Opened (AKS) Feb 2009 covered calls position for AK STEEL HLDG CO

A new covered calls position was established on December 30, 2008 with purchase of 2000 shares of "AK STEEL HLDG CO (AKS).

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081230, AKS, 2000, 8.85, 17700, 20090220, 7.50, 2.20, 4400, 13300)

Detailed Information

Stock Leg (Buy)

• Stock ticker = AKS
  
• Company name = "AK STEEL HLDG CO"
  
• Number of shares bought = 2000
  
• Price per share = 8.85
  
• Total money spent = 17700

Option Leg (Sell)

• Call Symbol = ASJBU
  
• Strike date = 20090220
  
• Strike price = 7.50
  
• Number of calls sold = 20
  
• Premium per call = 2.20
  
• Total call premium received = 4400
  

Transaction

• Total money out = (17700 - 4400) = 13300
• Initial investment = 13300
  

Returns (If calls get exercised)

• Absolute returns = 15000 (strike price * num_shares) - 13300 (Initial investment) = 1700
  
• Percentage returns = (absolute returns/initial investment * 100) = 12.78%
• Max. number of days position will be open = 20090220 (strike date) - 20081229 (transaction date) = 53
  
• Annual percentage returns (Normalized returns over 365 days) = (12.78 * 365 / 53) = 88.01%

Break Even Information

• Break-even point = 13300 (Initial investment)
• Break-even buffer percentage = 8.85 (current price) - 6.65 (break even point/num_shares))/8.85 * 100) = 24.86% [This means that this position can wither a 24.86% drop in stock's price before losing any money).
  

Date (position established): 2008/12/30

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Opened (PLD) Feb 2009 covered calls position for Prologis SBI

A new covered calls position was established on December 30, 2008 with purchase of 2000 shares of "Prologis SBI" (PLD).

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081230, PLD, 2000, 12.36, 24720, 20090220, 10.0, 3.50, 7000, 17720)

Detailed Information

Stock Leg (Buy)

• Stock ticker = PLD
  
• Company name = "Prologis SBI"
  
• Number of shares bought = 2000
  
• Price per share = 12.36
  
• Total money spent = 24720

Option Leg (Sell)

• Call Symbol = PADBB
  
• Strike date = 20090220
  
• Strike price = 10.0
  
• Number of calls sold = 20
  
• Premium per call = 3.50
  
• Total call premium received = 7000
  

Transaction

• Total money out = (24720 - 7000) = 17720
• Initial investment = 17720
  

Returns (If calls get exercised)

• Absolute returns = 20000 (strike price * num_shares) - 17720 (Initial investment) = 2280
  
• Percentage returns = (absolute returns/initial investment * 100) = 12.87%
• Max. number of days position will be open = 20090220 (strike date) - 20081229 (transaction date) = 53
  
• Annual percentage returns (Normalized returns over 365 days) = (12.78 * 365 / 53) = 88.63%

Break Even Information

• Break-even point = 17720 (Initial investment)
• Break-even buffer percentage = 12.36 (current price) - 8.86 (break even point/num_shares))/8.86 * 100) = 28.32% [This means that this position can wither a 28.32% drop in stock's price before losing any money).
  

Date (position established): 2008/12/30

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Established (M) Feb 2009 covered calls position

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081229, M, 2000, 8.89, 17780, 20090220, 7.5, 2.20, 4400, 13380)

Detailed Information

Stock Leg (Buy)

• Stock ticker = M
  
• Company name = "Macy's Inc"
  
• Number of shares bought = 2000
  
• Price per share = 8.89
  
• Total money spent = 17780
  

Option Leg (Sell)

• Call Symbol = MBU
  
• Strike date = 20090220
  
• Strike price = 7.5
  
• Number of calls sold = 20
  
• Premium per call = 2.20
  
• Total call premium received = 4400
  

Transaction

• Total money out = (17780- 4400) = 13380
• Initial investment = 13380
  

Returns (If calls get exercised)

• Absolute returns = 15000 (strike price * num_shares) - 13380 (Initial investment) = 1620
  
• Percentage returns = (absolute returns/initial investment * 100) = 12.11%
• Max. number of days position will be open = 20090220 (strike date) - 20081229 (transaction date) = 54
  
• Annual percentage returns (Normalized returns over 365 days) = (12.11 * 365 / 54) = 81.85%

Break Even Information

• Break-even point = 13380 (Initial investment)
• Break-even buffer percentage = 8.89 (current price) - 6.69 (break even point/num_shares))/8.89 * 100) = 24.75% [This means that this position can wither a 24.75% drop in stock's price before losing any money).
  

