Time for another disclosure post. I made the following moves in my trading account on Friday for anyone who is keeping score:
- Sold ORCL at $32.14 - Wishing I hadn't done this now. ORCL is really strong and I still think it goes to $35 pretty quickly. I sold to free up some capital for another trade which moved away from me and never executed. Meanwhile, ORCL has gone up another buck. FML. My average cost on ORCL was $29.26.
- Bought MWW at $8.50 - Wait, you bought Monster Worldwide when unemployment is ~10%? Yeah, and here's why:
- Sold Sep 2012 MWW $9 Calls at $.40 - This was strictly a covered call play.The calls I sold expire on Friday, and they paid me a 4.7% premium for what amounts to a week's time.
Here's how the Monster trade plays out:
- The stock is over $9 on Friday and gets called away. I keep the $.40 premium I collected plus another $.50 profit on the sale of the stock, for a total of $.90 profit on an $8.50 stock. That's a 10.6% profit in a week. I personally place the likelihood of this scenario at 35%.
- The stock is under $9 on Friday and the calls expire worthless. I get to keep the $.40 premium I collected, and now I get to write the Oct calls against the position, collecting an even healthier premium. Since I'm not married to Monster, I might even write in-the-money calls for a higher premium still just to get rid of the stock a month from now. I place the likelihood of this scenario playing out at 65%.
While a trade like this might seem aggressive to the uninitiated, it really isn't. In fact, it's so tame that it's considered an income strategy. Where a trade like this really falls apart is when the underlying stock tanks. Then you can find yourself sitting on some hefty losses and all you have to show for them are the option premiums you collected. But I don't see Monster tanking any time soon.
Also, just FYI, I ran this trade on margin for maximum leverage. You can't get a little bit pregnant. If you're going to run a covered call strategy, you might as well make use of everything at your disposal and buying the underlying on margin dramatically increases your return.
Some of you might be unfamiliar with granting options, or might think that granting options is an unlimited risk proposition. Sometimes it is, but not in this case. If you're interested in learning this strategy inside and out (and you really should) the best book written on the subject (I can't believe I'm about to say this) was written by Wade Cook, a late-night infomercial huckster.
I'm not kidding. It is the best, most accessible plain-English explanation of covered call writing ever written. The book is called Wall Street Money Machine: New and Incredible Strategies For Cash Flow And Wealth Enhancement and, cheesy title aside, it's the real deal.
Obviously, my opinion of the overall market has changed if I'm not only buying stocks now, but doing so on margin and granting options against it. Let's call it cautiously optimistic. I'm still heavily in cash, and the bulk of my non-cash portfolio is still in alternative investments. That said, I see an opportunity to wet my beak a bit thanks to Helicopter Ben's largess, so why not play the market for a few points here and there?
I'm happy to answer any questions you guys might have regarding options and granting options, or on a covered call strategy. I'm not an expert, but I do have tons of experience.
You may have a chance to buy back into Oracle after this thursdays earnings call. I'm guessing their hardware sales are going to be in the lower end of their guidance and boom missed earnings and a quick drop.
We were afraid to touch Oracle on the grounds that the CEO is a douchebag and pays himself $70M a year despite being a multi-multi-billionaire.
Now we think $70M is a little on the cheap side. Larry's the man. BUY BUY BUY
Ridiculous thesis. Larry is a Greek god. But not in the soon-to-default kinda way.
Interesting idea, I've been looking into some sort of option strategy to compliment my dividend portfolio. Out of interest, what broker do you use in the EU? I can't find one which deals in options in the UK.
I use OptionsHouse.
Black Hat: here's an idea of what a stud I think Ellison is. This is part of a query I wrote for a national yachting magazine in 2010:
Dramatic enough? lol
Great post. I think I'd add that the OTM options trade at a premium for a reason. This underlying stock can move. While you get 4.7% on stable or increased underlying performance, you have only a 4.7% cushion in the downside. This thing moved 20% peak to trough two Fridays ago. It is totally feasible that this thing falls off a cliff, so upside is premium (plus portion of stock increase before you hit strike). The two-three standard deviation downside is quite significant.
I think the determination of this investment is totally driven by percent chance and magnitude of a movement up down or sideways. This is not really predictable with any real accuracy, especially to the average investor. The yield can be misleading.
Eddie, these are the type of posts that make this site worth visiting. Still reeling in joy over my SRPT calls that expired last month...best trade I've made. Will likely be entering a covered call position on VZ soon
yes.
please keep doing these.
I hate Ballmer and John Chambers more than Larry.
Harumph!
I swear being a Jewish male increases your odds of getting rich by 100x.
I just checked out Oracles Def14A this morning to check out larrys comp, and man his entire exec team are rolling in huge money given their stock doesn't tank in the next 4 years while they vest. Mark Hurds comp value is at 100 mil, the EVP that got fired the other month Keith Booth comp worth $25 mil, and the CFO is like $60 mil. Fuck wallstreet, i wanna go to Oracle. All they have to do is keep doing their $10 billion repurchases and their adjusted EPS is always gona go up! FUCK YA!
Bio of the author of the book you recommend makes for some interesting reading: http://en.wikipedia.org/wiki/Wade_Cook
[quote=geofinance]Bio of the author of the book you recommend makes for some interesting reading: http://en.wikipedia.org/wiki/Wade_Cook[/quote]
No doubt. The guy is definitely a character. But the book is gold.
Any other recommendations for reading on options strategies? I have some ISOs that are vesting that I am interested in writing covered calls but more or less have no idea what I am doing. I know the OIC offers some free courses/seminars but am curious if you had any other options.
Eddie,
Nice post - always great to read ppl's thought process/strat.
Think it's worth pointing out to all that this strategy is not as benign as it sounds. The ATM implied vol for MWW is ~115 and the 15-day realised is ~80.
What this means:
To be precise, MWW moves over last 10 trading days were: +0.35, -0.5, +0.75, -0.24, +0.84, -0.25, -0.26, +0.15, -0.09
So how large does the $0.40c cushion feel now?
My questions for those trading something like covered calls are:
Yes levg'd covered calls generate fantastic income...until they don't...
Gracias Eddie, I had some excess cash on the sideline i've been holding until the market pulls back some, love this trade, keep these posts coming.
PS, i sold the October calls at 80 cents, 9.5% for a 5 week hold.
Good luck! (to both of us)
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