Go On The Attack By Playing Possum

Includes: CHK, IR, JPM, M, MOS
by: George Acs

The ultimate in passivity is rolling over and playing dead. It involves giving up faith in yourself and putting faith in your attacker to honor the dead.

I don't know much about the animal kingdom, but vultures feast on something. Certainly, that's one of the reasons why Jamie Dimon, of JP Morgan Chase (NYSE:JPM) was unwilling to give precise information regarding their beleaguered and unhedged European portfolio, during his Senate testimony.

I suppose that rolling over and playing dead occasionally works for possums, as they are hardwired to react in the way in which they do and somehow the species has survived.

I like the idea of rolling over, but only to actively take advantage of what's going on around me. In a world populated by vultures, it's probably not a good strategy to depend on some higher code of behavior. That's especially true in the markets, since the victim, the one on the losing side of an trade or position is usually anonymous. How bad can you feel about inflicting something gruesome on that which is unseen and unknown?

As a deeply faithful adherent of the covered call strategy, i don't get terribly nervous when share price has moved against me. Although I try as hard as I can to have all of my positions covered, there are just times when that isn't the case, particularly if I believe that the only strike price delivering a reasonable premium would put me at risk of assignment at a price too low and resulting in a net loss on the position. That's the investing equivalent of death.

Occasionally, however, I'm willing to take that risk if there are some crumbs to be had. That involves selling calls or puts a day or two before expiration, in the hope that either I get to keep both the premium and the shares or, if assigned, I can soon repurchase the shares at an even lower price.

Last Friday (June 8, 2012) for example, I did just that with shares of Mosaic (NYSE:MOS), Chesapeake Energy (NYSE:CHK) and JP Morgan Chase, among others. The ones that I just mentioned were the ones that I did lose to assignment, but then was able to repurchase this week at even lower prices and then subsequently write calls once more.

It doesn't always work out that way, though, and sometimes you have to pretend that the runaway gains that your assigned shares experienced either never occurred or had no meaning for you. Denial is more healthy than regret.

However, there are times when there's another approach to accumulating option premiums on holdings. It's a technique that tries to take advantage of a stock's price climb shortly before option expiration.

In the event that you have a covered call on a particular stock and it is sharply higher on the day or two before expiration, yet still below the strike price, there is opportunity to capitalize on the prevailing optimism by looking forward to the next option period. Invariably, the optimism reflects itself going forward, as well.

I tend to prefer weekly options, as my life expectancy dictates a shorter term outlook. But as the clock ticks away on the expiring option and its premium approaches just pennies, why not take advantage of the market's exuberance and close out the existing position by buying back those options and selling the next week's offering?

If you've looked at the market recently, you might have noticed that both pessimism and optimism tend to be short lived. In the absence of material news concerning the markets or your stock, why in the world would anyone believe that any price moving factor would continue to be a factor after the weekend?

Last week, for example, with less than 90 minutes to go until that week's options expired, I recommended to subscribers that they buy back $14 June 8, 2012 calls on their Morgan Stanley position. At the then current price of $13.61, which had moved up nearly 3% for the day, required a buyback of $0.02/share, but could then be rolled over for a $0.41 premium per share.

At this moment (11 AM Thursday June 14, 2012), Morgan Stanley is trading at $13.75, up 0.7%. Its option contract can now be rolled over to next weeks for another net gain of $0.27/share. If shares stay at this current level going into Friday's expiration, that net will grow even more.

As part of my process of looking for new purchases every Monday and Tuesday following the discovery of cash in my account after share assignments, I've come to realize that my stock picking is matched by my poor timing. Yet, the covered call approach offsets that innate inability to know what the future holds.

This week I purchased shares of Macy's (NYSE:M) and Ingersoll-Rand (NYSE:IR), specifically to try and capture their dividend this week, in addition to the option premium. Both happen to be losing positions at the moment, yet are close enough to their strike prices to still be assigned if they have yet another gain tomorrow.

But if not, I look for the opportunity to jump the gun a bit and close their option positions for those pennies and roll over to the next period. In both of their cases, that next period is of the monthly variety, yet both would offer an additional 3-4% premium, based on the shares purchase price, as well as some capital gains on the shares, if assigned.

Back to the metaphor. Maybe you aren't, but I am a possum. I don't have the same tools or inherent talents to battle my enemies. The uncertainty related to the Greek elections, the unemployment data and so many other market moving events. They're all too big and powerful for me. But rolling over and playing dead is the sort of passivity that is nothing but a death wish. Instead, rolling over can be an act of defiance and an expression of confidence in the ability to continue an existence that is not at the mercy of the elements and those natural enemies circling around and above.

Act now, for who knows what tomorrow may bring?

Disclosure: I am long CHK, MOS, JPM, IR, M.