Date (position established): 2008/12/29

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

How are options priced and where do gains come from for these trades?

I am no real expert on this. I can talk about my own understandings, but then I could be grossly wrong :)

As far as I know, the following 5 factors affect the price of an option.

1. Price of underlying stock also referred to as security or asset
2. Option strike price
   
3. Volatility of underlying stock.
• This is amount of uncertainty associated with the stock's expected returns. Higher the volatility, more expensive the option will be.
4. Time to expiration
• The price of an option decreases as it approaches the expiration date. This ties in with the volatility. Closer the option is to the expiration date, less volatile it becomes.
  
5. Risk free rate
• I will not get into this. Usually, this is the amount of interest earned by U.S. treasury bills.

The option prices are determined by using a fairly involved formula proposed by Myron Scholes and Fischer Black in 1973.

So, assuming that the market does not move too much, there are a couple of things an investor can do to hunt for gains.

1. Look for volatile stocks. These are riskier kind, which means you could end up in big trouble by trading on these stocks. But if you can craft a careful strategy around these and if you are willing to watch the price movements very closely, the chances of a catastrophe can be reduced a bit.
   
2. Make time value of an option act in your favor. This can be done by being on the "selling side" of the options trade. The price of an option decays with time, thus acting in favor of the seller (which means if everything was to say the same, the seller can close the obligation by purchasing the sold option from the market and earning a profit by doing so)

The above 2 points form the basis of "stock picking" strategy for my portfolio. Are these risk-free in any way? Absolutely not. At the end of the day, I am trading risk for reward.
So, lets see how the portfolio does. I will keep you updated.

Structure of a closing trade

All of the open positions are of the form (Buy stocks for company XYZ, Sell an equivalent number of calls)

A position will be closed because of one of the following reasons.

1. Expiration in the money
• The sold call option gets exercised (or called). This can happen anytime up to the expiration date of the sold option. This will happen only if the market price of underlying stock (also known as security) happens to be above the strike price of the sold option (otherwise, the shares could just be bought off the market). When a call option gets exercised, the seller of the call (in this case us) are obligated to furnish shares of underlying stock to the buyer of the call (one who paid us the premium). In addition to the already paid premium, the buyer will also pay us an amount equal to strike price of the call option for this transaction. If the sold call option gets exercised, then the position will realize maximum profit (This number is posted on the blog when such a position is opened)
2. Expiration out of the money
• The sold option does not get exercised. This will happen if the market price of the underlying stock happens to be less than the strike price of the option. It does not make sense for the buyer to exercise this option because he/she can obtain shares from the market at a lower price if interested in doing so. In any case, the premium that was paid earlier is ours to keep. There are multiple actions a seller can take under these circumstances such as
1. Exit the position by selling the shares. Depending on the break-even point for this position (This number is posted on the blog when such a position is opened), this may or may not end up in profit.
2. The seller can also chose to sell future calls for these shares and receive premium for the same. This is equivalent to opening up a new position (where the initial price of establishing the position needs to be adjusted to account for gains/losses incurred by current position)
3. Safety Check

• I decide to close the position because it is not doing so well before the expiration date. I watch all of my open positions very closely and the moment a position starts hovering around its break-even point, I will close it. It can be done by selling the shares and buying the call options back from the market to close out any obligation.

I intend to publish the following information about each closing trade.

Type of closing trade (whether it was due to reasons 1, 2 or 3. See above). For reason 1 and 2, there is no need to buy any options to offset any obligations and thus all values will be 0 for that leg. Right now, I do not intend to resell call options (see second bullet point under reason 2) on any shares. This is mostly to keep things simple. If I start doing that in the future, I will write an updated post about it.

