To Cover or Not to Cover with Call Options

Have you ever been to a fun funeral?  I went to one in college that was fun.  The mother of an ex-girlfriend of mine died and I drove from Athens, GA to Charlotte, NC with three of her girl friends.  I hadn’t hung out with a lot of them since we broke up and it was a fun reunion.  We actually had to wait a few minutes in the car before going in so we could stop laughing when we got there.  The funeral I went to this weekend had a similar element to it.  It was for the step-father of my old next door neighbor growing up.

The guy who died was 65 and seemed healthy.  I used to talk stocks with him some.  Walking around his house I saw a stack of Barron’s papers and various books on charting and fundamental analysis.  The reception seemed like more of a fun get-together for old friends and our kids.  The kids all had a blast playing together and the grown-ups (as if that’s what I am) got to catch up with people we haven’t seen much of in years.

I know, you are thinking what does all this have to do with stocks and options.  It’s the external factors that play into the mindset of an investor.  I often talk about keeping emotions out of investing, but I realize that sometimes recognizing external emotional factors is important in keeping your head on straight when investing.  My wife and I have been dealing with impending job changes lately and a co-worker of mine died two weeks ago followed by this friend mentioned above last week.  That “stuff” plays a roll in how one faces the markets.  Oddly, I tend to find comfort in diving into studying stocks as it keeps my mind off of other parts of my little world.  The reality is that external factors do matter and sometimes it’s better to recognize that.

BA was assigned to me last week before expiration and I covered it out of the money with a new call only to see it fall further telling me I should have sold in the money.  As of today, CAT, DOX, GM and MOT are all assigned to me too.  That puts $10,612 on margin for me including the MRO shares that were not called away as I planned for them to be.  I have a wide range of choices to make now.  I can sell part of my money market to become “whole” again and write covered calls on these five stocks.  I can sell all five stocks and start over with somewhat of a clean slate.  I can do a mix of the two above and can even do nothing and wait for my next deposit in two weeks to bring me most of the way back to whole if not all of the way there.  (My wife had company stock options vest and received a “thank you bonus” from the company she is leaving.  A lot of that small sum will be entering this account after my job situation is settled.)

I might come back to BA before expiration and take early losses on it, but first I need to plan for the others that were assigned to me, so I’ll examine each one.  I’m doing this pre-market, so my calculations could be wrong in another 90 minutes when the markets open.  All the charts are similar, down, but not below the very bottom of their trading channels.  Typically I’d be inclined to hold these, but with five new stocks assigned and one old one not called away yet and my desire to dump and run I have to give it more thought.

CAT – Selling a Jan 70 (at the money) covered call would offer approximately 30% annualized returns if exercised.

MOT – Selling five Jan 16 (in the money) covered calls would offer approximately 19% annualized returns if exercised.

DOX – Selling two Jan 30 (in the money) covered calls would offer almost 15% annualized returns if exercised. Selling two Jan 35 (out of the money) covered calls would offer approximately 14% annualized returns the stock stayed flat and if exercised the annualized return would shoot over 60%.  I need to decide where I think this one will go and drink my poison.  I’m leaning toward dumping DOX since I think I can do better than 15% elsewhere.  I just need to get past the lingering feeling of what if it rebounds.

GM – Selling three Jan 30 (out of the money) covered calls would offer approximately 55% annualized returns if exercised.  If it continues to fall, at least my cost per share will have been reduced substantially.

MRO – Selling two Jan 57.50 (at the money) covered calls would offer nearly 40% annualized returns if exercised.

All of these returns are based on where the stocks closed on Friday, not where I bought them from being assigned.  That’s important to recognize.  As I mentioned last week, where I started is moot, where I am now and where I want to be in two months matters.  I’ve dealt with the fact I’ll be taking realized losses on these most likely and have to just move past it now.  Of course with any of these, once I sell or cover I expect them to shoot for the moon and be good buying opportunities for everyone else.