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| Portfolio Activity |
Editor 4/14/2008 12:37:25 AM
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New Portfolio Position
With the major equity indexes continuing to suffer from the effects of an impending recession, our focus this week will again be on a stock that should be less influenced by the broader market gyrations. This company is Canadian Solar (NASD:CSIQ) and the position we have in mind is a moderately aggressive covered-call that offers a balance of downside protection and profit potential.
Buy CSIQ Stock: Last Price = $24.08
Sell MAY-22.50 Call (GQA-EX) Bid Price = $3.20
Cost Basis = $24.08 - $3.20 = $20.88
Downside Protection = 13.28%
Maximum Profit = 7.75% (without margin)
The target entry price in this example trade will be:
Net Debit = $20.75
Downside Protection = 13.83%
Maximum Profit = 8.43% (without margin)
Although CSIQ is listed as a technology/semiconductor company, the movement of the stock's price is related in large part to energy prices. Considering this fact, the covered-call may be more appropriate for those who have a bullish outlook for that sector/industry group. We'll monitor the position in the coming week to determine if an entry is possible. A stop-loss transaction (or position adjustment) should be initiated if CSIQ's share price closes below $19.50 - $21.00, depending on each individual investor's risk versus reward tolerance.
*****
Regarding the current issues in our (hypothetical) covered-call portfolio, here is situation for each trade:
*****
LONG EGY Stock and SHORT MAY-5.00 Call
Cost Basis = $4.50
Maximum Profit = 11.1% (without margin)
EGY stock closed at $5.58 on 4/11/08, thus no action is needed.
STOCK CHART
*****
LONG PGI Stock and SHORT MAY-$15.00 Call
Cost Basis = $13.50
Maximum Profit = 11.1% (without margin)
STOCK CHART
PGI stock closed at $14.45 on 4/1108, thus no action is needed but we will monitor the issue closely for further signs of downside (selling) pressure. Current technical support is near $13.60.
*****
LONG CCC Stock and SHORT JUL-$15.00 Call
Cost Basis = $14.15
Maximum Profit = 6.00% (without margin)
STOCK CHART
CCC stock closed at $13.99 on 4/11/08, near the bottom end of a 5-month lateral trading range. The CCC position has been rolled down and forward to the JUL-$15.00 strike due to previous unfavorable price activity and we were monitoring the issue for a close below $14.00. Since Friday's sell-off breached that level, the most prudent action (for conservative investors) would be to exit the position on any further downside activity. However, since the broad market movement at the end of the week was somewhat exaggerated, it may be best to use any ensuing bounce to sell the stock (if the recovery is not sustained). Currently, the JUL-$15.00 call is trading at $1.20 X $1.45, thus a net-credit closing trade would yield a loss of approximately $1.50 per share. While further declines (and the passage of time) will reduce the cost of repurchasing the sold calls, we do not recommend leaving a short option uncovered for more than a few days as the losses can increase exponentially if the stock price rebounds.
*****
LONG KGC Stock and SHORT APR-22.50 Call
Cost Basis = $21.85
Maximum Profit = 2.90% (without margin)
STOCK CHART
KGC stock is trading near $22.75 as of 4/11/08, however the position has previously been closed due to short-term bearish activity.
*****
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| New Covered-Call Candidates |
Editor 4/12/2008 7:54:43 PM
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Conservative (ITM) Covered-Calls for April 13, 2008
Speculative (ATM/OTM) Covered-Calls for April 13, 2008
Longer-Term (ATM/OTM) Covered-Calls for April 13, 2008
Notes/Abbreviations:
Stock Symbol - The stock to purchase for the covered-call
Last Price - The (stock) closing price on the trading day prior to the portfolio publishing date
Expiration Month, Strike Price, Option Ticker - Identifies the specific option to be sold
Option bid - The (option) closing price on the trading day prior to the portfolio publishing date
Cost Basis - The resultant cost per share after the call option is sold (stock price less option bid)
% Gain if assigned - Amount of profit (based on position cost basis) with option exercised
% Downside Protection - Relative distance to cost basis, based on cash received from sold option
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| Covered-Calls 101 |
Editor 4/5/2008 3:05:51 PM
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Time to Buy or Another Selling Opportunity?
