It was a good month for covered calls. Will June be the same?

The bull market continued unabated in May and that is good for almost any strategy that traders want to employ. The June option cycle is off and running with no hint of a pullback. We know there will be an eventual end to all the gains but as long as the Fed keeps pouring gasoline on the market it may not be soon.

If the Dow finishes positive on Tuesday it will be the 19th consecutive week and a new record. So far in May the market has ignored the bad economics, scandals in Washington and the soaring dollar. Volatility remains low and investors are not buying put insurance for their positions. Bullishness is rampant. This is the exact opposite of a normal May market.

Put premiums remain low and covered calls seem to be the way to go until the current rally dips to give us a put selling opportunity.

We had several positions this month that exploded higher and in retrospect we would have done better by simply buying the stocks and not selling the calls. However, in the long run the covered call and naked put strategy will win out over a buy and hold stock strategy. We just have to marry the strategy to the markets.

I added more new plays than normal today and a little something for everyone. I went back and used some of the stocks we just played because they seemed to have more premium than anything else I could find. For instance I recommended a short put on Solar City that is $10 OTM for $3.90. That is a killer premium compared to the 50-75 cent premiums on most other stocks.

Jim Brown

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Current Portfolio

Current positions

Current Position Changes

GMCR - Green Mountain Coffee Roasters (Called)

We entered the GMCR call position on March 12th at $53.39 using the May $60 call. This was an aggressive play and became very profitable at $9.31. I only wish we have not written the call but hindsight is 20:20.

GMCR stock @ $53.39, called $60.00, +6.61
May $60 Call @ $2.70, called, +2.70
Total profit = $9.31

GMCR Chart

TSLA - Tesla Motors (Called)

We entered the TSLA covered call when TSLA was at $56 on April 30th. Nine days later the founder prewarned the company would post its first quarterly earnings. A monster short squeeze was born.

TSLA stock @ $56.00, called $55.00, -1.00
May $55 Call @ $3.70, called, +3.70
Total profit = $2.70

TSLA Chart

SLW - Silver Wheaton (Expired)

We entered the Silver Wheaton $23 call on April 23rd at $1.13. SLW closed at $21.77 on Friday and the call expired worthless. SLW shares rebounded +1.41 on Monday and we will be writing a new call on the position today.

SLW stock @ $22.63
May $23 Call @ $1.13, expired +1.13

SLW Chart

RIG - Transocean Offshore (Called)

We have had the Transocean position for a long time. We were put Transocean stock at $54.52 when the stock fell under $50 for several months. We have written five cycles of covered calls before finally getting called away. We missed a couple cycles because the stock was declining and there were no premiums and we had to sell several months into the future to get any premium. In the end we turned the initial loss into a profitable position but it was a fight.

Transocean stock @ $54.52, called at $50, -$4.52
Nov $50.00 Call, entry $2.85, stopped $2.62, +0.23
Nov $50.00 Call, entry $1.45, closed $0.26, +1.19
Jan $52.50 Call, entry $1.07, closed $0.08, +1.07
May $57.50 Call, entry $2.73, closed 0.36, +2.73
May $50.00 Call, entry $2.67, called, +2.67
Total profit $3.37

Transocean Chart

BSFT - Broadsoft (Called)

We had a May $25 covered call on BSFT that was called. This was the second call we wrote on BSFT before being called away. We entered the first BSFT position at $27.10 on March 12th and the stock traded lower almost from the start. We finally exited with a minor profit in the May cycle.

BSFT stock @ $27.10, called $25.00, -2.10
May $30 call, entry $1.40, stopped $.50, +0.90
May $25 call, entry $1.71, called, +1.71
Total profit $.51

Broadsoft Chart

New Short Put Recommendations


New Covered Call Recommendations

SLW - Silver Wheaton

We have SLW shares acquired last month at $22.63. We wrote a $23 May call for $1.13 that expired worthless. I am recommending a July $24 call as the next strike.

Sell short SLW July $24 call, currently $1.15, no stop.

