Herm and thread;
From a longtime lurker, I wanted to express my thanks for your efforts. As a small payback, I want to explain the CC strategy I have used to good effect. Namely, combining bottomfishing with cc's.
As steve said many moons ago, the 3 most important factors in a strategy's success are: the stock, the stock, and the stock. To that end, I have been focusing on finding stocks that are the most likely to do what I want. For cc's, that means rise or stay flat. 2 basic stocks meet this need: Dumper stocks, and depressed stocks.
Dumper stocks: In this jumpy market, many good companies will announce slightly bad news, and their stock gets a severe haircut. Once the stock consolidates, it is ripe for a CC. The big drop means big volatility, which provides the option premium. Even more importantly, the big drop and consolidation gives the stock a very clear lower support. I am very comfortable using full margin on these issues, since my stop loss point is well defined, and close by. These stocks rarely drop below their support level, and if they do, you have a big red flag signal to get out. There is no temptation to hold on and use repair strategies; which can make you ride a loser down to the basement.
Depressed stocks: Any stock that has consolidated at its 52 week low. Similar to dumpers, these are great because they spell out their lower support in big neon letters. Fewer of these stocks have high call premiums, but there are still plenty of them out there.
Timeframe: I always write these options 1 month out. I am not interested in being exposed to the stock once it moves up from its support. If the stock stays flat and I dont get called out, my decision for the next month is mostly based on the call premiums. Still high: write another month. Premium has evaporated due to the low stock volatility: sell the stock and move on.
Here are a couple of plays from last month...
Occular Sciences (OCLR): Good profitable company issued an earnings warning and got hammered. Bot @ $16.25 on 6/22. Sold JUL17.5c @ $1.25 on 6/24. Using 50% margin, return is 15% uncalled, 25% if called. The best part is the stop loss. The stock had rock solid support at $15 after its big fall. My break even was also at $15. If the stock had collapsed further, I could get out with less than my max loss of 25%. As it happened, the stock moved from $17 to $18 the day before exp. If it had not, I would have sold it anyway for about $17.5 on Monday. The option premium had dried up, so I would have gone looking for a better place to fish.
ICG Comm (ICGX): Telecom company with decent outlook. Not a depressed stock, but it did have firm support at 18 for the past 52 wks. I bot the stock on 6/21 @ 19.75. Wrote the JUL20c @ 1 7/8 on 6/21. This gave me a nut of $18, exactly at the low support. Had the stock broken below 18, I would have exited with a small loss. Otherwise, I was setup for a 20% gain if the stock stayed flat or moved up even slightly.
One likely candidate for the coming month: NEON.
As most of you know, coveredcalls.com is a tremendous resource for finding stocks with good option premiums. However, their main lists only show calls that are out of the money. ITM options can also be very nice plays. Lo-and-behold! The good folks come through again.
coveredcalls.com
Sorry about the long post. =)
-Jeff |