The S&P 500 stock index jumped more than 4% during the past week despite worries about the economy and continued problems in the investment banking industry. The question now is whether or not the rebound can be sustained and investors are wondering when it is safe to start the buying process again.
As far as the activity in our educational portfolio, two positions (EGY and PGI) are performing as expected and one position (CCC) is faring reasonably well, considering the recent volatility.
The current status of each (hypothetical) trade is as follows:
*****
LONG EGY Stock and SHORT MAY-5.00 Call
Cost Basis = $4.50
Maximum Profit = 11.1% (without margin)
EGY stock closed at $5.58 on 4/4/08, thus no action is needed.
*****
LONG PGI Stock and SHORT MAY-$15.00 Call
Cost Basis = $13.50
Maximum Profit = 11.1% (without margin)
PGI stock closed at $14.88 on 4/4/08, thus no action is needed.
*****
LONG CCC Stock and SHORT JUL-$15.00 Call
Cost Basis = $14.15
Maximum Profit = 6.00% (without margin)
CCC stock closed at $15.49 on 4/4/08. The CCC position has been rolled down and forward to the JUL-$15.00 strike due to previous unfavorable price activity. Traders should now monitor the underlying issue for any move that breeches technical support near $14.00. A close below that price should signal an exit in the position for all but the most optimistic investors.
*****
LONG KGC Stock and SHORT APR-22.50 Call
Cost Basis = $21.85
Maximum Profit = 2.90% (without margin)
KGC stock is trading near $23.36 as of 4/4/08, however the position has previously been closed due to short-term bearish activity.
*****
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| New Covered-Call Candidates |
Editor 4/5/2008 2:32:16 PM
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Conservative (ITM) Covered-Calls for April 6, 2008
Speculative (ATM/OTM) Covered-Calls for April 6, 2008
Longer-Term (ATM/OTM) Covered-Calls for April 6, 2008
With 78 days until the June options expiration and an uncertain market
outlook, we are not going to recommend any long-term plays this week...
Notes/Abbreviations:
Stock Symbol - The stock to purchase for the covered-call
Last Price - The (stock) closing price on the trading day prior to the portfolio publishing date
Expiration Month, Strike Price, Option Ticker - Identifies the specific option to be sold
Option bid - The (option) closing price on the trading day prior to the portfolio publishing date
Cost Basis - The resultant cost per share after the call option is sold (stock price less option bid)
% Gain if assigned - Amount of profit (based on position cost basis) with option exercised
% Downside Protection - Relative distance to cost basis, based on cash received from sold option
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| Covered-Calls 101 |
Editor 3/31/2008 1:48:34 AM
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Looking For A Bottom...
Despite some of the optimism starting to emerge among technical traders, we have no tangible evidence the recent decline in equity values has come to an end. Although the past week's volatility may indicate the final stages of a sell-off, there is still potential for downside activity in stock prices and it's obvious the "R" word will continue to plague the economy (and investment portfolios) for many months to come. With that outlook in mind, our focus this week is on a small-cap company that should be relatively unaffected by broader market gyrations and may even benefit from rising energy costs. This company is Vaalco Energy (NYSE:EGY) and the position we have in mind is a longer-term, speculative covered-call.
Buy EGY Stock: Last Price = $5.03
Sell MAY-5.00 Call (EGY-EA) Bid Price = $0.45
Cost Basis = $5.03 - $0.45 = $4.58
Downside Protection = 8.9%
Maximum Profit = 9.2% (without margin)
The target entry price in this example trade will be:
Net Debit = $4.50
Downside Protection = 10.5%
Maximum Profit = 11.1% (without margin)
Since the movement of the underlying stock is related, in large part, to the cost of oil, this trade is only appropriate for those who have a bullish outlook for crude prices. We'll monitor the position in the coming week to determine if an entry is possible. A stop-loss transaction (or position adjustment) should be initiated if EGY's share price closes below $4.20 - $4.45, depending on each individual investor's risk versus reward tolerance.
