By Don Fanstone, Member, Kitchener/Waterloo User Group
VectorVest and the Markets:
We’re all subscribing to VectorVest and trading in the markets for the sole purpose of generating income and/or capital gains.
When using VectorVest, it’s likely that you’re buying shares or ETF’s to generate dividend income, as opposed to buying mutual funds and relying on someone else to make your stock picks. Interestingly enough, very few professional traders can consistently beat the market averages.
My broker frequently reminds me of this and wonders why I think I can do better than the professionals. If you follow the VectorVest System or a model portfolio such as Jake’s Patent Winners for example, you will do very well in picking winners, generating consistent dividend income, and keeping your trading costs to a minimum.
If you want to do a little bit better with respect to income received, you can sell Covered Call Options on the stocks in Jake’s Patent Winners. I will write about this in a future column.
For the purpose of generating Capital Gains, there is opportunity in trading Call or Put Options.
I will be writing a weekly column here in Stan’s blog about Options. If you have questions, please use the “Post” at the bottom of the blog to post your question. I will do my best to post an answer to every query.
Option trades since last Tuesday Feb. 10:
Sold 10 Avigilon (AVO) July 14 Calls @ $10.80 on Feb. 13. Bought @ $6.00 on Jan. 2/15. 80 % Profit.
Sold 5 CGI Group (GIB.A) Aug. 40 Calls @ $13.15 on Feb. 13. Bought @ $10.00 Jan. 26/15. 31.5% Profit.
Sold 10 Great West Life (GWO) July 28 Calls @ $7.82 on Feb. 13. Bought @ $4.15 on Jan. 29/15. 88% Profit.
All of these trades could have been held longer. Experience has taught me to follow VectorVest advice. Take profits in hand. While they were not exhibiting sell signals, the significant profit in $ said: “A Bird in the hand is worth two in the bush!”
Added 10 Brookfield Asset. Mgmt. (BAM.A) July 62 Calls @$7.15 Brookfield had a great earnings report.
Added 10 Kroeger (KR) July 65 Calls @ $9.20 (USA Holding). An excellent graph, running lower left to upper right. All signals positive.
DISCLAIMER: Options trading involves risk and is not suitable for everyone. The information contained in this Blog is for education and information purposes only. Example trades should not be considered as recommendations. Options training is strongly recommended before placing any trades. VectorVest offers a basic options course online and occasional intermediate options workshops in Canada each year.
Thank you for your regular posts.
Can you please discuss the parameters for your call options strategy? I see that both KR and BAM.A call options are about five months out, at deltas of 1.00 or close to it where the option price behaves much like the underlying stocks without the required capital outlay. What is your exit strategy as you have closed your positions in AVO, GIB.A and GWO before their July-Aug expiration?
I am also interested in applying covered calls to my holdings based on Jake’s Patent Winners. However, the guidelines from a webinar on the topic of using the front month especially on Canadian stocks would generate such pitiful premiums that’s really not worth my while unless I am willing to accept assignment. What is your experience on this?
Thank you for sharing.
Please Note: Brookfield Asset Mgmt. did not increase the Dividend, an error on the positing.
I have fixed and updated the post. Thanks.
Vicky:
The general parameters are as you have noted, Options 6 months out to give the underlying time to work, and a delta of .80 or greater.
Canadian Options are scarcely traded. if I want in, I buy at the offer, if I want out, I take the bid. There is a market maker and I always get my fills when posted. Many have considered it a poor practice due to the low volumes, but it has been acceptable as you will note.
I tend to follow VectorVest and take profits as they accrue. Holding options for any length of time has not been worthwhile in most of my situations. CNR has been an exception. When profits occur and a new Option expiry date is posted, I usually sell the current option and buy the longer dated option. These are broad strokes and each situation is addressed at that point in time.
Covered Calls are normally sold one month to take advantage of time decay. Unfortunately, the premiums are very low. In the context of what you are receiving in dividends, ideally the option premium received should at least double the dividend.
Alternately, sell a Call Option that is 10% higher than the stock price further out .While you may be “called”, evaluate the return including dividends. For this reason, it’s wise to hold a monthly dividend payer.
Don
Thanks for your option posts Don.
I’ve been trading options for a few years and have sold naked puts consistently for income. The way I’ve profited from the energy collapse is to sell naked puts on XEG (Ishares energy ETF). I wait for support to build as it has for XEG at $13, and then sell the $13 puts one month out for income. This has worked great last month and this month (expiration this Friday), but with the increase in the price of XEG I will probably sell the $14 strikes expiring in March, in order to receive a decent premium. If the price is at or below $14 by expiration, I will gladly take possession of the shares as I feel they will be higher within a year, and pay roughly a 2.5% dividend.
Great info Don. Thanks. Did you purchase BAM.A and KR today at those prices. Just started
To read Stan blog and follow you today.
Don, Do you ever buy a put? (Say, at a C/dn or DPO going negative & price falling below 30 dMA or when the market is tanking.)
