now, I’m leaning towards dealing with capital gains the way that a corporation does, since I can’t really “book” gains until I sell a stock. Any time I have money in the market, I’ll have a negative capital gain based on purchase price. For a company, cash and stocks are seen as assets with a value on the balance sheet at a specific point in time. As far as cashflow goes, the positive amount shows up in “cash” and a corresponding liability added because I “owe” someone an ETF at the strike price per the covered call.

My account statements calculate a the total account value, which includes the value of investments at the end of the month, similar to a corporate balance sheet. I also have the value of my outstanding options shown as a negative value. The caveat with the options negative value is that it is overstated; the negative value will slowly dwindle away as we head towards expiration due to the time value of the option.

I’ve also tried to make these reports a little less time intensive by showing capital gains and cashflows net of commissions and fees rather than having a separate line item. This will remove some of the calculation steps I go through at the end of the month and hopefully avoid one of the issues I discovered at the end of last year.

Cashflow Report – Paper Income During January 2012 – Breakdown:

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

Realized Capital Gains = $70.00
Premiums = $194.36
Dividends = $0.00

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

Realized Capital Gains = ($734.70)
Premiums = $324.36
Dividends = $0.00

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

Realized Capital Gains = $3.11
Premiums = $423.72
Dividends = $0.00

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

Realized Capital Gains = $836.94
Premiums = $380.46
Dividends = $0.00

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

Realized Capital Gains = ($1,180.03)
Premiums = $0.00
Dividends = $0.00

Cashflow = $1,323.36
Realized Capital Gain = ($1,004.68)
Unrealized Capital Gain = $4,716.62
Estimated Profit = $3711.94

Goal Achieved!

Bar Graph of Profits from Covered Call Trading

GOAL: Execute a covered call trading strategy that creates cashflow profit greater than $3,600 USD per month, and deposits $3,600 USD per month into an expense account, for 3 months straight.

The Road Ahead

I’m sitting on some nice paper profits right now, but until the calls are executed I can’t actually “spend” the money. The good news is that 2012 is off to a good start!

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