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| New Covered-Call Candidates |
Editor 3/29/2008 11:20:22 PM
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Conservative (ITM) Covered-Calls for March 30, 2008
Speculative (ATM/OTM) Covered-Calls for March 30, 2008
Longer-Term (ATM/OTM) Covered-Calls for March 30, 2008
Notes/Abbreviations:
Stock Symbol - The stock to purchase for the covered-call
Last Price - The (stock) closing price on the trading day prior to the portfolio publishing date
Expiration Month, Strike Price, Option Ticker - Identifies the specific option to be sold
Option bid - The (option) closing price on the trading day prior to the portfolio publishing date
Cost Basis - The resultant cost per share after the call option is sold (stock price less option bid)
% Gain if assigned - Amount of profit (based on position cost basis) with option exercised
% Downside Protection - Relative distance to cost basis, based on cash received from sold option
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| Covered-Calls 101 |
Editor 3/23/2008 1:19:04 PM
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KGC Hedge Position Closed
The recent decline in gold prices has taken its toll on gold-related stocks and the bullish covered-call in Kinross Gold (NYSE:KGC) was one of the victims. The original position had a cost basis near $21.85 and a stop-loss price between $23.25 and $24.00, depending on each individual investor's risk versus reward tolerance. Although Tuesday afternoon's sharp sell-off did not physically reach the trigger point, Wednesday morning's drop left no doubt that it was time to exit the play. Regardless of when and/or at what price ($23.25-$24.00) the stock was sold and the call(s) repurchased, the closing credit was substantially less the opening debit, thus creating a loss in the play.
Some readers might wonder why we did not advocate rolling this position to longer-term, lower strike calls. There are two primary reasons: (1) it was intended as a short-term portfolio hedge against further downside activity in the broader market sectors and (2), the technical character of the issue and its industry group; Gold Producers, changed significantly (for the worse) during the recent plunge in gold prices.
As adept investors, one of our critical tasks is to review our portfolio on a regular basis to identify unwanted changes (such as technical weakness) in the outlook for its holdings. When this occurs, it is generally necessary to exit or modify the affected position to limit the effects of adverse market activity. While a covered-call affords additional downside protection for the stock price, a large decline can rarely be tolerated without capital loss. Occasionally the issue will recover prior to the option expiration date however the best course of action is to curb losses before they significantly affect portfolio value.
With Calgon Carbon (NYSE:CCC) and Premiere Global Services (NYSE:PGI), the favorable fundamentals and well-defined technical support evident in both issues suggested a defensive "adjustment" was more appropriate, thus we initiated a process to lower the respective cost basis in each position. Recall that an investor who remains bullish on a particular asset in the long-term will do this in order to protect for short-term weakness because the stock is expected to eventually recover. As a rule, the break-even price is reduced by rolling down and/or forward to a future expiration date. Keep in mind, if the trade is initiated before the option expiration date, you must first buy back the current sold calls (which should be relatively cheap). Then you can look for new calls to sell, which will provide income to offset the near-term decline in share value. You may have to move forward several months (or use LEAPs) in order to achieve a credit in the transaction. In all cases, you must evaluate the risk-reward scenario of each option strike and time frame and select a combination that best fits your (revised) outlook for the underlying issue.
