I entered limit orders early in the week to clean-up my account some by closing out some positions that had very little time value left in them. Both of those orders hit today near the open and I freed up some more cash for new trades. After the jobs data came out and the futures spiked, I thought I’d be chasing some trades this morning, but resistance at the 50-day moving average on the S&P 500 is holding. That leaves me waiting and wondering if waiting for a better entry point is wiser. My account hit a new 2013 high this morning due to the jump in oil prices. I still have roughly $600 in time value for my remaining six UCO covered calls that just moved to being in-the-money on July 3rd. If UCO holds for another two weeks near this level, I’ll be completely out of my oil exposure and can start over with lower strikes. I could see oil moving even higher until the unrest in Egypt calms down. I’m not planning to rush my next UCO trade, but will exit if the time value drops enough on my July $33 calls.
The order to close my lower UCO covered calls triggered and I sold 600 shares of UCO at $33.345. At the same time, I bought to close six UCO July $28 covered calls for $5.445. I received $16,732.39 after commission. My order was for $27.90, which means I left $0.10 per share of time value on the table and added $7.61 in commission costs that I would have avoided if I let it play out. In other words, by closing these 600 shares and six calls early, I spent $67.61 that I might not have needed to. That is certainly a change in my trading style from years past. I’ve changed because I’ve been burnt in the past while trying to squeeze out a few more dollars on high beta positions. I decided $69 was worth the cost to avoid losing hundreds in a reversal. Since I still have upside UCO exposure, I opted to cut my risk and take profits early.
I made a profit on these 600 shares based on buying the shares for $28 after being assigned six $28 strike puts and then selling the shares using six $28 strike covered calls. The point that I actually sold the shares for more than $28 and bought the calls for more than the premiums I received is moot. What matters is that my net intake is greater than my net output. Just to make it confusing – my tax related view is different. I operate on a first in, first out basis and that means my first 300 shares will be matched with the 300 shares I bought for $37.00 in July 2012. My next 300 shares have a lot identification with shares I bought at $33.00 in October 2012. That gives me a realized loss on the shares of $996.00 and a realized loss on the covered calls of $2,431.37. That doesn’t look good until you realize that (for tax purposes) my 600 shares remaining that I bought in April have a cost per share of $28.00 and UCO is trading at $33.53 while I write this. I stand to make a gain of $3,000 on my next 600 shares (assuming I sell at $33.00) and another $570 from the $33 strike covered calls. The $33 strike covered calls aren’t a lock for being assigned, but I’d like it if they were. It’s possible that I’ll end July with a realized gain for the month. My UCO gains are much higher than these few figures since I’ve been taking in premiums for more than a year on these shares. I’ll total that up in full when I’m completely out of the position.
My UWM puts help the possibility that I’ll end July with a gain (although it all depends on UCO really). While UWM was trading at $63.31, I bought to close two UWM July $52 naked puts for $0.10 each and paid $21.54 including commission. I took in $359.26 when I sold these puts in May, so that gives me a realized gain of $337.72. I was planning to wait before selling new UWM puts to see if resistance was going to keep small caps depressed, but with today’s jobs number being better than expected, I decided any further weakness should be limited and I have a good opportunity for a small trade now. While UWM was trading at $62.61 (still up $0.61 for the day, but down 0.79 from its intraday high), I sold two UWM October $52 naked puts for $1.95 each and received $390.08 after getting a small commission rebate.
I chose to repeat the same strike because I have a 22.05% cushion below the recent high for UWM and a 20.05% cushion below the current price for the leveraged small cap ETF. That gives me a buffer of approximately 10% for the Russell 2000 index to fall before I take a loss. If the trade goes my way, I’ll make 3.88% on the money I should have in reserves. That’s 13.3% annualized. A 13.3% annualized return is nothing to write home about, but being so far out of the money, I’m happy to get that much. Since I don’t have $10,400 set aside to buy these shares, my potential return on investment is actually much more than this. I chose the October expiration because August was too soon and didn’t offer big enough premiums. January was too far out and it would’ve reduced my annualized gain potential. October seemed to hit the sweet spot and will allow me to make a good adjustment for whatever direction stocks turn in the fourth quarter with less time value to interfere with the premium.