I mentioned in yesterday’s post that I needed some more cash flow for February options expiration and could probably use some covered calls on my small cap ETF, IWM.  I was able to knock out both of those needs with a single limit order.  Yesterday afternoon, I entered an order well above the bid/ask with the time in force as good-til-cancelled (GTC).  I didn’t expect it to hit as quickly as today, but it did.  While IWM was trading at $87.36 (a penny from the high of the day, for a few hours and then only $0.08 below it), I sold three IWM February $88 covered calls for $1.50 each and received $447.69 after commissions.  I’m in a good place in my account right now.  I can leave orders in place and wait for someone to reach for my asking price rather than having me chase orders and getting in at the wrong time of the cycle.  Now I can be patient and that’s how a trader makes more money.

I bought my 300 IWM shares on a put option assignment for $82.00 in November, but stayed long with no covered calls.  I thought IWM would recover (as it did), but bought two puts as insurance from a collapse.  The collapse hasn’t happened yet and the rally is still going, but I thought it was wise to take some profits while I could.  This trade reduced my cost per share down to $81.23, so I stand to do well on the short series of trades if the February calls are assigned.  I’ll probably get right back in IWM if the shares are called away, but can make that decision depending on how the debt ceiling talks are going by then.  I might not have much of a risk of assignment really.  I can’t imagine politicians resolving anything more than a day before the deadline.

If the shares are assigned, I’ll have a strong start to 2013.  Based on the closing price for IWM on December 31st ($84.25), I’ll be out of IWM with a 6.22% gain in a month and a half.  That’s a great start for 25% of my account.  It’ll leave me with less than 9% to make over the next 10.5 months to hit my 15% goal.  Looking at this trade from where it was when the order hit, rather than the beginning of the year, I stand to make 2.44% over the next 6.2 months.  That’s 20.47% annualized.  If my shares aren’t assigned and magically stay flat, I’ll make 14.33% on an annualized basis on the premiums alone.

If nothing else, I’m reducing my over-exposure as the days drag on without a small correction.  I don’t think we’re going to get to February options expiration without at least dropping a few points.  I don’t know how high we’ll climb before that happens, but I’ll have some of my realized gain either way due to this trade.  I’d actually prefer to hold onto the shares and rewrite covered calls while I pick up the IWM 3.33% dividend.  I’ll have another opportunity to get back into IWM before the March ex-div date if I still like the chart and overall economic indicators next month.  Selling further out of the money puts after February isn’t such a bad plan either.

Unrelated to trading – I just saw my subscriber count broke 400 for the first time ever.  That’s in addition to those of you who drop by on a regular basis.  Thanks for reading!