Phantasmix Stock Market Blog

(SRS: 29.88 -0.57%)

In May, I bought 100 shares of SRS at $21.65. Got greedy and waited for a big up day – which never materialized – to sell a call. I got impatient watching SRS tank day after day and finally on June 11th sold a JAN 2010 $18 call for $5.20.

Why so deep in the money? Because it’s a well-known fact that these ETFs decay. I figured there’s a good chance SRS would go below $15 and I could buy back the call at a good price. And maybe wait for a day when SRS goes up again and sell another call.

Since the call was so far out, it didn’t decay fast enough, had lots of time value in it. And since I sold it after the stock dropped, I didn’t get a very good premium for the option.

Ok, so long story short, I bought back the call for $2 and sold SRS @ $12.88, my net P&L on this trade was ($589).

What went wrong?
- bought an inverse double ETF and held
- sold the call on a dip, didn’t get a good premium
- sold a too far out call, so it didn’t decay fast enough

If it wasn’t an inverse Ultra ETF but a stock that tanked 80% (like many banks did last year) it would work out pretty much the same – the call wouldn’t have protected against that big of a loss.

There are other considerations to keep in mind. If you’re writing a call on a volatile stock, you may want to get out in premarket some day but won’t be able to until regular trading hours because you’d have to buy back the call first, before selling the stock.

I must say this was my worst experience ever with a covered call, all previous ones worked out okay. The lesson here is that this seemingly “can’t lose” strategy can yield horrible results if done wrong.

Most of the time FAS and FAZ are up/down the same percentage. But every once in awhile they go off track, don’t know if it’s intentional or what.

Today is one of those days. (FAZ: 26.74 -1.07%) is up rought 1% less than (FAS: 80.17 +1.14%) is down. They may even out at the end of the day, but from what I’ve seen before, this will not be corrected.

I suppose it could be because of the afterhours or premarket action, but not sure.

The market is overbought and here’s my case —

Click charts to enlarge

$SPX

Retraced nearly 100%

XLF

Looks good. Low-volume week and WFC pre-announcement manipulation or not, the fact is the pattern I was watching played out as expected. Possible scenarios:
- fills the gap and goes back up
- consolidates just above new support level, this would be the proper behavior for a high volume breakout

U.S. Dollar Index

Despite bullish patterns that worked out on the financials and SPX (and XLU and probably some other indices), oddly enough the U.S. dollar is showing the same pattern. Should it break out, this rally may die. $US is a factor that may work against the continuation of the move up. It’s one of those things that works, until it doesn’t.

$S&P 500 Stocks Above 50-Day Moving Average

Seriously overextended, must correct

$NDXA50 Nasdaq 100 Stocks Above 50-Day Moving Average

Same here

QID

On long-term support here

SDS

Same here, though it can still go lower, to yet another long-term support level