Hey Jen,
Ahhh, I can tell you have been thinking about CCs and the process. Let me answer your question by saying "it all depends on the stock." For example, pay attention to the trading characteristics for your stocks. One pattern is what happens in the AM vs. the PM and the price of the stock. Does the stock gap up at the open only to dip around mid-day and then close higher? I tend to look at the volume for the stock relative to the average daily volume. If a stock normally trades 1,000,000 shares and today it's trading 3,000 shares at 11:00 am on mostly down ticks I would say that it is not a trend and I would hold my limit sell price because the MMs will have to move the price to my mark to pick up my money! And, they will! I would not let them sucker me into giving it away. Also, the size of the bids is a sign you can use.
Now, the second answer is more in line with your question. I will use BTGC which I currently own. I sold 7 CCs for the July 10s a week or so ago. Yesterday, after several down days the price dropped more than usual. I looked at my charts (RSI and BB) and decided that was the pivot point and today it reversed and went up by 1/8s point. I have a limit buy to cover my CCs for 1/16s. Why? My reason is that BTGC is due to start moving up again. The earnings report will be out in July and the BTGC price will start to move upwards UNLESS there is a warning of bad earnings 30 day before the report date. They do that to avoid being sued for not releasing the info. So, by covering at this cheap price I can proceed to write another round of CCs. When? When I know I can make more money on the premies. Time value is one components in Call option premies. The more time, the higher the premie and the more profit for you! Also, the more volatility the higher the premies. So, I would love to capture a spike in the CC premie with those two variables.
Let the trend be your friend. Buy on the dips your LEAPs and sell the CCs on price gaps and you will lock in more profit. Of course, you should be aware of the trading pattern before the expiration week. You will notice that most MMs will try to shake you out of your position on week before expiration. It will always be rock and roll during that week because people are trying to close out and/or move into a better position.
With my BTGC example, would you rather make only 3/8s for two months (just write CCs and hold until expiration) or 2/8s (1st CC round) + 3/8s (2nd CC round) = 5/8s total premies collected in the same length of time? It does not make sense to hold and wait until expiration if you have locked in 80% of the premie profit anyway! As the price increases after you cover you are in a new position to write more CCs and increase the income flow and the rate of return. Remember, what I just described was out of the money CCs which would pay nicely if called out at a even larger profit margin over my net cost basis (nut).
Summary: Always use volatility to do your CC work! Make the CC buyer pay for it!
Study the BTGC chart with the Bollinger Bands and RSI indicators set. Notice, you cover your CCs when the RSI drops below 50 and bottoms around 30 and at the same time the price touches the lower BBs. Look at past similar events to determine the pattern for your stock.
bigcharts.com
PS IFMX starting to look real cheap for entry into the LEAPs. |
