Phantasmix Stock Market Blog

(SRS: 29.88 0.00%)

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.

FAS and FAZ, triple financial ETFs, bull and bear respectively.

Both have been dead in the water for the last 6 weeks.

I think holding FAS + writing calls is (was?) the best strategy here.

I’m testing this strategy, and using (BGU: 70.62 0.00%) as my guinea pig.

BGU — 100 shares, bought @ $23.46
BGU APR $25 CALL — sold @ $1.60
BGU APR $30 CALL — bought @ $0.38

In short, here’s what this gives you:
if you expect the stock to move up but want to lock in some profits, sell an OTM call, and buy a cheaper one even further OTM to capture the potential upside move in the underlying in case yours gets called out.

I’m curious to see how it works out versus simply holding the stock. The experiment should conclude by April options expiration, and I’ll post an update.

Pros:

• Lets stocks work for you by generating option income
• Significantly better upside potential than standard buy-write
• Should enhance overall returns under most market conditions

Cons:

• Lower standstill returns than traditional buy-write
• Additional commissions
• Lower income generation means less protection against prolonged downtrend by the stock (i.e., higher cost basis)