August Option Investing – Covered Calls

As of July expiration, my DRN calls expired ($79 strike price), and my TMF calls were exercised ($82 strike price).

Last week, I noticed that TMF was trading around $86, but the next strike price for calls was $90.  Given TMF was in an uptrend, I decided to purchase 200 shares of TMF in an attempt to capture some capital gains.

The general markets looked soft, fundamentally speaking, and continued to deteriorate (the market entered a correction on Tuesday).

As the trading week opened, I was a bit worried that DRN wouldn’t hold up to the weakness in the general markets.  I was able to sell a call, but DRN flirted with my stop price (<$72) in intraday trading.

TMF started off with a continued rise in price, so I “maxed” out my risk-adjusted position size by purchasing an additional 200 shares.  Unfortunately, only two of my call orders were executed.

By the end of the week the general markets were back in an uptrend (how’s that for a whipsaw).  DRN made its way back in the high 70’s, avoiding my stop loss price.  But TMF dove on Thursday and Friday to ~$85, so now it is dangerously close to a stop level.

ETFs (Owned)

  • DRN – 100 shares @ $78.86
  • TMF – 200 shares @ $86.46

ETFs (Bought)

  • TMF – 200 shares @ $92.26

Calls (Sold)

  • DRN – 1 $75 call @ $2.25
  • TMF – 2 $95 calls @ $2.80

Investing for Cashflow – July Technical Analysis

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!

July Discussion – General Stock Market


The general market has not made a lot of headway since the last review.  IBD gave us the green light, with a confirmed uptrend around 7,670 on the NYSE.  Since then, we’ve had one correction, 2 rally follow-throughs, and 3 uptrends underpressure.  And for all that noise, we’re right back where we started.

 

2012-07-22 - Price Convergence - NYSE

Looking at the major trendlines for the NYSE, we have April’s downtrend meeting up with Junes uptrend, which means we should get confirmation of one of the trends (unless we move sideways, and cancel out both of them).

July Technical Analysis for DRN


Here were my thoughts on DRN in June:

DRN found support just below $60 at a former resistance level.  There appears to be a bearish “symmetrical triangle” pattern governing the price action between the July ’11-May12 downtrend and the Oct ’11 Dec ’11 uptrend.  Contrary to the confirmed uptrend in the general markets, DRN has not generated a buy signal for me.

July’s Chart:

Candlestick Chart for DRN - July 2012

Soon after last month’s technical analysis, DRN generated a buy signal…go figure.  It also appears that DRN broken the July ’11-May ’12 downtrend along with the “bearish” symmetrical triangle I mentioned.  While DRN is back in play for August calls, I’ve got my eye on the 52-week high price level.  Leveraged ETF’s are built for day-traders, but that doesn’t mean people haven’t been holding shares all this time, waiting to break-even.

July Technical Analysis for EDC


June’s commentary:

EDC spent most of May testing the $65 support level.  Contrary to my thinking, the support level held.  EDC will have to get back to the low 80’s if it is going to test the current downtrend.  As with DRN, my program still hasn’t given a buy signal.

July’s Chart:

Candlestick Chart for EDC - July 2012

EDC gave me a small victory when it found support around $60 per share (the level mentioned back in April).  But the ETF does not appear to have the strength to break the May ’11-Jul ’11 downtrend.  If EDC breaks the $60 level, we have to go back to March ’09 for a support target of ~$30!

July Technical Analysis for ERX


June’s Commentary

The low 30’s showed some level of support, which is good.  ERX did not join the June rally with the same intensity as the other ETFs or the general market, which is bad.  If ERX could rally to the mid-40’s over the next month, then it would be back on my radar.  Until then, we wait.

July’s Chart:

Candlestick Chart for ERX - July 2012

ERX received a shot in the arm last week, rallying about 10%.  The ETF appears to be ready to challenge the Jul ’11 – Feb ’12 downtrend, so the shares are back on my radar (which means I’m watching my program for a buy point, not that it will be used for investing for cashflow in August).

July Technical Analysis for FAS


June’s Commentary

Weekly options or not, FAS was not a good play in May.  A previous resistance level ($80) failed to provide much support, although FAS did retake that level last week.  I’d need a +20% move next month to get FAS back on the radar for June/July cashflow.

