Thursday, November 30, 2006

Duck and covered calls

So I have never dabbled in options before now. From what I have read trading options is a gold brick road to riches… if you are right in your trades or guesses. If you aren’t then you can disappear a pile of cash in a blink of both eyes. That being said I have found a more conservative use of them that seems to fit me better.

Can’t even tell you how I first heard about covered calls a few months back. They have been there the whole time just for some reason I haven’t really looked into them until now. From what I have read and understand selling covered calls can get you some money coming in right now. That is never a bad thing the way I see it. The downside is that your upside is limited to the strike price. Which in a nutshell means you pick a winner it takes off galloping past the strike price then you miss all the money above the strike price. This is the part that stresses me some.

I am always looking for an edge and new trading strategies are fun to read about even if later I decide they aren’t for me. But with covered calls (CCs) I thought that it would be worth the effort. I was looking to do one strike price out of the money and one month out. With price increase plus the premium I wanted to find trades that would give me 3%-5% for the month’s time. Sounds good don’t you think?

In August I did September CCs for Best Buy (BBY) and Starbucks (SBUX). Both got called out and the stock price continued to go up. Made money but missed some upside. In September I wrote EBay (EBAY) and Garmin (GRMN) both called out and the stock continued to rise. But still made money and still missed some. In October it was Yahoo (YHOO), Advance Micro Devices (AMD), and Sandisk (SNDK). Yahoo was called away. AMD was not and I sold the stock shortly after because I didn’t think the following options premiums were that great. SNDK didn’t get called. (See Batting Single A for the first chapter of what so far is a less than happy X-mas story.)

I have decided to stay with covered calls for at least awhile longer and try to give the strategy a fair shake to see what I can do with it. I have eased up a bit and don’t have CCs on everything now. Only half of my Crocs (CROX) have contracts on them. (See Ugly Shoes for the start of that story. Which may or may not turn into a best seller?)

More later.

No comments: