Covered Calls: Making Money In A Shaky Market

Includes: SLV, SPXU
by: Mayo Welch

Market Overview

The economy is shaky at the moment and has been for the past 2 decades. We have not felt a true business cycle for many years due to monetary and fiscal policy coming from Washington, and that is sending mixed signals throughout the market. This leaves many investors displaced in terms of how they value the market.

An example of this displacement is the unemployment report, which does not actually encompass the entirety of the problem. The report reflects two groups, “Unemployed" and "Discouraged" – After a certain amount of time looking for employment you will be shifted from the “unemployed” to the “discouraged worker” category. So, we actually have 2 reports for unemployment but the media makes it appear as though there is only one. This can really throw individual investors for a loop, and deceive them into believing that the economy is turning around making them think it is a good time to invest.

The displacement could also be argued as a type of rational ignorance. If you think about how many new bills go before Congress with each member vying for his or her pork-barrel clause, it becomes difficult to identify what is actually influencing America’s “free” economy.

So, while the above may sound discouraging I would like to share with you what I have been doing this month to stay ahead while the market has been hammered with a vast array of unsettling economic reports.

I am a contrarian value investor and I rarely deviate from my investing strategy, but a friend of mine who trades on the technical side of the market alerted me a few days after the first dip that it was going to be a rough month. I decided to listen to him after watching my portfolio start to sink, and I took about 10% of my portfolio and invested it in both SLV and SPXU.

SLV is a silver trust and SPXU is an S&P short fund. I played them both the same way, When they had a good day I would sell covered calls (SLV I would sell $45 September and SPXU I would sell $24-$25 September), then I would wait two maybe three days for a small relief to hit the market which would, of course, have a negative impact on both stocks. I would then buy back the covered calls. I am continuing to do this with much success.

How it works: I purchased SLV at $38 a share it then goes to $40. I sell the September call for $2.05 per contract. Two days later the market rallies or gold declines (both which will impact silver); the calls are now worth $1.20 per contract. So my net is $00.85 per contract. – Please note that options are contracts of 100 shares so actually the net per contract is $85. I mimicked the same strategy with SPXU.

So, while my long positions have been sluggish I have slowly been adding to my cash position and using the cash generated through 10% of my portfolio to fuel by buying of stocks on down days. I will take my low risk and a nice return while my long positions muscle their way through this rough month.

Those interested, I picked up SPXU at $23, looking back I wish I had got in at $20-$21 because selling the calls at $22-$23 is much more profitable then selling the $24-$25 calls. I picked up SLV for $38.28 and I don’t regret that price point, although I do think I paid a bit of a premium in current market conditions.

Disclosure: I am long SLV, SPXU.