Covered calls in a $5,000 portfolio

[Rocko]

The reason why I don't really do covered calls is I hate limiting my upside. I'm an all or none investor.

Ok, but do you ever take profit? When does it go up enough for you to say ok, I'm cashing in. Perhaps you're saving for retirement, so you know you won't need to sell for a few years. You can sell a covered call that is way out in the future, and get a large premium. If you buy UCO now at $6.80, and sell a $10 Jan 2017 call. You'll get a $1.90 premium, meaning your net cost for the UCO will be $4.90. If UCO is over $10 in Jan 2017, you'll have doubled your money, because it went to $10. To double your money without selling covered calls, the $6.80 UCO has to trade at $13.60.

Suppose UCO goes up to $15. Then you'll be ahead not selling the call, but not by much. On the other hand, if UCO goes down to $5, you'll lose 25% if you don't sell covered calls. If you sell covered calls, and UCO goes down to $5, you'll still be ahead!

Another thing Bruce, what when the stocks up 60% and your calls expire? Yeah you get to keep the lousy premium, but I'm up 60% on my stock. If you invest for income than CC are a good strategy, but if you're looking for aggressive growth not so much.

 

[Brucethethinker]

Another thing Bruce, what when the stocks up 60% and your calls expire? Yeah you get to keep the lousy premium, but I'm up 60% on my stock. If you invest for income than CC are a good strategy, but if you're looking for aggressive growth not so much.

It's all in how you look at it. I bought some AMZN a couple of years ago at $135. I sold it at $300. I was hoping to buy it back but it just kept going up, to $400. So I "lost out". When I write a covered call, in my mind I've already sold the stock, I just haven't gotten paid in full yet. I always write the call with a strike higher than the trading price, so I'm glad when my call gets exercised.

 

[william the wie]

Another thing Bruce, what when the stocks up 60% and your calls expire? Yeah you get to keep the lousy premium, but I'm up 60% on my stock. If you invest for income than CC are a good strategy, but if you're looking for aggressive growth not so much.

It's all in how you look at it. I bought some AMZN a couple of years ago at $135. I sold it at $300. I was hoping to buy it back but it just kept going up, to $400. So I "lost out". When I write a covered call, in my mind I've already sold the stock, I just haven't gotten paid in full yet. I always write the call with a strike higher than the trading price, so I'm glad when my call gets exercised.

it also helps with rebalancing the portfolio. You can, I know of no case of anyone actually doing this, find issues or etfs with low sector risk in high risk sectors and set up as many balanced piles and once a month sell/buy back to balance if there is more than 10% difference in size between your biggest and smallest piles. average returns exceed 20% annually.You will double your capital in 4 years or less. But it is the scariest ride you will ever take.

 

[Brucethethinker]

... find issues or etfs with low sector risk in high risk sectors and set up as many balanced piles and once a month sell/buy back to balance if there is more than 10% difference in size between your biggest and smallest piles. average returns exceed 20% annually.You will double your capital in 4 years or less. But it is the scariest ride you will ever take.

I'm not really following that. I read the CBOE stuff about options, as well as what's on different brokers' sites. It sounds like they all want you to buy and sell a lot, and why not, that's how they get commissions.

One thing I'm trying to understand. Right now you can buy UCO for $7. You can sell a 2017 $4 call for $3.80. This means your net cost is $3.20, and you'll get $4 in Jan 2017, a 25% return for 21 months. The only way you can lose ANY money is if UCO is trading below $3.20, in other words, if the price of oil drops more than 50%. Even if the price of oil drops to less than a dollar / barrel, you'll lose less than half your money. Why is this possible? Am I just harvesting money from fools who are gambling, making foolish bets?

Oil could drop a lot short term. When there is no where to store any more oil, and the wells are all still pumping, it could go much lower. That's why I've kept some cash. I'll buy more UCO if it goes below $5. I'm assuming that it has to go back up eventually.

 

[william the wie]

... find issues or etfs with low sector risk in high risk sectors and set up as many balanced piles and once a month sell/buy back to balance if there is more than 10% difference in size between your biggest and smallest piles. average returns exceed 20% annually.You will double your capital in 4 years or less. But it is the scariest ride you will ever take.

I'm not really following that. I read the CBOE stuff about options, as well as what's on different brokers' sites. It sounds like they all want you to buy and sell a lot, and why not, that's how they get commissions.

One thing I'm trying to understand. Right now you can buy UCO for $7. You can sell a 2017 $4 call for $3.80. This means your net cost is $3.20, and you'll get $4 in Jan 2017, a 25% return for 21 months. The only way you can lose ANY money is if UCO is trading below $3.20, in other words, if the price of oil drops more than 50%. Even if the price of oil drops to less than a dollar / barrel, you'll lose less than half your money. Why is this possible? Am I just harvesting money from fools who are gambling, making foolish bets?

YES.

Oil could drop a lot short term. When there is no where to store any more oil, and the wells are all still pumping, it could go much lower. That's why I've kept some cash. I'll buy more UCO if it goes below $5. I'm assuming that it has to go back up eventually.

