Only one of my 10 options gained value today and both of my stocks gained and yet I finished the day up $93. That’s the beauty of diversification.
I knew I should have bought my AAPL covered call back this morning when the stock was only up a dollar and change. I saw that a date was announced for the iPhone and figured that would lift it some, but I got busy working and never pulled the trigger to buy my option back. I might have to get around to it tomorrow. My AAPL covered call only has a few cents of extrinsic value left. I have been watching AAPL thinking that I should just buy it back and have the money to invest elsewhere, but I’ve been so busy trying to work (my job) that I’m not even fully invested and see no reason to incur the trading commissions to open up money I can’t find the time to trade with. Hopefully, starting this week I can get back in the trading saddle and bring in some more cash flow. If China’s beating can’t bring this market down for more than a few hours I feel I need to be all in while this bull market keeps moving.
Definitely. Ok, just finished “Real Money” by Jim Cramer, and would like to address the irony. I think it has everything to do with diversification. Sometimes he made big money when he wasn’t well diversified, but his stock play was correct. For example, the time when he put $80,000 calls for future Merck strike, and said it made him 10x, or $800,000. What a payday! I like how he advocates some speculating in a portfolio. He thinks over-diversifying just turns an investor into his own mutual fund manager. I did learn that when i have losers I can sell them and put my money into my winning position(s); and also learned to let winners ride sometime. (Recently, WMT is good example, it is still moving up)
All eggs in one basket is definitely recipe for failure, though. Let me propose a question. If 80% of options expire worthless, and someone uses say, $1,000 monthly to buy calls like 6 months out, for maybe 10 months, will the 2 calls that do not expire and ideally make money outweigh the 8 others that faced expiration or were mercifully bought back to close? Also, a question about IRA’s. What if I began an IRA with the idea I will use the money for the riskier call buys so that if they do return nice profits then the money grows untaxed, hoping to make up in the IRA for lost years of contributing? And then keep the main, larger, account for the more sane covered calls and stock profits? Does this make sense? Again, diversity is a huge method of preserving liquidity, rate of return, safety, and peace of mind. Thanks for the reminder!
Good questions. I haven’t read that book, but did read his most recent. I like this easy to read style. Let’s see if I can answer all of your questions. 80% of options do not expire worthless. There’s a link somewhere on http://www.cboe.com that explains the details, but I couldn’t find it at a glance and don’t recall where I’ve seen it listed before. I don’t know how that rumor got started but I think I hear/read it at least once per month.
I use my IRA to sell covered calls and love not paying taxes on my gains. I don’t think you can BUY calls in an IRA. I’ll even write ITM calls to give a better chance of locking in the profit if I don’t think the stock is going to climb much. You can make so much money selling covered calls that I don’t think it’s worth taking too many risks. I’m with Cramer that some speculation is good and I do a little, but keep it very limited. Regarding buying calls, I think you can make massive % gains doing it, but the losses can be overwhelming too. I friend of mine (I’m trying to coax him into commenting) doesn’t mess with puts and only buys and sells calls. In January he was up over 20% in the first few weeks of the year and by the end of February he lost all of that and another 15%. As of this past Friday he is back up around 8-9% I think. My stomach can’t handle those ups and downs, but he can and typically ends the year up.
I’m responding from The Trader’s request on my experience and ideas for trading calls. As he mentioned above, I was up significantly by the end of Jan 07 having a 79% ROI on my account that had a value of 38k at the beginning of that month. But the kicker was I had no more than 10k invested during those 4 weeks. All of the return was based on Apple (AAPL) and Google (GOOG); both I have been following for quite some time. I ended 2006 with an ROI of 38% on my account giving me a solid position to start from.
I purchased and sold calls at various strike prices and expire dates, most were out of the money, but some were deep ITM calls in AAPL. My downfall was pure greed. I held the GOOG calls too long and also purchased a few calls on CSCO that I watched drop thousands in 2 days time.
I follow the hype and press on companies that are in the news and that have higher premiums. I watch the movement of call prices within a trading day, realizing that if I can jump in at a low point, and pick a high point to exit, I’ve made a specific amount of revenue…or profit, but having a set target. AAPL and GOOG are great examples of companies that will see large movements in short periods of time. I have to be willing to make daily trades, potentially liquidating a position in the same trading day. Example: I took a risk this morning purchasing an ITM call on GOOG for Sept expiration. I did this based on the latest info of their alliance with salesforce.com, only speculating it would go up (also on Cramer’s take). It was a gamble for the day, but I saw a 17% gain on a 3700.00 investment for the day. I closed out at 3:59pm taking my gains and sleeping well tonight.
I’m not at my PC often during the trading day and have maybe 2-3 days per month to actively trade so I have to be careful in what I trade. I could care less about long term invesments in my brokerage account, mainly because I believe the market place has changed in the last 10 years. The strongest of companies can go upside down in one day and you lose. I can be diversified in ETF’s and there are plenty that have nice returns and use them in my IRA’s. So I stick with a few stocks, keeping cash reserves on hand to ride waves of excitement and earnings reports. Hopefully I’ll not let my greed keep me from dumping my holdings when I get the very solid returns that can be made trading calls. Plus, it’s FUN.