A Covered Call Traditional IRA Update–The Great, The Good and The Bad

After years of largely ignoring my small traditional IRA I decided in March of this year it was about time to try out a covered call investment strategy I had thought about for a long time.

The plan was to find undervalued equities with a market cap of at least $200 Million, a positive P/E, a stock price of below $5.00 per share and are traded on the options exchange.  From the remaining companies I will research them one by one to determine whether to move on any of the options available.  The covered calls will be out of the money options that will expire within 0 to 6 months of purchase.  The strike price will be an amount that I am very okay profit-wise.

As a reminder, according to Investopedia, a covered call is,

An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.

My last covered call update was in May 2012 and the option contracts purchased in that post just came do so it is time to see how I did.  As always you can check out my running tally which is updated periodically.

For organizational purposes I will provide the update in regards to the symbol.  I think this will provide an easier understanding as to what I have done and the money I have made or lost going forward in the years to come.

My Covered Call Moves

Sprint – The Great

  • Bought 575 Shares of Sprint at $2.25 on 2/22/2012 (I had 125 in the account to round me up to 700 shares)
  • Sold 6 Sprint Covered Call Option Contracts on 2/27/2012 for a Strike Price of $3.00 in August

Sprint - Fidelity Purchase

WOW IS ALL I CAN SAY ABOUT THIS STOCK. Sprint closed on Friday August 17th at $5.19/share.

First, the good news. I made money!

Sprint Sale

  • So I bought 575 Shares for $1,306.42 plus the other 25 shares came from a different purchase for around the same price so call it a total of $1,362.67
  • I received proceeds of $1,792 on the Sale
  • I received $111.89 on the option contract
  • Total income of $1,903.89 Minus purchase price (and fees) of $1,362.67 = Total Gain $541.22 inside 6 months. A GAIN of 39.71% in 6 months.  

If I could do this steadily I would be in a very different position but worry not I have absolutely no delusions.  This type of return is CAN’T be the normal.  The bad news should be pretty evident.  I didn’t capture a bit over $2/share gain since the call was lower.  I knew this was a “risk” but hey what is the saying,

Bears and Bulls make money and pigs get slaughtered.

I still have one outstanding January option contract at a call price of $3.5 once that happens I will be totally divested of Sprint.

Radian Group – The Good

I purchased three lots of RDN:

RDN Purchases

With those lots I have sold 4 Covered Calls:

RDN Options

So I have purchased $2,432.49 worth of RDN Stock.

  • I have collected (and kept) $111.97 on an expired Contract
  • The other Covered Call contracts brought in $228.89

On August 18th RDN closed at $3.34 a bit above some of my strike prices

RDN Results

I know this has a lot of moving parts but the awesome thing about this blog is it keeps me accountable and forces me to break everything down.

  • RDN Purchased for $2,432.49
  • I already collected $111.97 on expired contracts and $228.89 for the August Contracts
  • Received $2 in dividend income
  • I will now be receiving $1,492.01 for the $3.0 contract which was fulfilled
  • So far I have received $1,834.87 of my original purchase.

This is not a loss.  I still own 300 shares of RDN (current Value about $1000).  If I sold today I would stand to gain about 15%.  While it is a very great return I am thinking of letting it play for a bit longer and selling more contracts.  What does everyone think? 

EXM – Excel Maritime – The Bad

I purchased one lot of EXM:

EXM Purchase

I sold one contract on it which expired:

First Round of EXM Contracts

I then sold another contract:

Second EXM Contract

  • So I paid $1,877 for EXM
  • Sold a Covered Call with a net of $189.74 – it expired
  • Then brought in another $187.74 – it expires in September
  • The stock closed on Friday August 18th for $.50

I am obviously way under water on this stock.  I don’t/can’t do anything on it for another month, so I can’t calculate gain/loss but this one is not looking good right now.

My next move is to start researching various equities based on the criteria above.

