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Almost exactly one year ago, I recommended a covered call strategy for investing in Golden Star Resources (NYSEMKT:GSS). At that time, I wrote the following:

I have just opened a new position buying the stock and selling the $2.50 January 2012 call. With the stock trading at $2.21 asked and the call trading at $0.40 bid, one can initiate a position for a net cost of $1.81. The potential return if the stock is called is 38% in four months. If it is not called, there should be an opportunity to sell additional calls at a $2 strike price.

A somewhat safer alternative is to buy the shares and sell the $2 February 2012 call. This call is currently trading at $0.60 bid and the net cost would be $1.61. The potential profit is significantly less -- $0.39 -- and the yield on net cost is 24% in five months.

Golden Star has not performed well over that time period and, despite a recent move higher, the shares are still only at trading around $1.85, down more than 15% from the time when that article was written. So, how did that strategy work out?

First, those who followed the February strategy saw the shares at exactly $2 at expiration and could have sold the shares the following week, pocketing the 24% gain.

Second, those who did what I did would have been disappointed. The shares were all the way down to $1.74 at the January 20, 2012, expiration. The saving grace in all this was that the strategy did minimize the loss vs. a straight outright purchase.

I noted in the article that if the shares were not called I would look to sell the $2 call at expiration. While trying to decide what to do, the shares had a strong run over the next two weeks, reaching $2.20 on Jan. 27 and $2.25 -- its high for the year -- on Jan. 31. In hindsight, I should have used that opportunity to sell and taken a 20% gain on the net cost. Instead, I posted the following comment to the original article on Jan. 30:

As an update to the strategy outlined in this article, and in the interests of disclosure, the January calls expired worthless. I had executed a trade on Sept. 15, where I bought 2100 shares for $2.26 and simultaneously sold 21 January $2.50 calls for $0.41 at a net outlay of just over $1.85 per share including all commissions.

There was an opportunity on Friday to close the position at about $2.20, for a profit of about 19% in just over four months. Even though I initially intended to get out after four months, I instead chose to sell August $2 calls, but the trade did not go through on Friday.

Today I sold $2 January 2013 [this was a typo and should have read August 2012] calls for $0.50. This will yield a net of nearly 50% if the shares are called at $2 in August.

The shares are currently trading at $2.14.

This reduced the net investment in the transactions to $1.37/share (including all commissions and fees). Those calls expired on Aug. 18 when the shares were trading at $1.32. Ever the optimist, I decided to hold for a bit longer and have been rewarded with another run-up, this time to $1.86 on Sept. 17. Once again, a decision needs to be made. Is it time to take a decent profit or look for a greater return by selling more $2 calls with a February expiration?

Before going further, I should point out that this was a relatively small trading position involving 2,100 shares and not expected to be a long-term hold. Its purpose was to get a decent return on some idle cash in an IRA. I maintain an additional long position of just under another 30,000 shares. Back to the decision.

The company has shown some operating improvements and has had promising results from exploratory drilling. It also owns and operates mines in one of the relatively stable area of Western Africa. And, as of its last conference call, the company noted all its production is now unhedged, which will allow it to fully benefit from further appreciation in the price of gold. However, many of the same issues that drive up costs and hurt performance are still there. There are still power interruptions from the Ghana electrical grid and diesel fuel costs are rising.

This was originally intended to be a short-term trade. The call premiums available for the farthest out calls -- February 2013 -- are only trading at $0.25 bid for the $2 strike price. These two factors, and the opportunity to close the position now for a gain of more than 30% over the past year, have pushed the decision to one of take the money and run. I have just entered an order to sell at the limit price of $1.85.

Source: Golden Star Resources - Looking Back And Looking Ahead