Then why are the big players, Russia, ME and major oil companies, betting the other way for the most part?

 

[CrusaderFrank]

Why don't you sell puts instead?

 

[william the wie]

Why don't you sell puts instead?

Great idea usually but given the lack of information presented on the use of margin in this issue, marginal costs, reserves, beta, sector risks and times fixed costs coverage in the OP and subsequent posts I don't know if it applies here. Me, I use Beta and sector risk to guide both my investing and special situation speculations but I still keep a hedge against being wrong on the direction of the market as a whole.

 

[Brucethethinker]

You'll all be happy to know that with UCO trading at $7.56, my portfolio is now worth $5,658.33. So I'm up 13% after 33 days, EVEN THOUGH UCO IS BELOW my average cost of $7.69. This is so easy it doesn't seem like it should be possible. If a dumb hillbilly like me can do it, I can't imagine what the smart guys on wall street are doing. The bad news is my shares are tied up until July, but that's ok. I'm half way to my goal of 25% return this year.

 

[Brucethethinker]

Well, UCO is at $8.51, so my calls will get exercised (if it stays over $8). If my shares get assigned, I'll still be ahead if it trades below $8.86. If the share's get assigned (in July), I'll have $4,800 + $1,122.33 = $5,922.33, up 18.4%. Since my goal was 25%, I'll have more to do after July. Of course it could still crash to $5, but if it does I'll buy more.

 

[Brucethethinker]

This is too easy. UCO is at $9, so it's looking more and more like m $8 calls will get exercised July 17.

 

[fmdog44]

25% is OK but look at what Netflix did in one day last year, up 154 points!! I sold mine a few days later. I got out of mutual funds about four years because 25% in a year is almost a ghost story in funds now days.

 

[Brucethethinker]

25% is OK but look at what Netflix did in one day last year, up 154 points!! I sold mine a few days later. I got out of mutual funds about four years because 25% in a year is almost a ghost story in funds now days.

I didn't mention it, but my strategy is ultra conservative. I want to have my chances of losing to be reduced as much as possible, I'm retired and on social security. I'm not going to go out on a limb just to meed my 25% goal. It looks like I'll be cashed out in July with an 18% gain. I may just sit on it if I don't see an attractive opportunity.

 

[Brucethethinker]

Just an update. UCO did a 5:1 reverse split. My calls will almost certainly get assigned, and July 18 I'll have $5,922.33 (less a small commission) and no stock. All I can do is wait!

 

[Brucethethinker]

I should have said, my calls will get assigned if UCO is over $40, and right now UCO is $48.15.

 

[Brucethethinker]

Well, with the recent tumble in price, my calls expired without getting exercised. The 5:1 reverse split means instead of 600 shares, I now have 120 shares, and $619 in cash. UCO is now trading at $32.58, so my 120 shares is worth 3909.60, plus my 619 = 4528. I'm down $472. I'll sell more calls, but I think I'll wait a day or so since the price is down so much right now.

 

[boedicca]

Well, with the recent tumble in price, my calls expired without getting exercised. The 5:1 reverse split means instead of 600 shares, I now have 120 shares, and $619 in cash. UCO is now trading at $32.58, so my 120 shares is worth 3909.60, plus my 619 = 4528. I'm down $472. I'll sell more calls, but I think I'll wait a day or so since the price is down so much right now.

I think you'd be better off with a no load Vanguard fund.

Just sayin'.

 

[Brucethethinker]

I think you'd be better off with a no load Vanguard fund.
Just sayin'.

Can you recommend one?

 

[sjay]

I think you'd be better off with a no load Vanguard fund.
Just sayin'.

Can you recommend one?

Are you for real Bruce,you're buying and trading options and you need a recomendation for an index fund.

 

[boedicca]

I think you'd be better off with a no load Vanguard fund.
Just sayin'.

Can you recommend one?

There are tons of them. The choice depends upon your risk profile and goals.

All Vanguard mutual funds by asset class Vanguard

 

[william the wie]

Well, with the recent tumble in price, my calls expired without getting exercised. The 5:1 reverse split means instead of 600 shares, I now have 120 shares, and $619 in cash. UCO is now trading at $32.58, so my 120 shares is worth 3909.60, plus my 619 = 4528. I'm down $472. I'll sell more calls, but I think I'll wait a day or so since the price is down so much right now.

If you want to play the options game go to Yahoo stock screener
Use the following settings: Reasons
min market cap 1B The company is highly likely to live long enough to get at least some of your money out of Dodge
max stock price $15 Diversify your risk. Penn-Central and Enron were recommended for Little old Ladies until shortly before bankruptcy. With 4500 you might be able to write as many as 5 puts with expiration dates six months out.
max risk 0.5 beta Risk is a badness thing. I am doing my annual review and I am not happy that I can only manage to do 28 issues of puts at a max stock price greater than $15. .

Then find out which of the issues are optionable.and go for the high premium long maturities on expiration date.