SLW Chart

BSFT - Broadsoft

We just exited a call position on Broadsoft but the outlook for the next six weeks is ripe for a new play. The volatility in BSFT has eased and the stock is moving out of the recent consolidation pattern. I am recommending a July strike to allow us to capture a possible $2.50 profit on this $28 stock.

Buy-Write BSFT, July $30 Call, currently $28.19-$1.35, no stop.
Profit if called $3.16.

Broadsoft Chart

JASO - JA Solar

JA Solar shares spiked 70% on Monday to $9.58 after the company posted a positive gross margin for the first time in three quarters. They reaffirmed full year shipment projections. There was heavy shorting of the shares and they were crushed. Call premiums exploded.

I suspect there will be another short squeeze at the open on Tuesday. If we can launch a call position on the June $10 strike with the premium of more than $1 we should take it for a quick buck. The option closed at $1.20 on Monday. If you can't get more than 75 cents on the call I would pass on the trade.

Buy-write JASO June $10 Call, currently $9.56-$1.20. No stop.

JASO Chart

New Long Term Recommendations


New Aggressive Recommendations

HLF - Herbalife (Short Put)

The mother of all short squeezes may have already begun. HLF shares rallied +10% on Monday on no news. Ackman has a 20 million share short worth $1.1 billion and Car Icahn has built up a 16.3 million share long worth $800 million. Icahn is determined to push Ackman out of the position and force him to take a major loss. They are sworn enemies. Icahn believes he can force the short squeeze and apparently it is working.

We already have a covered call on Herbalife that is $7 ITM. For those that did not get in on the call play I am recommending an aggressive short put position. I am not using a stop because of the volatility and we can always write calls on it if we are underwater at expiration. The option premiums are always high.

Sell short HLF June $50 put, currently $3.50. No stop

Herbalife Chart

SCTY - Solar City

We already have a covered call on SCTY but the option premiums are so high I could not resist adding another play using a short put. SCTY has gone ballistic over the last two weeks after strong earnings. This trend may not last so be prepared for some volatility.

Sell short SCTY June $42.50 put, currently $3.90. no stop

SCTY Chart

Existing Play Recommendations

Links to original play recommendation

RIG - Transocean (Covered Call)

BSFT - Broadsoft (Covered Call)

GMCR - Green Mountain (Covered Call)

SLW - Silver Wheaton (Covered Call)

TSLA - Tesla Motors (Covered Call)

SCTY - Solar City (Covered Call)

HLF - Herbalife (Covered Call)

CCJ - Cameco (Covered Call)

PHM - Pulte Homes (Covered Call)

BZH - Beazer Homes (Covered Call)

GMCR - Green Mountain Coffee (Covered Call)

PPC - Pilgrim's Pride (Short Put)

Margin Requirements:

There are several different formulas for determining margin requirements for naked put writing. These are normally broker specific and some can require larger margin requirements than others.

Here is the most common margin calculation for naked puts.

100% of the option premium + ((20% of the Underlying Market Value) - (OTM Value))

For simplicity of calculation simply use 20% of the underlying stock price and you will always be safe. ($25 stock * 20% = $5 margin)

Prices Quoted in Newsletter

At Option Investor we have a long-standing policy prohibiting the editors and staff from actually trading the individual recommendations in order to conform to SEC rules concerning trades.

The prices quoted in the newsletter are the end of day prices in most cases.

When discussing fills or stops the prices quoted are the bid/ask at the time the entry trigger or exit stop is hit. This is NOT a price that someone on staff actually got using a live order.

For entry/exit points at the market open the prices quoted will be the opening print. The majority of the time the readers are able to get a better fill than the opening print because of market maker bias at the open.

For trades with an opening qualification the prices quoted will be the bid/ask at the time the qualification was met.

All of these rules normally produce worse prices than an active trader would normally get. Because they are standardized there may be some cases where a price quoted was better than an actual fill. If you received a price that was dramatically different than what was quoted please let us know.