Stock Leg (Sell)

• Stock ticker
• Company name
• Number of shares sold
  
• Price per share
• Total money received

Option Leg (Buy)

• Call Symbol
• Strike date
• Strike price
• Number of calls bough
  
• Total money spent

Transaction

• Total money in
  
• Initial Investment
• Net returns
  
• Percentage returns
• Annual percentage returns (Normalized returns over 365 days)

All of the prices will adhere to conservative view in terms of bid-ask spread. This means that a "buy" transaction will be recorded at "ask price" and a "sell" transaction will always be recorded at "bid price". In reality, an investor can do better than this by appropriately placing limit orders.

Al always, if you like any other fields to be added to this, please leave a comment or send an email.

A few good reads for understanding covered calls better

These folks do much better justice to explaining the topic than I :)

Readers may find these links interesting and useful.

General information:
http://www.numa.com/derivs/ref/os-guide/os-035.htm
http://www.smartprofitsreport.com/archives/2008/covered-call-investing.html
http://www.optionseducation.org/strategy/covered_call.jsp

Deep in the money covered calls:
http://www.smartprofitsreport.com/Archives/2005/deep-in-the-money-covered-calls180.html

LEAPS & covered calls:
http://www.investopedia.com/articles/optioninvestor/04/021104.asp
http://thefinancialwhiz.com/2007/02/04/selling-covered-calls-against-leaps-positions/

Let me know if you know of any other links and I will update the post.

How to compute current value of the portfolio?

A lot of you have asked about how I intend to compute value of the portfolio at any given time. I will use a very simple method to determine that.

Let me explain:

At any point of time, the portfolio has some free cash and a list of currently open trades. The value of the free cash stays the same for determination :). Now, each trade is of the following nature:

1. Buy XYZ stock
2. Sell equivalent number of calls on XYZ stock.

The value of this trade would be the cost incurred to close it (at the current time) Closing this trade would mean:

1. Selling XYZ stock
2. Buying an equivalent number of calls for XYZ stock
   

As usual, I will consider conservative points of the bid-ask spreads for both of these legs. In reality, a better price point may be reached by appropriately placing limits on the orders.

Does this sound good? Do you have any better ideas to measure the value? I would love to hear from you. Please either leave a comment or send me an email in case you have any further suggestions.

Established PRU Mar 2009 covered calls position

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081226, PRU, 1000, 26.55, 26550, 20090320, 20, 9.40, 9400, 17150)

Detailed Information

Stock Leg (Buy)

• Stock ticker = PRU
  
• Company name = "Prudential Financial Inc."
  
• Number of shares bought = 1000
  
• Price per share = 26.55
  
• Total money spent = 26550
  

Option Leg (Sell)

• Call Symbol = PRUCX
  
• Strike date = 20090320
  
• Strike price = 20
  
• Number of calls sold = 10
• Premium per call = 9.40
  
• Total call premium received = 9400
  

Transaction

• Total money out = (26550 - 9400) = 17150
  
• Initial investment = 17150
  

Returns (If calls get exercised)

• Absolute returns = 20000 (strike price * num_shares) - 17150 (Initial investment) = 2850
  
• Percentage returns = (absolute returns/initial investment * 100) = 16.62%
• Max. number of days position will be open = 20090320 (strike date) - 20081226 (transaction date) = 85
  
• Annual percentage returns (Normalized returns over 365 days) = (16.62 * 365 / 85) = 71.36%

Break Even Information

• Break-even point = 17150 (Initial investment)/1000 (num_shares) = 17.15
  
• Break-even buffer percentage = (26.55 (current price) - 17.15 (break even point))/26.55 * 100) = 35.40% [This means that this position can wither a 35.40% drop in stock's price before losing any money).
  

Date (position established): 2008/12/26

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Established UAUA Mar 2009 covered calls position

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081226, UAUA, 2000, 10.51, 21020, 20090320, 7.50, 4.20, 8400, 12620)

Detailed Information

Stock Leg (Buy)

• Stock ticker = UAUA
  
• Company name = "UAL Corporation"
  
• Number of shares bought = 2000
  
• Price per share = 10.51
  
• Total money spent = 21020
  

Option Leg (Sell)

• Call Symbol = UALCU
  
• Strike date = 20090320
  
• Strike price = 7.50
  
• Number of calls sold = 20
• Premium per call = 4.20
  
• Total call premium received = 8400
  

Transaction

• Total money out = (21020 - 8400) = 12620
  
• Initial investment = 12620
  

Returns (If calls get exercised)

