Time for another disclosure post. I made the following moves in myaccount 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.