What is your understanding of DITM, as opposed to one strike ITM?
Do you use ProTrader….. to search out, for instance, DPO > 0 and price > 30dMA? I guess that you might be able to add a filter such as Optional Stocks, or even Petra Hess’s 3 & 8 EMA crossover? Currently I have not bought the ProTrader and have not tried that , but am “thinking out aloud”…so I guess my question is do you have and use Pro Trader? ( I have Opt Analyzer…..)
Thanks and keep on posting…all very useful and valuable information.
Robin.
Reg:
You have the Naked Put Option Strategy down to a “T” and profiting well. For all would be Option Traders, Reg’s Naked Put Option Strategy is outlined in Lee Lowell’s book, “Get Rich with Options, Chapter 7, Page 93. Book is available from VV or likely Amazon.
Don
Rick:
Yes, those were my fills on the Canadian market. BAM also trades in the US I understand.
Don
Robin:
I do have ProTrader and I admit, I have not made full use of the tool. I will address your search suggestions.
DITM options are options that have a Delta of .80 or greater. Ideally, if you buy an option with a Delta of 1, the option will increase in price dollar for dollar with the underlying security. It’s a toss up which to buy, Dollars invested versus Option return.I do not normally buy In The Money Options. The only time this may be a worthy consideration, if you knew that a stock would be announcing a healthy earnings report or a takeover or being taken over, you may want to buy a good number of Call Options cheaply. Normally, the calls I buy are DITM.
Don
Thanks Don. So typically for DITM options ,how many strikes in the money do you use? OR , does DITM mean a Delta of .80 or more…sorry for the confusion, but someone from VV suggested that ITM was one strike , and DITM was 2 strikes ITM.
Tks.
Robin.
Hi Don,
Thanks for the great info. I took the Basic Options Course with VV in the summer and find your words of wisdom to be an excellent supplement to the course.
AVO had a pullback between January 2 and January 14. I find that setting stops on options using the same techniques as I would on stocks to be too narrow, resulting being stopped out of a position earlier than I would like. Volatility is a good thing for options but I’m struggling trying to manage the negative aspects of it. What kind of stop limits, exit strategies or general approach do you use to exit a position if the position pulls back without any significant gain?
Thanks,
Rick
Rick:
I do not set stops on the option holdings. Once I buy the Call, I track the stock price each day and the profit or loss on the option holding.. As long as the stock price is going up, I stand pat. If the profit on a position gets to be significant, as it was on Great West Life in a short period of time, I cash out. I may leave money on the table, but I tend to follow VectorVest’s advice on taking option profits in hand. On occasion, I do go back in and buy a similar option with a higher strike price, having less money at risk.
With options and a normal investment of $10,000 give or take in some cases, I limit all losses to $1000 to $2000 if I am able.
A good guideline is the Star Search graph. If the stock continues to ride up in the upper channel, it’s a hold, if it starts to trend down, then you need to make a decision on what you know. Better to be safe and out of the call. They do go down faster than they go up.
Hope this helps on when to sell.
Don
Robin:
You asked if I ever buy a PUT. I have done so once and I realized a small gain. For some reason, I am much more nervous with PUTS than Calls. At the next C/D, I will endeavor to focus on PUT trading. Stocks do fall fast and I’m sure that the PUTS would be profitable in a short period of time.
Don
“Never buy an investment you don’t understand”. I’m sure I must have read that somewhere. As an options novice I was very excited to see your blog as it adds so much to my comfort level to be able to follow along with someone who knows what they are doing. I’ve dabbled in options this year and bought and sold calls, sold naked puts and sold a covered call i.e. all the simple stuff.
A few weeks ago when Dr. D. talked about selling $90 Jan/16 puts on SLB I thought this is fantastic. Who better to follow than the big guy? And it sounded so simple and success should be all but guaranteed. I had to call TD and take a small verbal test on the phone to get permission to sell naked calls. Well of course a week later the situation became a bit more complicated when Dr. D. added the sale of $90 Calls resulting in a Short Straddle. At the time it all seemed to make sense. But now everything I have Googled screams of “danger” when doing straddles which should only be done by “advanced” traders.
As the stock approached the $90.00 strike price a few days ago I called tech support to ask if I needed to do anything or if anything will happen automatically. I was thinking will the stock get “Put” to me…..and “Called” away at the same time? Actually that would be great, leaving me with a pile of cash (I think). But it can’t be that easy and I can’t be that lucky. Plus there are two breakeven points, one quite a way above the strike and one just as far below. So Don, correct me if I am wrong but I think I just want SLB to go sideways until January and hope that the price does not move too far from the strike. I still cannot however get my head around the question of whether or not sometime during the year something will actually be triggered while the stock is between the break even points and while I may still have a few hairs left on my head …so that is my question.
The VV tech support answer this week was “Mr. Cauley you are a very brave man”. What a confidence builder that was LOL. I would be very interested to know if others followed Dr. D blindly like I did or if I am the only genius.