• Absolute returns = 15000 (strike price * num_shares) - 12620 (Initial investment) = 2380
  
• Percentage returns = (absolute returns/initial investment * 100) = 18.86%
• Max. number of days position will be open = 20090320 (strike date) - 20081226 (transaction date) = 85
  
• Annual percentage returns (Normalized returns over 365 days) = (18.86 * 365 / 85) = 80.98%

Break Even Information

• Break-even point = 12620 (Initial investment)/2000 (num_shares) = 6.31
  
• Break-even buffer percentage = (10.51 (current price) - 6.31 (break even point))/10.51 * 100) = 39.96% [This means that this position can wither a 39.96% drop in stock's price before losing any money).
  

Date (position established): 2008/12/26

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Established WFT Feb 2009 covered calls position

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081226, WFT, 2000, 9.3, 18600, 20090220, 7.5, 2.50, 5000, 13600)

Detailed Information

Stock Leg (Buy)

• Stock ticker = WFT
  
• Company name = "Weatherford International Ltd"
  
• Number of shares bought = 2000
  
• Price per share = 9.30
  
• Total money spent = 18600
  

Option Leg (Sell)

• Call Symbol = WFTBP
  
• Strike date = 20090220
  
• Strike price = 7.5
  
• Number of calls sold = 20
  
• Premium per call = 2.50
  
• Total call premium received = 5000
  

Transaction

• Total money out = (18600- 5000) = 13600
• Initial investment = 13600
  

Returns (If calls get exercised)

• Absolute returns = 15000 (strike price * num_shares) - 13600 (Initial investment) = 1400
  
• Percentage returns = (absolute returns/initial investment * 100) = 10.29%
• Max. number of days position will be open = 20090220 (strike date) - 20081224 (transaction date) = 57
  
• Annual percentage returns (Normalized returns over 365 days) = (10.29 * 365 / 57) = 65.89%

Break Even Information

• Break-even point = 13600 (Initial investment)
• Break-even buffer percentage = 9.30 (current price) - 6.80 (break even point/num_shares))/9.30 * 100) = 26.88% [This means that this position can wither a 26.88% drop in stock's price before losing any money).
  

Date (position established): 2008/12/26

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Established BTU Jan 2009 covered calls position

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081226, BTU, 1000, 21.75, 21750, 20090116, 20, 3.0, 3000, 18750)

Detailed Information

Stock Leg (Buy)

• Stock ticker = BTU
  
• Company name = "Peabody Energy Corp."
  
• Number of shares bought = 1000
  
• Price per share = 21.75
  
• Total money spent = 21750
  

Option Leg (Sell)

• Call Symbol = BNUAD
  
• Strike date = 20090116
  
• Strike price = 20
  
• Number of calls sold = 10
  
• Premium per call = 3.0
  
• Total call premium received = 3000
  

Transaction

• Total money out = (21750 - 3000) = 18750
  
• Initial investment = 18750
  

Returns (If calls get exercised)

• Absolute returns = 20000 (strike price * num_shares) - 18750 (Initial investment) = 1250
  
• Percentage returns = (absolute returns/initial investment * 100) = 6.67%
• Max. number of days position will be open = 20090116 (strike date) - 20081224 (transaction date) = 22
  
• Annual percentage returns (Normalized returns over 365 days) = (8.75 * 365 / 22) = 110.66%

Break Even Information

• Break-even point = 18750 (Initial investment)
• Break-even buffer percentage = 21.75 (current price) - 18.75 (break even point/num_shares))/21.75 * 100) = 13.79% [This means that this position can wither a 13.79% drop in stock's price before losing any money).
  

Date (position established): 2008/12/26

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Established ZION Jan 2009 covered calls position

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081226, ZION, 1000, 22.09, 22090, 20090116, 20, 3.70, 3700, 18390)

Detailed Information

Stock Leg (Buy)

• Stock ticker = ZION
  
• Company name = "Zions Bancorp."
  
