It’s not time to panic yet, but I thought it wise to take some future profits in early and sold covered calls to do it.  That’s how I see covered calls – they are basically an advance on future profits if they end up getting called away.  If the calls expire worthless they are just a good tool to reduce the average cost per share.

I started with a big move on UCO.  While UCO was trading at $33.76 this morning I sold three January $40 covered calls for $3.80 each and received $1,138.47 after commissions.  I was torn on this trade.  I still think oil will strengthen over time, but with the chances of the euro weakening and therefore the dollar strengthening oil prices might be pushed lower, especially if the economy doesn’t pick up and increase demand.  If we get a big bump from some government plan (whether it’s from Bernanke, the President or Congress) I’ll add more naked puts on UCO.  If the 300 shares I have long right now get called away at $40.00, it’ll be a gain of more than $6 in stock value and almost $4 in option value.  Together that’s a potential increase of around $3,000 in the next four months on the $10,128 I have invested in UCO.  I like 30% gains in less than four months.  If it’s not exercised, it’s still a return of 38.94%, not counting any price movement up or down in the underlying ETF.

A few hours later the markets started selling off again and fell below the morning lows.  As I mentioned in my SPX chart post yesterday, I still think support will hold and don’t want to sell my long positions down at these levels yet.  As an alternate approach I decided to sell one covered call on my 200 long SSO shares.  While SSO was trading at $38.64 I sold one October $42 covered call for $2.00 and received $199.65 after commissions.  This leaves half of my current long position open to run higher in a better bounce/rally off the lows and also allows me to reduce my average cost per share by a dollar on these 200 shares.  I also have four more naked puts on SSO spread between September $45 and January $50 and $55.  Once my September put is assigned I’ll probably go ahead and sell another covered call closer to the money on it and might even cover my other 100 shares and leave the other three naked puts short to keep a good bit of upside potential in my account.

Just a few minutes after my trade on SSO, the rumor hit the markets that China was going to aid Italy and buy some of their bonds.  This took the markets up sharply off their lows and showed how fickle this market is lately.  The rumor hasn’t surfaced to be anymore than a good story so far and might not matter in the end, but serves as a great reminder of what can happen when not-bad news hits the wires.

With the Fed meeting in a couple of weeks, the coiled spring could be set to unload.  If the Fed doesn’t do anything with a QE3 feel to it the malaise could continue for months.  There’s always the (very) slight chance Congress and the President will actually agree on something to help our country’s economy.  I think even a small agreement could lift stocks as it shows they are actually willing to talk to each other and compromise.  That said, even if we do everything right, all eyes are on Europe no matter what and I exited my UUP position too early.  At some point fundamentals might matter again and if we see companies doing OK on their upcoming earnings calls we could get a bounce for it.  A lot of the bad news is already priced into current stock prices.  While we’ll certainly get some downward revisions, the upside has more room to bounce than the downside does to fall.