Stop Loss Alert for EDC and ERX

I’ve had my eye on EDC and ERX for the past few weeks because both are having difficulty breaking a long term downtrend (one that I said was broken already – Whoops!).

Today’s price action dropped EDC and ERX below one of my program’s trading stops, causing a buy back on the calls and liquidation of the underlying positions.  Ideally, naked calls would be the order of the day, but I’m not there yet in terms of account balance.

Hopefully I’ve saved myself from larger losses, and not been forced out before a major move.  Time will tell.

March Option Investing – FAS Covered Calls

This month has been a bit hectic, so I’m a bit behind schedule on documenting my March option investing using FAS covered calls.  Here’s were we are as of the market close today (March 26).

  • 3/05 – Bought @ $91.64  / $92.00 call @ $1.76 (Assigned)
  • 3/12 – Bought @ $93.19 / $94.00 call @ $1.78 (Assigned on 3/15)
  • 3/16 – Bought @ $107.36 / $108.00 call @ $0.58 (Assigned on 3/16)
  • 3/17 – Bought @  $109.08 / $110.00 call @ $2.20 (Expired)
  • 3/26 – Bought @ $109.08 / $111.00 call @ $2.30 (Open)

March Option Investing – Covered Calls

My February calls for DRN calls were exercised, while the EDC and ERX calls expired.  I documented my FAS option investing using March covered calls here.

March technical analysis indicated some near term resistance for EDC and ERX (so not surprised the calls expired) and DRN and FAS had just experienced some powerful upward moves.  So I’ll use out-of-the-money (OTM) calls again.  TMF continued its recent fall, so I’m still out.

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

ETFs (Bought)

  • DRN – $65.14
  • EDC – $114.06 (Purchased on 2/18)
  • ERX – $57.77 (Purchased on 2/21)

April 21st Calls (Sold)

  • DRN – $66.00 call @ $2.80
  • EDC – $115.00 call @ $5.90
  • ERX – $59.00 call @ $2.50 / $52.00 call @ $3.00

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

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

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!

March Market Analysis


We had a bit of a hiccup at the beginning of March, but the markets bounced back well.  The NYSE is up ~16% since the follow through day in mid-December, but also has a count of 6 distribution days (the S&P500 has 4 and the NASDAQ has 3 as of Friday).  All in all, it appears to be a time of quiet consolidation for the markets, as the distribution days have been spread out and the technical “damage” limited.

Remember…don’t fight the market.  I think we’re way overdue for a correction, but I trade based on market action.

March Technical Analysis for DRN


Here were my thoughts on DRN in February:

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.

March’s Chart:

DRN Price and Volume Chart

DRN stayed in the range mentioned last month ($65 and $57), but seemed to find its footing last week at $57.  Hopefully, this was confirmation of December-March uptrend (I was a bit premature on the trend last month).  Technically speaking, there is nothing stopping DRN from reaching a 52 week high in the low 80’s (~20% gain).

March Technical Analysis for EDC


February’s commentary:

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).

March’s Chart:

 EDC Price and Volume Chart for March 2012

On the surface, it seemed like a pretty tame month.  EDC closed at $113.45 at the last option expiration;  today it’s at $113.17.  But between those two points, we saw more than a 20% price swing.  I was surprised that my program didn’t signal a volatility stop two weeks ago, but that’s another story.   The $120 price level remained a sticking point for EDC over the last four weeks.  If I had to guess, we haven’t shaken out all the people holding shares since last March, and I may have been a bit too early on my call for confirmation last month.  So EDC is still a stock to watch in March and April.

March Technical Analysis for ERX


February’s Commentary

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.

March’s Chart:

ERX Price and Volume Chart for March 2012

ERX hit that next level of resistance (low 60’s), and fell back to the mid 50’s.  Actually, ERX has been a pretty good covered call play; the volatility is high enough for good premiums, without causing the underlying capital gains to fluctuate wildly.  I could see March/April being fairly flat for ERX (in terms of price action), as we move towards the October-December trendline.

March Technical Analysis for FAS


February’s Commentary

$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.

March’s Chart:

FAS Price and Volume Chart for March 2012

I made a good call last month…we’re just off 110.  But seriously…last week was quite a surprise.  I expected to be around the high-90’s, and telling you to expect more upward price movement.  Instead, we’ll probably see some sideways action as we process last weeks massive price gains and look for more support from the now confirmed November-March uptrend.

March Technical Analysis for TMF


February’s Commentary

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!

March’s Chart:

TMF Price and Volume Chart for March 2012

Well, it took a bit longer than I anticipated, but TMF finally rolled over last week, and is approaching the next level of support (low-50’s, which are a convergence of the April-August long-term uptrend and a former level of resistance that is now switched to support).

Cashflow Report – Portfolio Income during February 2012

Welcome to the Investing for Cashflow Report – February 2012 Edition!

Each month, I review the portfolio income (i.e. paper income or income from investments) created from trading covered calls and create a “cashflow report”.  Analyzing trades is something every investor/trader should do on a regular basis, so this is my attempt to practice what I preach. The reports 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

Enjoy!

Overview of February 2012

February was much like January; the general markets continued higher despite a general expectation of a pullback from most experts. DRN, EDC, ERX, and FAS continued to breakthrough long-term resistance levels, and I continued to ride the uptrend.

Lessons Learned in February

The increased focus on capturing capital gains decreased the return gained from option premiums (as expected). The premiums are lower when selling out-of-the-money calls compared with near-the-money calls. The goal was to avoid the capital losses that wrecked my returns in 2011, so in that light, the increased focus as worked. However, there is a cost, in terms of my return on investment.

My measurement system needs another round of improvements. Actual gains rely on option assignment, which may or may not occur each month. All of my positions were assigned at some point in February, so I can calculate actual capital gains and compare them with my January estimate. Logically, the next step would be to revise my profit number from January.

For example, In January, I estimated my capital gains at $2,426.41, based on my account balance at the end of the month. As you will see below, that actual capital gains that I captured were $2,213.26 (approximately 10% lower). This means that my realized profit for January was $3,498.79, which is below my goal of $3,600.

But my longest stretch between buying a position to open and selling on assignment has been 6 months, which makes meeting monthly goals difficult.

I’ll see what I can come up with this month. In the meantime, I’ll revise January’s method a little, and go from there.

Cashflow Report – Portfolio Income During February 2012 – Breakdown:

Realized Paper Income Gains

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

Premiums = $533.05
Dividends = $0.00

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

Premiums = $454.36
Dividends = $0.00

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

Premiums = $229.36
Dividends = $0.00

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

Premiums = $488.45
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

Realized Cashflow = $1799.58
Estimated Capital Gain = $335.05
Estimated Profit = $2,134.63

Realized Capital Gains

DRN = $563.98
EDC = $1,096.25
ERX = $285.10
FAS = $267.93
TMF = $0.00

Total = $2,213.26
Actual vs. Estimated = 91.2%

Goal Not 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 realized ~90% of the capital gains from January, which was great. The potential still exists for some nice capital gains in March, but I won’t know until the 16th. I’ve been working on some other aspects of this strategy for the past few months, and I’m hoping to wrap it up in March, so stay tuned.

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