• Number of shares bought = 1000
  
• Price per share = 22.09
  
• Total money spent = 22090
  

Option Leg (Sell)

• Call Symbol = ZNQAU
  
• Strike date = 20090116
  
• Strike price = 20
  
• Number of calls sold = 10
  
• Premium per call = 3.70
  
• Total call premium received = 3700
  

Transaction

• Total money out = (22090 - 3700) = 18390
  
• Initial investment = 18390
  

Returns (If calls get exercised)

• Absolute returns = 20000 (strike price * num_shares) - 18390 (Initial investment) = 1610
  
• Percentage returns = (absolute returns/initial investment * 100) = 8.75%
• Max. number of days position will be open = 20090116 (strike date) - 20081224 (transaction date) = 22
  
• Annual percentage returns (Normalized returns over 365 days) = (8.75 * 365 / 22) = 145.17%

Break Even Information

• Break-even point = 18390 (Initial investment)
• Break-even buffer percentage = 22.09 (current price) - 18.39 (break even point/num_shares))/22.09 * 100) = 16.74% [This means that this position can wither a 16.74% drop in stock's price before losing any money).
  

Date (position established): 2008/12/26

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Happy Holidays

Happy Holidays everyone.
Be safe and have fun.

Best wishes from us!

Established MCO Feb 2009 covered calls position

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081224, MCO, 1000, 20.88, 20880, 20090220, 17.5, 4.90, 4900, 15980)

Detailed Information

Stock Leg (Buy)

• Stock ticker = MCO
  
• Company name = "Moody's Corp"
  
• Number of shares bought = 1000
  
• Price per share = 20.88
  
• Total money spent = 20880
  

Option Leg (Sell)

• Call Symbol = MCOBW
  
• Strike date = 20090220
  
• Strike price = 17.5
  
• Number of calls sold = 10
  
• Premium per call = 4.90
  
• Total call premium received = 4900
  

Transaction

• Total money out = (20880- 4900) = 15980
• Initial investment = 15980
  

Returns (If calls get exercised)

• Absolute returns = 17500 (strike price * num_shares) - 15980 (Initial investment) = 1520
  
• Percentage returns = (absolute returns/initial investment * 100) = 9.51%
• Max. number of days position will be open = 20090220 (strike date) - 20081224 (transaction date) = 59
  
• Annual percentage returns (Normalized returns over 365 days) = (11.23 * 365 / 59) = 42.71%

Break Even Information

• Break-even point = 15980 (Initial investment)
• Break-even buffer percentage = 20.88 (current price) - 15.98 (break even point/num_shares))/20.88 * 100) = 23.47% [This means that this position can wither a 23.47% drop in stock's price before losing any money).
  

Date (position established): 2008/12/24

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Established TSO Feb 2009 covered calls position

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081224, TSO, 2000, 11.89, 23780, 20090220, 10, 2.90, 5800, 17980)

Detailed Information

Stock Leg (Buy)

• Stock ticker = TSO
  
• Company name = "Tesoro Corp"
  
• Number of shares bought = 2000
  
• Price per share = 11.89
  
• Total money spent = 23780
  

Option Leg (Sell)

• Call Symbol = TSOBY
  
• Strike date = 20090220
  
• Strike price = 10
  
• Number of calls sold = 20
  
• Premium per call = 2.90
  
• Total call premium received = 5800
  

Transaction

• Total money out = (23780- 5800) = 17980
• Initial investment = 17980
  

Returns (If calls get exercised)

• Absolute returns = 20000 (strike price * num_shares) - 17980 (Initial investment) = 2020
  
• Percentage returns = (absolute returns/initial investment * 100) = 11.23%
• Max. number of days position will be open = 20090220 (strike date) - 20081224 (transaction date) = 59
  
• Annual percentage returns (Normalized returns over 365 days) = (11.23 * 365 / 59) = 69.47%

Break Even Information

• Break-even point = 17980 (Initial investment)
• Break-even buffer percentage = 11.89 (current price) - 8.99 (break even point/num_shares))/11.89 * 100) = 24.39% [This means that this position can wither a 24.39% drop in stock's price before losing any money).
  

Date (position established): 2008/12/24

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Established ROH Jan 2009 covered calls position

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081224, ROH, 500, 63.88, 31940, 20090116, 45, 22.60, 11300, 20640)

Detailed Information

Stock Leg (Buy)

• Stock ticker = ROH
  
• Company name = "ROHM HAAS CO."
  
