Update: Sold ORCL, Bought MWW, Sold MWW Calls

Eddie Braverman's picture
Rank: The Pro | 21,198

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.

Comments (22)

Sep 18, 2012

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.

Sep 18, 2012

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

Sep 18, 2012
BlackHat:

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.

Sep 18, 2012

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.

Sep 18, 2012
Asatar:

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.

Sep 18, 2012

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:

A single cannon shot fired as Sayonara crossed the finish line in Hobart, Tasmania on December 29, 1998. In her wake remained only 43 of the 115 boats at the starting line; the rest were sunk, abandoned, or disqualified for fleeing the hurricane which overtook the fleet, costing six sailors their lives and greviously injuring dozens of others. From the helm of Sayonara, Oracle's Larry Ellison looked back over the horizon of broken ships and watery death and vowed never to race the Sydney-Hobart again.

In a similar storm one hundred years earlier, Thomas Lipton was roused from his cabin aboard a Sri Lankan cargo ship to receive the news that, if his entire cargo of Lipton Tea was not immediately jettisoned, the ship would go down with all souls. A profligate promoter to the last, Lipton gathered every available porter aboard the ship and paid them to stencil, "DRINK LIPTON TEA" on each of the crates going overboard. For months the crates washed ashore and created the legend that would become a worldwide brand.

Two men, two storms, two near-death experiences at sea, one quest that would unite them across the centuries. For more than 30 years Lipton would challenge for the America's Cup, spending millions in futility, and cementing the image of the wealthy industrialist yachtsman in the imaginations of fans on both sides of the Atlantic. With the tables turned a century later, Ellison would challenge and succeed where Lipton failed; bringing home the Cup aboard a ship so technologically advanced that it is more aircraft than watercraft.

Dramatic enough? lol

Sep 18, 2012

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.

Sep 18, 2012

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

Sep 18, 2012
CaR:

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.

If your dreams don't scare you, then they are not big enough.

"There are two types of people in this world: People who say they pee in the shower, and dirty fucking liars."-Louis C.K.

Sep 18, 2012

I hate Ballmer and John Chambers more than Larry.

Sep 18, 2012
ladubs111:

I hate Ballmer and John Chambers more than Larry.

Harumph!

Sep 18, 2012

I swear being a Jewish male increases your odds of getting rich by 100x.

Sep 18, 2012

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!

Sep 18, 2012

Bio of the author of the book you recommend makes for some interesting reading:
http://en.wikipedia.org/wiki/Wade_Cook

Sep 18, 2012
geofinance:

Bio of the author of the book you recommend makes for some interesting reading:
http://en.wikipedia.org/wiki/Wade_Cook

No doubt. The guy is definitely a character. But the book is gold.

Sep 18, 2012

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.

Sep 19, 2012
Edmundo Braverman:

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.

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:

  1. The options mkt is pricing in ~8% avg daily move on the stock (8%*$8 = $0.64c)
  2. The stock has been moving at ~5% daily over the past 15-days ($0.40c/day)

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:

  1. How are options priced and why are they priced that way? Why do you think the insto options traders have mispriced the upside/downside/vol? Do you have specific knowledge?
  2. What's your edge? From what I read you took a bullish punt on stimulus. Outcome aside, why did you choose this strategy to express your bullish punt? Do you like the company or have a good reason why it will be disproportionately strong? Is it superior to eg an index, or simply a more concentrated risk (aka shitty Sharpe/unecessary risk)?

Yes levg'd covered calls generate fantastic income...until they don't...

Moving tonnes of product. Making fat stacks.

Sep 19, 2012

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.

Sep 19, 2012
HFFBALLfan123:

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.

Sep 19, 2012
HFFBALLfan123:
HFFBALLfan123:

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)

Sep 19, 2012
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