Thanks for this great blog and have a great weekend,
Tom
I am a newbie. I own 200 shares of Apple and am trying to figure out the best covered call to use to step my toe in the option waters. Thanks
I am a newbie and trying to learn about options. I own 200 shares of Apple and am trying to determine the best covered call strategy to use. Please help. Thanks
Don….this column you are writing is excellent. Options is a field that one never stops learning so enjoying the questions and the answers. Yesterday, I was contemplating selling a covered call in the US. I was wondering if doing this exercise on the expiry date of an option is something one should do or wait until the Monday following? I am just not sure what the dynamics are with options on expiry Friday and maybe it makes no difference at all.
Lucine:
Selling Covered Calls provides a range of considerations.
For every 100 shares you own, you can sell One Call Option.
If you’re holding AAPL for the dividend, then you would likely sell a Call Option, one month out, one strike in the money. Normally, this does not provide a large return. If you could do it every month, it would add up.
A March 135 will get you about $1.20. If AAPL gets above $135 by March 20, you will be called away, and earn $5.51 +$1.20 on your $129.50 investment. $6.71/129.50 = 5.18%, annualized it’s 62% less commissions.
If AAPL does not get to $135, you get to keep the $1.20 and do it again.
Alternately, what is your objective with respect to what you are expecting in the way of return!
If you want to gamble on being called at a higher stock price, sell a July 145 Call for $2.90. This is $15.50 + $2.90 for a total of $18.4% if you are called away.
Selling Covered Calls limits you in what you can or cannot do.
When you are short a call, you cannot sell your stock until the call expires or you are called away.
If the stock moves up significantly, you will miss out on the gain unless you rebuy the Call you sold.
Please read Lee Lowells’ book on Option Trading. He explains it in more detail.
Don
Tom:
Your opening statement says it all, “Never buy an investment you don’t understand!”
I am surprised that TD would let you sell naked calls without a significant amount of money in your account to cover a situation where you might be called to deliver the shares if the stock price were to go above $109.81. Selling naked calls is dangerous, not a trade I would make.
At the moment, you have a trade that will not expire until Jan 15, 2016. Can you sleep peacefully until that date?
One of my personal guidelines is simply, “If a mistake is made, correct it at once.”
I have no idea where SLB will go. It’s a wide range from a high of $109.81 to a low of $70.19. Even with the wide range, the stock has traded above and below these values in the past.
The trade itself is not a mistake, but a situation where you are in the dark as what you should do and when.
You can hold on and hope, or you can close out the trade with a minimal loss and sleep soundly. The choice is yours.
Don
Hi Don,
Thanks so much for your reply. I think TD must have let me do it because the account has enough stock in it that there is C$213 k of available margin. So I guess I might get hit with US$90K of SLB which would be on margin and I would want to get rid of it ASAP.
This blog is fantastic.
Thanks Don,
Tom
Bob:
Option values do change following an expiry date. It will not make a large difference, but you will likely get a good trade if you wait until the Monday following an option expiration date.
Don
Great….thanks Don.
Tom
You and Dr. DiLiddo are both sitting on significant income from Selling the Naked Puts and Calls ($19,810). While you think about what can go wrong, you could BUY some insurance. This involves Buying both Put and Call Options with the same expiry but with strike prices that will limit your losses. This means giving up some of your profit, but you may sleep more soundly knowing that your potential loss is a limited amount.
Don
Hi Don..Stan suggested I ask you this newby question…as he is heading for Montreal :)..snow cold…
I stepped into the realm of options a few days ago and sold a covered call on apple
strike at 129, mar 6 expiry for $2.20 apple had been flat for a while so I thought why not, and its at a high already
today that option is $4.40 and apple is trading at 132.60
So here is what I know…129 +2.20 is the value is 131.20 (not incl comm), so it is very likely the stock would be called from me, unless apple goes down a bit. Its down from its high, so thats good..(I think).
I am uncertain what would be the best for me to do at this point.
Closing doesn’t seem like a good option unless I think apple will go up more in the short term.
I could just sit, and if stock is taken, buy back in on a dip, or on an momentum upswing.
What i am saying is I am having difficultly in assessing the situation when its this close..
Looking for a view thru ‘experienced eyes’
Thanks
John:
Your conundrum is common to many who sell a covered call and then find themselves missing out on a rise in the price of the stock and the option.
I do not recommend buying back the option due to the fact that it could turn around and you would be out money.
You’ve made the trade, let it expire. If you’re called away, buy the stock again. Consider it a lesson for your trading plan going forward.
Selling Covered Calls on stocks “on the move” will earn you income, but you sometimes face a situation you are not entirely happy with.
Covered Calls work best on good dividend paying stocks with a low GRT rating.
Don
Hello, I have 10.00 calls written on a stock expiring June/2016.
The company is going to be taken over Dec.15 for (.75 in the new company’s stock.
What happens to the calls written?
thank you