• Number of shares bought = 500
  
• Price per share = 63.88
  
• Total money spent = 31940
  

Option Leg (Sell)

• Call Symbol = ROHAI
  
• Strike date = 20090116
  
• Strike price = 45
  
• Number of calls sold = 5
  
• Premium per call = 22.60
  
• Total call premium received = 11300
  

Transaction

• Total money out = (31940 - 11300) = 20640
• Initial investment = 20640
  

Returns (If calls get exercised)

• Absolute returns = 22500 (strike price * num_shares) - 20640 (Initial investment) = 1860
  
• Percentage returns = (absolute returns/initial investment * 100) = 9.01%
• Max. number of days position will be open = 20090116 (strike date) - 20081224 (transaction date) = 24
  
• Annual percentage returns (Normalized returns over 365 days) = (5.14 * 365 / 25) = 137.03%

Break Even Information

• Break-even point = 20640 (Initial investment)
• Break-even buffer percentage = 63.88 (current price) - 41.28 (break even point/num_shares))/63.88 * 100) = 35.38% [This means that this position can wither a 35.38% drop in stock's price before losing any money).
  

Date (position established): 2008/12/24

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Established YHOO Jan 2009 covered calls position

Here are the details of the position.

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081224, YHOO, 2000, 12.32, 24640, 20090116, 11, 1.93, 3860, 20780)

Detailed Information

Stock Leg (Buy)

• Stock ticker = YHOO
  
• Company name = "Yahoo Inc."
  
• Number of shares bought = 2000
  
• Price per share = 12.32
  
• Total money spent = 24640
  

Option Leg (Sell)

• Call Symbol = YHQAK
  
• Strike date = 20090116
  
• Strike price = 11
  
• Number of calls sold = 20
• Premium per call = 1.93
  
• Total call premium received = 3860
  

Transaction

• Total money out = (24640 - 3860) = 20780
• Initial investment = 20780
  

Returns (If calls get exercised)

• Absolute returns = 22000 (strike price * num_shares) - 20780 (Initial investment) = 1220
  
• Percentage returns = (absolute returns/initial investment * 100) = 5.87%
• Max. number of days position will be open = 20090116 (strike date) - 20081224 (transaction date) = 24
  
• Annual percentage returns (Normalized returns over 365 days) = (5.14 * 365 / 25) = 89.27%

Break Even Information

• Break-even point = 20780 (Initial investment)
• Break-even buffer percentage = 12.32 (current price) - 10.39 (break even point))/12.32 * 100) = 15.67% [This means that this position can wither a 15.67% drop in stock's price before losing any money).
  

Date (position established): 2008/12/24

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Established BIDU Mar 2009 covered calls position

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081223, BIDU, 200, 123.33, 24666, 20090320, 85, 44.9, 8980, 15686)

Detailed Information

Stock Leg (Buy)

• Stock ticker = BIDU
  
• Company name = "BAIDU COM INC SPON ADR REP A"
  
• Number of shares bought = 200
  
• Price per share = 123.33
  
• Total money spent = 24666
  

Option Leg (Sell)

• Call Symbol = BDQCQ
  
• Strike date = 20090320
  
• Strike price = 85
  
• Number of calls sold = 2
• Premium per call = 44.9
  
• Total call premium received = 8980
  

Transaction

• Total money out = (24666 - 8980) = 15686
  
• Initial investment = 15686
  

Returns (If calls get exercised)

• Absolute returns = 17000 (strike price * num_shares) - 15686 (Initial investment) = 1314
  
• Percentage returns = (absolute returns/initial investment * 100) = 8.38%
• Max. number of days position will be open = 20090320 (strike date) - 20081223 (transaction date) = 88
  
• Annual percentage returns (Normalized returns over 365 days) = (8.38 * 365 / 88) = 34.76%

Break Even Information

• Break-even point = 15686 (Initial investment)/200 (num_shares) = 78.43
  
• Break-even buffer percentage = (123.33 (current price) - 78.43 (break even point))/123.33 * 100) = 36.41% [This means that this position can wither a 36.41% drop in stock's price before losing any money).
  

