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I blog about covered call investing at my website: I generally write monthly covered calls and try to make 3-5% a month in my IRA account. My blogsite includes articles about my strategy and trade alerts as I put them on. I have a goal to make an... More
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  • Watch list 9/27 - Staying Patient 7 comments
    Sep 27, 2010 1:59 PM | about stocks: CCJ, CAT, AAP, MSFT, TSL, AMFW, AGU, AKS, BCSI, CLF, CMI, GLW, GMCR, WDC, TRW, VMW, SUNEQ

    October options expire on Friday, Oct. 15, which is a very short option cycle this month.  With only three weeks left I do not anticipate putting much into October trades since the time values are falling on call options.  I am looking out towards November expirations at the moment and have about 25% of my portfolio still in cash.  I'm going to be picky the next week and only go into things I really like, because I have time to step back and watch the market.  I take my market cues from Phil at Phil's Stock World, and I agree with his current view that we have run up quickly this month on low volume and could have a pull back, especially as the 3rd Quarter ends and funds are done window dressing for statements and sell off in early October.  I'm not expecting a huge move, but I think some quality stocks may be at a better price in a week or two.  Here's what I'm watching now:


    CCJ is my current favorite as it recently went over its 200-day MA, a great bullish sign.  I'd like to see it bounce off that line in early October and write an at-the-money call for November.

    CAT is another long-term favorite but is overbought right now and I am waiting for a pullback.

    AAP is in the same boat with CAT.

    MSFT makes the cut because big tech is making a comeback and Microsoft is the only one with compelling premium worth writing calls.

    TSL is a solar stock I have written calls on many times.  Its pulling back to its 20 day MA and may be bouncing back soon.

    FWLT is a quality infrastructure stock and has pulled back to it's moving average.  If it bounces back up I will give it serious consideration.


    Also, everything I currently own with October covered calls already written are candidates for November.  So I will be watching AGU, AKS, BCSI, CLF, CMI, GLW, GMCR, SNDK, TRW, VMW and WFR.  I am happy with this current group of stocks and all but two of them have made decent gains and should be high enough to get called out on October 15 even with a pullback.  Only SNDK and AKS are currently below the strike prices, but they are still above the cost basis and have held steady since pulling back last week.  They are candidates for rolling down and out (meaning I would buy back the call, and sell a lower strike in November) but it is too early to be worthwhile today.  While I am ready for a pullback, I'm going to let the market move before I react.  Look at the SPY chart below with me:


    SPY 9-27
    First, notice how quickly the price has moved above all three moving averages (red, blue and green lines.)  A pullback is likely.  However, look at the price of the February through May rally, which just kept on moving up.  

    Second, look at the RSI (14) chart above the price graph.  Generally the market is overbought when that indicator is above 70.  Today it is at 65.24, which is high.  However, look at how long the SPY index stayed over 70 in the last rally!  It just wouldn't quite die, though we all wondered at the time when we should go short.  Then you see the "flash crash" and the steep downturn that followed.  So the watchword is "be prepared" and be patient, because anything could and probably will happen.  

    My guess is that I will be writing quite a bit about rolling down the calls in October, so stay tuned.  I may also throw just  few hedges on in case of a flash crash.  I'll let you know later in the week.  

    Disclosure: Long AGU, AKS, BCSI, CLF, CMI, GLW, GMCR, SNDK, TRW, VMW and WFR.
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Comments (7)
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  • RichFranck
    , contributor
    Comments (19) | Send Message
    Currently this IRA portfolio has no hedge for a downturn?


    Thanks for sharing your trading ideas.
    I am contemplating a similar trading strategy for my IRA.
    27 Sep 2010, 09:46 PM Reply Like
  • revtodd64
    , contributor
    Comments (6) | Send Message
    Author’s reply » At the moment the only hedge is that each trade involves selling the call in-the-money. So I have a 5 to 10 percent hedge built into each trade. I will also roll the calls either down to a lower strike or out to another month to gain more premium, so you could say I have a flexible hedge with each trade. I am considering buying some puts at the moment, but no hedges yet.


    You might find this article on my website helpful about how I protect myself with this style of call writing.
    29 Sep 2010, 08:22 AM Reply Like
  • RichFranck
    , contributor
    Comments (19) | Send Message
    Very well written post about risk protection.


    I've been reading Phil Davis on Seeking Alpha (not a member of PSW yet), and he mentions disaster hedges to protect against the market dropping 20% or 40%. But I haven't seen a description of the disaster hedge.


    I assume the puts (that you are thinking about) would be this type of a disaster hedge.
    29 Sep 2010, 06:57 PM Reply Like
  • revtodd64
    , contributor
    Comments (6) | Send Message
    Author’s reply » Yes, Phil has some amazing disaster hedges. My website actually started because many of us who are members wanted to discuss strategies for IRA accounts. The high paying disaster hedges Phil recommends pay off very well in a regular margin account, where you can put on a debit spread and also sell a put against it. The margin requirements are different in an IRA, so they aren't as spectacular. But if your broker allows debit spreads (like ThinkorSwim and Interactive Brokers) you can still do a version of his hedges that pay off well.


    For example you can write a debit spread on a triple inverse fund like TZA (the Russell) or DXD (the Dow) and have a very high rate of return with a managed risk. It is like buying insurance on your portfolio. I haven't done any yet because I have to get some trading permissions changed on my account. (I'm an affiliate writer on Phil's site, so if you want to try it out, you can get a 20% discount through my website.)


    Here is an example from his public access blog. You just can't sell the puts on margin in an IRA, because they have to be cash secured:


    "I think we did those on Friday. TZA is good as you can sell Nov $23 puts for $1.55 and that pays for a $25/31 bull call spread at $1.85 so net .30 on the $6 spread that’s $1.80 in the money now (up 500% to start!). "


    Note that he doesn't count margin costs when he calculates profits. I hope this helps!
    29 Sep 2010, 10:18 PM Reply Like
  • RichFranck
    , contributor
    Comments (19) | Send Message
    Thanks for the reply.


    I did read the TZA play that Phil recommended. I looked at it as a hedge against a 5% pullback, rather than a disaster hedge against a 20-40% drop (black swan).


    I am totally out of the market at this point, and I want a disaster hedge before I go long with stocks. Perhaps I can see Phil's disaster hedges when I join PSW (I'll go through your website to get the discount).


    TDAmeritrade does not permit level 3 options (spreads), even though they have the TOS software available. Looks like I might need to move my IRA.


    On the other hand, you're style of IRA investing (covered calls) is permitted at TDAmertitrade (level 2).
    3 Oct 2010, 09:04 AM Reply Like
  • RichFranck
    , contributor
    Comments (19) | Send Message
    I found an example disaster hedge I was looking for ... August article by Phil:
    3 Oct 2010, 09:20 AM Reply Like
  • revtodd64
    , contributor
    Comments (6) | Send Message
    Author’s reply » RichFranck - Both IB and TOS have higher level option privileges that allow for spreads. The rule at IB is basically you must have a long option to cover every short option and the long options has to be dated as long or a longer time period than the short option. Its a good thing to know as you pick a broker.


    IRA hedges are a bit more costly than in the margin account because you can't sell the naked put on the margin, it has to be cash secured. But you can still hedge yourself adequately, especially with a spread on a triple inverse fund.
    4 Oct 2010, 01:06 PM Reply Like
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