13 Responses to A Covered Call Traditional IRA Update–The Great, The Good and The Bad

  1. You said “do” when you meant “due”

    Might want to take a look at ZNGA. It’s gotten the crap kicked out of it thanks to over-reliance on FB. If FB bounces, so could ZNGA. Also, if you believe the ZNGA gambling game story then as soon as that becomes available, revenues should go up markedly.

    Also, I’m happily acquiring VXX right now. Selling puts and acquiring shares while volatility is super low. I love that there’s no earnings to deal with when you’re trading an index. It’s the emotion of the market. Fun, fun, fun.

    • Fixed the Typo – Thank you
      ZNGA could be an interesting play. I don’t like it because it has a negative P/E however that could play well here since the market can push it up (and theoretically down) 10 or 20% EASILY before a contract date.

      I am thinking that I’ll use my criteria first and if there is nothing that grabs my attention I’ll look into ZNGA. It does have A LOT of option action.

  2. How much time did you spent on these transactions? I want to start selling covered call to generate extra income, but haven’t had a chance to learn yet.

  3. I always get a little worried when I see people doing options contracts without discussing the underlying volatility structure and pricing. Not saying you don’t understand that stuff – just that you didn’t mention it in the post.

    Many covered call investors actually lose substantial money on their options positions without realizing i. Arguably it looks like that’s happening here, what with the $2 per share loss you took on the Sprint options. Had you simply skipped the options altogether and sold the stock at market on the same days the options would have excercised, you’d be way ahead if I did the math right.

    Certainly the sample size is small, but food for thought.

    • Ah The Greeks. I don’t mention b/c I am not worried about them (maybe it is my naivety or Maybe because these investments don’t have an extra zero on them).

      Much like a comment below by Joe – I am not sure how someone could argue that I lost money in the sprint case. My original investment is up 39% is it up the 100% nope? but did I lose money no.

      Let us take EXM for example – if I hadn’t sold the covered calls I would be in a much bigger whole than I am already.

      I am admittingly a neophyte in the options world but it seems like covered calls are hated by hardcore traders.

  4. You’re underwater on the third transaction, but not as much as you’d have been if you hadn’t sold the covered call. I like your attitude on the Sprint sale. Many people who don’t understand covered calls get all kinds of upset when they miss out on that kind of gain. They should do what you did: celebrate their huge gain.

    • This approach baffles me. He has two independent positions: the short call position and the long stock position. One made lots of money, the other lost. He could have had the exact same position, exited on the exact same day, and made more money if the call wasn’t sold.

      So it makes sense to analyze the call writing independently to see if its making or losing money. After all, you DO have the choice of the stock without writing the calls. Thus far, it looks like the calls are losing on average. That could be luck, but it also could be because he’s entering them at poor prices/IVs.

      • W it seems from your two comments you are focused on the “lost” gain and I think that is where we are going differ in terms of aggressiveness.

        You are 100% correct when you say, ” He could have had the exact same position, exited on the exact same day, and made more money if the call wasn’t sold.”

        And to that I ask what about my EXM position? I could have lost more money if I didn’t sell those calls. RDN seems to be the middle ground where I didn’t “lose” as you say since everything is around (5 to 10%) in the same price range.

          • Glad you like the blog! Don’t take my comments on the option trade as overly negative – I just feel like the short volatility position needs to be dealt with separately from the long delta position since the two can be adjusted relatively independently.

            I think of it as a 2 dimensional space (delta vs. vol) where you can be sitting at any point your margin/clearing agreement will allow. And you make or lose money more or less independently on the two axis. I think it’s at least worth considering whether you’re making money on one and losing on the other.

            • “Don’t take my comments on the option trade as overly negative”

              I don’t I just think you and I are coming from 2 very different places in terms of these moves.

              I don’t look at it as 2 different axis I look at it as 1…the value of my account. If it is going up, but not as much as it would have that is good (S). If it is going down but not as much as it would have that is good err not as bad (EXM).

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