The tide appears to be turning in the $100,000 portfolio.
After more than tripling last year's $10,000 edition, I have to admit that, while I do consider this exercise options learning experience first, the relative stagnation of 2012's simulated portfolio irked me a bit. I have a feeling, however, that that's about to end.
Before we discuss how things stand and how I will attempt to make them develop, let's review the present slate of holdings:
- Long 200 shares of Amazon.com (AMZN). Short 2 AMZN May $200 calls ((ITM)). Value: $40,000 (+ $3,096).
- Long 3,000 shares of Pandora (P). Cost basis: $10.03. Value: $25,770 (- $4,320).
- Long 200 Wendy's (WEN) January 2013 $5 calls. Value: $8,000. (- $3,000).
- Short 5000 shares of Sirius XM (SIRI) from $2.28. (+$200).
- Long 141 SIRI January 2013 $2.50 puts. Value: $6,768. (-$705).
- Long 5 Lululemon (LULU) September $75 calls. Value: $3,725 (+ $1,950).
- Long 25 LULU September $75 calls. Value: $26,250 (+ 8,360).
- Cash balance: ZERO.
- Total Portfolio Value: $110,513.
First thing's first. I took these prices from quotes throughout the morning. As such, by publication time, things could be different. At day's end it all evens out.
Second, AMZN took off on me. As I write, it trades for $231.10. That's a good and bad thing, but it helps highlight one of the biggest "risks" associated with writing covered calls.
You'll notice that I value my 200 shares at $40,000, not the $46,200 they would be worth at around $231. I do that because, if my shares get called away, I have to let them go for $200 each. When I wrote the May $200 calls against the position I capped by gain on the stock trade. As this point, I risk leaving over $6,000 on the table.
I did collect $9.20 ($920) when I wrote the calls; therefore, I effectively capped gains up to $209.20.
Why did I select the $200 strike? I was cautious headed into earnings, anticipating weakness followed by a recovery or moderate strength, not the enormous move AMZN made after blowing out the quarter.
I never fret in these situations, though. If called away, the entire AMZN trade accounted for profits of approximately $4,000. That's better than a loss.
Third, I closed the small lot of LULU calls just to be prudent. It never hurts to take profits. That gives me $3,725 worth of cash, but I remain in the larger position to play upside on a stock I expect to hit $100 before the end of the year.
Fourth, I am using using some of the proceeds to add to the SIRI position. I like even numbers so I will take 59 more SIRI January 2013 $2.50 puts at $0.48 apiece, bringing my position size to 200 and cost basis on the trade to $0.52. It takes $2,832 to add on to that short via long puts trade, knocking my cash balance down to $893.
I reiterated my bear case for SIRI yesterday on Seeking Alpha. You can read that article for more color, but, in a nutshell, it's time to give up the dream that this is anymore than a range-bound stock that will gyrate between lower lows and lower highs.
A glance at the LULU and SIRI charts, courtesy of FreeStockCharts.com, is telling.
I love using Williams %R. Do not mistake it for a trading tool. I have found that it's a great way to determine near- to longer-term momentum.
While a Williams %R between 0 and -20 indictates "overbought," it does not always mean time to sell. The inverse is also true. Stockcharts.com sums things up nicely:
... it is important to note that overbought readings are not necessarily bearish. Securities can become overbought and remain overbought during a strong uptrend. Closing levels that are consistently near the top of the range indicate sustained buying pressure. In a similar vein, oversold readings are not necessarily bullish. Securities can also become oversold and remain oversold during a strong downtrend. Closing levels consistently near the bottom of the range indicate sustained selling pressure.
Again, this is more than a technical indicator for me. I combine it with MACD and various simple moving averages. From there, I use qualitative information to help me decide which way I think a stock is going to go.
Both SIRI and LULU showed what looked like periods of consolidation following weakness. While SIRI flirts with its 50-day moving average, LULU blew through it. I did not need a chart to tell me LULU would bust out and SIRI would stagnate. At this point, the mid- to long-term direction a stock takes has almost everything to do with investor confidence.
While there was some caution after LULU's most recent report, the stock broke out because Wall Street recognizes that Lululemon not only has hyper growth in its future, but it operates from a position of strength. As I explain in yesterday's article (and a load of articles prior to it), the opposite holds true at Sirius XM. Investors have no reason to expect anything but relatively slow growth and more of the same from Mel Karmazin.
I intend to ride the LULU train until it slows down its breakout (probably into the next earnings report in early June). From there, I want to get aggressive with AMZN, a company I fully expect to burn the shorts when it reports sometime in July.
All of that aside, we learned two things here today. Something somewhat basic, but incredibly important about covered calls. We also learned how to differentiate between a stock about to break out and one about to stagnate.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in AMZN over the next 72 hours. I am short SIRI. I am long LULU, P, WEN.