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Continuing The Harmonic Trade

A little over a year ago, I did a diagonal call spread on Harmonic (NASDAQ:HLIT) long July 2014 5 calls and short April 2014 7.5 calls. This trade has worked well for years, given the company has relatively high volatility combined with a strong balances sheet. So it's possible to earn premium by selling covered calls, without worrying unduly about the downside of the long position.

I've been rolling this along all year, and I'm now long the April 2015 5 calls and short the April 7.5 calls. The stock has gone from $7.60 when I opened the trade to $7.69 when I sold the latest set of calls.

If shares are above $7.50 at expiration in April, the IRR will be 42%.

I've been doing this thing on and off since April 2009, and so far I've always made money. Basically I just keep selling calls at 7.50 and buying the next strike down to cover the short position. From time to time I roll the thing forward another 90 or 180 days. IRR has been between 20% and 1,000%, and probably averages about 40%.

This is like a penny slot machine that is somehow rigged in the gambler's favor. Just sitting in a quiet corner of the almost totally deserted Green Room, put in a $20 dollar bill and sooner or later you get tired of pushing the buttons and close out with $35 or $40. At this point, I don't really care how it ends: it's more of an experiment, how long can this go on?

Disclosure: The author is long HLIT.