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| New Covered-Call Candidates |
Editor 3/22/2008 10:44:46 PM
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Conservative (ITM) Covered-Calls for March 23, 2008
Speculative (ATM/OTM) Covered-Calls for March 23, 2008
Longer-Term (ATM/OTM) Covered-Calls for March 23, 2008
Notes/Abbreviations:
Stock Symbol - The stock to purchase for the covered-call
Last Price - The (stock) closing price on the trading day prior to the portfolio publishing date
Expiration Month, Strike Price, Option Ticker - Identifies the specific option to be sold
Option bid - The (option) closing price on the trading day prior to the portfolio publishing date
Cost Basis - The resultant cost per share after the call option is sold (stock price less option bid)
% Gain if assigned - Amount of profit (based on position cost basis) with option exercised
% Downside Protection - Relative distance to cost basis, based on cash received from sold option
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| Covered-Calls 101 |
Editor 3/15/2008 10:28:07 PM
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A "Bear" Market Indeed!
Another week of losses in the broader equity markets has put extreme downward pressure on portfolio issues Calgon Carbon (NYSE:CCC) and Premier Global Services (NYSE:PGI), but neither position is ready to close just yet.
The adjusted basis in the CCC covered call is near $14.15 for traders who rolled down and forward to the JUL-$15.00 strike and the current trading range should find price support no lower than $14.00 as long as the company's fundamental outlook does not change. A move below that price (on a closing basis) would signal an exit in the position for all but the most optimistic investors.
The technical condition of PGI is less impressive in the short-term but again, an area of historic buying pressure exists slightly below the cost basis (approximately $13.50, given Monday's "gap down" to $14.60 at the opening bell) of the position. The first sign of complete technical failure -- and our catalyst for an early exit from the current covered-call position -- would be a closing price below $13 on increasing volume.
Remember, closing a covered-call position involves buying the call(s) and selling the underlying shares of stock, thus a net-credit order can be used to execute the trades simultaneously, without undue slippage. For those who are more adept at timing market swings, one or the other transaction can be initiated first (repurchase sold calls OR sell stock, depending on directional momentum) but be aware of the potential for additional losses if the share value does not move as expected or the closing order is not executed in a timely manner.
New Position
We decided to look for a short-term hedge play in this week's portfolio and based on the way gold stocks are performing, it appears that Kinross Gold (NYSE:KGC) is a good candidate to offset further downside activity in the broader market sectors. Gold is currently trading near all-time highs and the technical outlook for KGC reflects unlimited upside potential with near-term support in the $22-$24 range.
Buy KGC Stock: Last Price = $26.84
Sell APR-22.50 Call (KGC-DX): Bid Price = $4.80
Cost Basis = $26.84 - $4.80 = $22.04
Downside Protection = 17.9%
Maximum Profit = 2.1% (without margin)
The target entry price in this example trade will be:
Net Debit = $21.85
Downside Protection = 18.6%
Maximum Profit = 2.9% (without margin)
Please understand, this a hedge for our current positions as the stock will likely move in opposition to broad equity index values (and it will certainly trend lower if gold prices fade). Based on your current holdings, it may or may NOT be an appropriate candidate. We'll monitor the position in the coming week to determine if an entry is possible. A stop-loss transaction (or position adjustment) should be initiated if KGC's share price closes below $23.25 - $24.00, depending on each individual investor's risk versus reward tolerance.
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| New Covered-Call Candidates |
Editor 3/15/2008 8:37:35 PM
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Conservative (ITM) Covered-Calls for March 16, 2008
Speculative (ATM/OTM) Covered-Calls for March 16, 2008
Longer-Term (ATM/OTM) Covered-Calls for March 16, 2008
Notes/Abbreviations:
Stock Symbol - The stock to purchase for the covered-call
Last Price - The (stock) closing price on the trading day prior to the portfolio publishing date
Expiration Month, Strike Price, Option Ticker - Identifies the specific option to be sold
Option bid - The (option) closing price on the trading day prior to the portfolio publishing date
Cost Basis - The resultant cost per share after the call option is sold (stock price less option bid)
% Gain if assigned - Amount of profit (based on position cost basis) with option exercised
% Downside Protection - Relative distance to cost basis, based on cash received from sold option
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