July’s Chart:

Candlestick Chart for FAS - July 2012

No 20% rally for FAS, although it did rally more strongly than EDC or ERX.  The ETF is still a bit below the Feb ’11-Mar’ 12 trendline, so no covered calls at this time.

July Technical Analysis for TMF


June’s Commentary

TMF broke resistance in fine fashion last month, rallying another 20% or so…only to immediately retreat back to high 70’s.  The former mid-70 resistance level is now a support level, so hopefully we don’t have to fall all the way back to $60 anytime soon.  Again, TMF is the only play for June at this point.  With the uncertainty surrounding the Eurozone leading us into the summer months (traditionally a lighter trading period), I expect TMF to be quite volatile…good for premiums, bad for capital gains.

July’s Chart:

Candlestick Chart for TMF - July 2012

TMF continues to benefit from all the Eurozone debt issues.  Not that the U.S. is OK by any means;  The U.S. it is just the least “bad” right now.  The ETF is riding a healthy uptrend, similar in pace to the Aug ’11 – Dec ’11 time period.  Hopefully this one will last a little longer before heading sideways.

Summary


Green Light (Uptrend w/ Buy Signal): DRN, TMF

Yellow Light (Uptrend w/o Buy Signal or Downtrend w/ Buy-Signal) : N/A

Red Light (Downtrend): EDC, ERX, FAS

July Option Investing – DRN Covered Calls

Option investing in July seems to be picking up!  After finding support in the 60’s,  DRN appeared ready to test its recent correction/downtrend.  My last technical analysis revealed that markets were in confirmed uptrend but my buy/sell program hadn’t generated any new signals – so no DRN covered calls.  Imagine my surprise when I updated the pricing information last weekend and found a buy signal.

With the general markets looking soft, I’m keeping my exposure small.  The last thing I need is another week where the markets go from boom to bust and DRN falls 20%.

ETFs (Bought)

  • DRN – 100 shares @ $78.86

Calls (Sold)

  • DRN – 1 $79 call @ $1.50

Cashflow Report – Portfolio Income During June 2012

Welcome to the Investing for Cashflow Report – June 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 June 2012

June was similar to May, which was similar to April, which was similar to…it just hasn’t been a great start to the year for my covered call experiment.

The general markets have trended downward since mid-March, and subsequently DRN, EDC, ERX, and FAS became unplayable (generated a sell signal in my trading system). TMF emerged with the only buy signal, and as a result, my cashflow are based on that position only.

Lessons Learned in June

Long term success requires different methods at different times. After taking a look at my performance to goal for the first 6 months of the year, it is clear to see that my system has not worked very well since the March-April time-frame (March cashflows were good, but that also means that my positions were set going into April). The general stock markets peaked in March and have fallen since.

A key part of my strategy is consistency (Consistent = Sell covered calls profitably in all market conditions). Based on 2012, my current strategy is yielding positive results only when markets are rising. When markets are falling, the price drops in leveraged ETFs wipe out any potential for positive cashflow from selling calls.

On the positive side, my added attention to capital gains (or avoiding capital losses) has kept losses small so far this year…much smaller than had I tried to sell calls as the leveraged ETF’s fell. I haven’t gone “all-in” either, so I do not know the monthly cashflow I can expect to achieve. It could be large enough to cover months when I am out of the market, which would make these periods easier to stomach.

Cashflow Report – Portfolio Income During June 2012 – Breakdown:

Realized Paper Income Gains

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

Premiums = $0.00
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

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

Premiums = $0.00
Dividends = $0.00

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

Premiums = $593.67
Dividends = $0.00

Realized Cashflow = $593.67
Capital Gain = ($760.22)
Profit = ($166.55)

Goal Not Achieved

Portfolio Income for June 2012 - Investing for CashflowGOAL: Execute a covered call trading strategy that creates 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

Add June to the “bust” list; 3 straight months with capital losses gobbling up premiums generated by selling calls.  Again, I’m still in the black for the year (~5k) in terms of trading, but my monthly withdrawals ($21,600) have taken a rather large chunk of my trading capital.

July will start out in a confirmed uptrend (per IBD), given it is a holiday week, trusting the market action will be difficult.

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