Date (position established): 2008/12/23

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Established NOV Feb 2009 covered calls position

Here are the details of the position.

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081223, NOV, 1000, 22.21, 22210, 20090220, 17.5, 6.1, 6100, 16110)

Detailed Information

Stock Leg (Buy)

• Stock ticker = NOV
  
• Company name = "National Oilwell Varco Inc."
  
• Number of shares bought = 1000
  
• Price per share = 22.21
  
• Total money spent = 22210
  

Option Leg (Sell)

• Call Symbol = NOVBW
  
• Strike date = 20090220
  
• Strike price = 17.5
  
• Number of calls sold = 10
• Premium per call = 6.10
  
• Total call premium received = 6100
  

Transaction

• Total money out = (22210 - 6100) = 16110
• Initial investment = 16110
  

Returns (If calls get exercised)

• Absolute returns = 17500 (strike price * num_calls) - 16110 (Initial investment) = 1390
  
• Percentage returns = (absolute returns/initial investment * 100) = 8.63%
• Max. number of days position will be open = 20090220 (strike date) - 20081223 (transaction date) = 60
  
• Annual percentage returns (Normalized returns over 365 days) = (8.63 * 365 / 60) = 52.5%

Break Even Information

• Break-even point = 16110 (Initial investment)
• Break-even buffer percentage = (22.21 (current price) - 16.11 (break even point))/22.21 * 100) = 27.47% [This means that this position can wither a 37.86% drop in stock's price before losing any money).
  

Date (position established): 2008/12/23

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Established AIZ Jan 2009 covered calls position

Here are the details of the position.

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081223, AIZ, 1000, 26.2, 26200, 20090116, 22.5, 4.8, 4800, 21400)

Detailed Information

Stock Leg (Buy)

• Stock ticker = AIZ
  
• Company name = "Assurant Inc."
  
• Number of shares bought = 1000
  
• Price per share = 26.2
  
• Total money spent = 26200
  

Option Leg (Sell)

• Call Symbol = AIZAX
  
• Strike date = 20090116
  
• Strike price = 22.5
  
• Number of calls sold = 10
• Premium per call = 4.80
  
• Total call premium received = 4800
  

Transaction

• Total money out = (26200 - 4800) = 21400
• Initial investment = 21400
  

Returns (If calls get exercised)

• Absolute returns = 22500 (strike price * num_calls) - 21400 (Initial investment) = 1100
  
• Percentage returns = (absolute returns/initial investment * 100) = 5.14%
• Max. number of days position will be open = 20090116 (strike date) - 20081223 (transaction date) = 25
  
• Annual percentage returns (Normalized returns over 365 days) = (5.14 * 365 / 25) = 75.04%

Break Even Information

• Break-even point = 21400 (Initial investment)
• Break-even buffer percentage = (26.2 (current price) - 21.4 (break even point))/26.2 * 100) = 18.32% [This means that this position can wither a 18.32% drop in stock's price before losing any money).
  

Date (position established): 2008/12/23

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till the strike price is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Established PRU Jan 2009 covered calls position

Here are the details of the position.

Quick Summary
(date, ticker, num_shares, price per share, shares money out, strike date, strike price, premium, options money in, total money out) = (20081222, PRU, 1000, 26.35, 26350, 20090116, 20, 7.4, 7400, 18950)

Detailed Information

Stock Leg (Buy)

• Stock ticker = PRU
  
• Company name = "Prudential Financial Inc."
  
• Number of shares bought = 1000
  
• Price per share = 26.35
  
• Total money spent = 26350
  

Option Leg (Sell)

• Call Symbol = PRUAX
  
• Strike date = 20090116
  
• Strike price = 20.0
  
• Number of calls sold = 10
• Premium per call = 7.40
  
• Total call premium received = 7400
  

Transaction

• Total money out = (26350 - 7400) = 18950
• Initial investment = 18950
  

Returns (If calls get exercised)

• Absolute returns = 20000 (strike price * num_calls) - 18950 (Initial investment) = 1050
  
• Percentage returns = (absolute returns/initial investment * 100) = 5.54%
• Max. number of days position will be open = 20090116 (strike date) - 20081222 (transaction date) = 26
  
• Annual percentage returns (Normalized returns over 365 days) = (5.54 * 365 / 26) = 77.77%

Break Even Information

• Break-even point = 18950 (Initial investment)
• Break-even buffer percentage = (26.35 (current price) - 18.95 (break even point))/26.35 * 100) = 28.08% [This means that this position can wither a 28.08% drop in stock's price before losing any money).
  

