Well, my second go-round with covered calls was a scary one. As I mentioned in my June Results post Steel Dynamics (STLD) took a huge tumble. I bough at $40.02, pretty much the top, and from there it dropped like a stone. I am still long term bullish on steel stocks. There has been a sell off lately because of the “global slowdown” and bad news from the auto industry, but long-term I think the future is bright.
On a side note, Goldman Sachs placed steel producer Worthington Industries (WOR) on its Conviction Sell List, sighting a slowdown in the auto industry, etc. I have been investing in WOR since 1998, buying on dips through their Direct Stock Purchase Plan (DSPP) and collecting the dividends. I haven’t had a lot of money to invest in them, but I always invest about $100 on pull backs like this and I have done very well over the years. My cost basis is around $15.
Anyway, I stopped out on STLD, closed my option position and ended up taking about a $226 dollar loss. Actually the loss was about $600, but it was offset by the $438 I receive from writing the first call. The transactions looked like this:
|
Transaction |
Total Cost |
| Bought STLD - $40.02 | - $8013 |
| Wrote 2 July $40 calls | + $438 |
| Bought 2 July $40 calls | - $61.95 |
| Sold STLD - $37.01 | + $7410 |
| NET RESULT | ($226.95) |
Sigh….my first hard lesson learned:
“Don’t Chase Premiums”
Actually I learned some other lessons as well, but this was the big one.
So despite my loss I still wanted to get in before the July 19 options expiration date so I waited a few days to collect my thoughts. I researched a lot of stocks searching for one with a decent premium, but not as much volatility. I was really gun-shy and couldn’t decide what to do. I remembered seeing a book on writing covered calls on EFTs; it was called Covered Call Writing With Exchange Traded Funds. When I came across this book on Amazon I didn’t think it looked all that great so I didn’t buy it, but it made me think about EFTs as a covered call possibility. This is an area I will definitely explore more; maybe I’ll even go back and get the book. So on July 8th I decided to write a call on UltraShort Oil & Gas ProShares (DUG). I did a “Buy / Write” and sold two July $33 calls. More on how this covered calls goes in my next post after the July 19 options expiration….
2 responses so far ↓
1 Mark Wolfinger // Jul 20, 2008 at 3:23 pm
I’m glad you learned the lesson of not chasing premiums. When writing covered calls, it’s very important to only buy stocks you WANT to own.
When the premium is high, it’s high for a reason, and the stock can take a mighty tumble (as you have already learned). If it’s a stock you researched well and truly want to own, the chances of such a tumble should be less.
For further discussion on various option strategies, visit:
http://blog.mdwoptions.com/options_for_rookies/strategies_covered_call/
2 pittrollie // Jul 23, 2008 at 5:38 pm
Hi Mark,
Thanks for the feedback. Yeah. Hard lesson learned. Funny thing is a really like STLD long term. I’ll check out your site.
Mike
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