I've been in the same position with CMGI. Not that they're the best ideas, but here's what I've done.
- Keep rolling up and out if you can.
- At some point the stock just keeps flying such that you can't even do that - either because there aren't higher strikes available or because the roll-out itself doesn't yield enough return to be worthwhile. But then again, if you're at that point, look at your return if you just unwind the position. I had some shares I bought at 120 in January that were covered with June 160's in my IRA account. At the time, that would have yielded a 60% return ($20 premium reduces cost basis to 100) in 1/2 a year if I were called out so I thought it was a good investment. This week, I saw there was little premium left in the 160's so I simply unwound the position and took 158+ change instead. That's still almost 60% in 3 months which is quite acceptable for me <g>. Now I have the $$ to reinvest + 2 months to improve on my original 60%-in-6-months goal. Had I tried to roll up and out I would have had to increase my cost basis such that the return wasn't as worthwhile.
- Buy 2 or 3 out of the money puts for every 100 shares and buy back your calls (this won't work in a retirement acct, btw, because they won't let you do 2 for 1). If the stock continues flying, you'll gain more on the shares than you'll lose on the puts. If the stock tanks, you'll make more on the puts than you'll lose on the stock ... well, it depends how far it tanks, how many puts you buy, delta, etc. You need to crunch the #s. In general big tank, you win; little tank, you lose. But CMGI doesn't often do things in a little way. At expiration of the puts, redetermine an appropriate CC to write for next month. Again, if the beast has moved up, you'll get more premiums than if you just roll out your original CC. If its tanked, the gain on the puts should cover the reduced premiums.
- One thing I've learned with CMGI, YHOO, et al. NEVER cover all your shares. If your portfolio is small, just buy 120 shares and cover 100 but always leave _something_ for those times when the thing runs 70 points in a week as it just did.
- If your portfolio is large, consider buying calls further out of the money when you write your CCs. E.g. write 10 May 250's, buy 5 May 260's. You'll still get a nice net return on the calls and you're covered if the stock goes to the moon.
I'm far from having mastered CMGI type stocks and CCing them. Perhaps they're best left not CC'd. Indeed, in only 4 of the past 12 months did you make more $$ CC'ing CMGI. That is, just holding the stock uncovered was the better investment. But who knew when the stock was at 40 in December that it would jump 600% by April? A CC is in effect shorting the stock and with fast movers, you can 'lose' or just not gain as much. ALSO, bear in mind that if you only get 1/2 of the monster run-ups, you're probably still getting a pretty good return on your investment and shouldn't feel bad because you didn't get all of it. Its just being more conservative.
Anyway, anyone else have any thoughts/ideas on how to deal with monster stocks & CC's, I'm all ears!! |