Date (position established): 2008/12/22

The position will be watched closely and liquidated if it starts to hover around the break even point. A fall in the stock price till $20 (strike price) is expected to be compensated linearly by corresponding fall in the option's premium (thereby maintaining a balance and avoiding drastic losses if liquidity is desired).

The current portfolio details can be accessed here.

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Structure of an opening trade

For all opening trades i.e. (buy stocks and write calls), the following information will be posted.

Quick Summary view

Stock Leg (Buy)

• Stock ticker
• Company name
• Number of shares bought
• Price per share
• Total money spent

Option Leg (Sell)

• Call Symbol
• Strike date
• Strike price
• Number of calls sold
  
• Total call premium received

Transaction

• Total money out
• Initial Investment
  

Returns if call gets exercised

• Absolute returns
• Percentage returns
• Annual percentage returns (Normalized returns over 365 days)

Break Even Information

• Break-even point (Below which the position loses money)
• Break-even buffer (in terms of percentage of current stock price)
  

All of the prices will adhere to conservative view in terms of bid-ask spread. This means that a "buy" transaction will be recorded at "ask price" and a "sell" transaction will always be recorded at "bid price". In reality, an investor can do better than this by appropriately placing limit orders.

If you like any other fields to be added to this, please leave a comment.

What do you mean by selling covered calls anyway?

As quoted by the relevant wikipedia entry, selling covered calls is a process in which one owns shares of a stock or other securities, and then sells (or “writes”) a corresponding amount of call options. By selling a call, an investor is selling a right to the “buyer” for being able to purchase the underlying stock till a future date (strike date) at a pre-determined price (strike price). For this, the buyer pays a premium to the seller.

The return curve looks like (image from http://www.optionseducation.org/strategy/covered_call.jsp)

As indicated by the above graph, selling a covered call lowers the break even point a bit by letting go of possibility of infinite gains in the upward direction.

Advantages:

1. Lowered break even point. In case of stock price movement in the southern direction, the investor is better protected compared to just holding the stock. The premium received from selling the call serves as an additional buffer.
2. Lowered initial investment. Again, the premium received from selling the call lowers the initial investment compared to that required for just buying and holding the stock.

Disadvantages:

1. Cap on maximum gains. If the underlying stock happens to surge beyond the strike price of the call option, then the investor will not realize any profit beyond the strike price (which he/she would have realized in case of just buying and holding the stock)
2. Higher commissions. More individual legs to the overall transaction means higher commissions. These eat into the profits.
3. More complex taxation rules. The rules are definitely more complex compared to those for simple stock based transaction. Search for these on the Internet if you are interested.

Fair amount of material is available on the Internet for those who wish to learn about these further.

About this blog & Disclaimer

This blog is intended to serve as a journal for my experimentation with options (derivatives) based trading. I am new to this and want to learn more about this fascinating financial instrument. In my opinion, the best approach for this is to do it yourself, but with hypothetical money

So, for this blog I will assume

1. Initial capital of $1,000,000.
   
2. My experimentation will only involve selling (writing) short term, deep in the money covered calls.
   
3. No individual position will exceed $25000.
   
4. To keep things simple, I will assume no transaction costs. In reality, these costs are a function of your brokerage house and/or number of traded options/shares.

At the end of every month (or possibly 2 weeks), I will write about performance of this portfolio and compare it with standard indexes for evaluation. I will also make all trades available (at some point in the future) in a much nicer format (like a spreadsheet).

Disclaimer: The content of this blog is for informational and educational purposes only. If you invest using information contained here, do so at your own risk. Options trading is inherently risky and can have weird tax implications. Be sure to consult your tax advisor for the same. You may want to find more information about options trading using various search engines like Google, Yahoo etc.

Important Note: Options involve risk and are not suitable for all investors. For more information, please read the Characteristics and Risks of Standardized Options.

Hello World!

This is the mandatory "Hello World" post!