While I try to follow hard and fast rules on the way I invest, I am starting to realize that a lot of it is more of an art than a science. I was asked if I ever buy back a covered call and re-write it at a new strike. I couldn’t recall the last time I’ve done that. Typically if I see a call will likely be assigned and the stock called away I consider that a good trade. If I’ve played it right, I’m pocketing the money and can move on to another good trade. If I’m really bullish on the stock I still wouldn’t buy back the call. I’d write another naked put on the same stock, generally at the same strike. Buying the call back and writing a new one seems good on the surface, but my goal is to have the cash available, not hold the stock.
The art of the investment comes in to play with when to write another naked put. I missed out on AAPL as it rocketed to new highs. I left a lot of money on the table with it, but I also can sit back and not worry on days like yesterday when it dropped nearly $6.00 from its intraday high. My option expires this coming Friday and has virtually no time value left to decay. If I was interested in holding on to AAPL I could buy back the call for a loss and hold the underlying stock with all of the profit from the price increase. The risk in that move would be that I don’t time it right and buy the call back before the stock drops and have to re-cover it after it falls. I have good profit built into the position and see no need for greed on this one. On the other hand, I could time it right and buy the call back and then see the stock price increase. It comes down to the point that if I’m bullish I’m going to “double down” on the underlying stock and not worry about trying to squeeze a few more cents out of an earlier trade.
I don’t think covered call writers should buy back calls as the price increases. By keeping this choice available for a later time you can second guess each move too much and one can potentially “over trade” and end up with less money. If an investor thinks the stock can take off then he shouldn’t sell the covered call in the first place. Of course if new information enters the equation after the call is sold, the rules change and the art of the transaction takes over.
Technorati Tags: naked puts, investing, stocks, options, trading model, covered calls, options strategies, trade
Good Day,
The success of your trading is self-evident. AAPL is just one example that can arise, and you definitely must decide how to deal with it’s current volatility. On occassion I got lucky enough after doing a covered call that the underlying stock rose so much so fast, it was worth it to me just to buy the call back and take the stock profit in order to cash out of the position, and not worry. Like it happened early in the trading month weeks before expiration so there was no special need to wait. Otherwise, I can’t agree with you more the success I’ve had letting folks call away my stock and enjoy the premium.
For the other day I made a typo on a stock, where I had put ECNY, and the correct symbol is ENCY for Encysive Pharmaceuticals. If it holds steady, I pocket a good 1 week return this weekend. The other typo was “hear” for “here”, not nearly as important. Don’t we love to read our own comments. Actually, I like to keep the flow and stay in touch. I don’t want to miss any concept that could PAY off. As an aside, thanks to the motivation of this blog and a guy at work who built a family web page, I thought it would be cool to have a web page about money, and the never-ending search for dollars. I used BuyerZone.com to request info about this and have received some feedback. Average price quotes to design something are between $750 to $3000 right now. This may not materialize, but I discussed some concepts with one person over the phone. Because of the difficult nature of trading/saving/investing, and money concepts and education in general, and because of my personal experiences, my idea was more consultation and process improvement, versus offering business services for profit. Simply, I wanted to be non-profit. If anything comes, I will pass on my experience. Meanwhile, I was noticing Qualcomm, anyone bought it before, and is anyone bullish, (another tech co.)?
Here’s an interesting article on QCOM –
http://www.thestreet.com/_yahoo/markets/activetraderupdate/10361920.html?cm_ven=YAHOO&cm_cat=FREE&cm_ite=NA – I’ve owned and sold it a couple of times before, but the lawsuits scare me now.
Regarding starting your own Web site I suggest using a simple blog format like this. I pay <$100 per year and the layout is free. Check out wordpress.org. You can also go the totally free route and use blogspot, but that didn't work for me since I didn't want blogspot in my url name AND more importantly, I can't get to blogspot sites from work. If you really like it you can always pay someone later on, but that money could easily be used for a spec stock if you want to give it away. I'll also offer my paypal account if you really need to give it away soon. 🙂 (I'll edit those typos for you in the previous comments.)
Kadena mentioned ENCY in his comment yesterday and I saw this article which I thought was worth sharing:
http://www.thestreet.com/_tsccom/newsanalysis/biotech/10362161.html