Trade Adjustments Today - AMZN
January 4th, 2008 by John BrasherYesterday (1/3) I put on some trades, since I like to write on market down days. I didn’t know today would be another market sell-off day, but who did? I want to do more this year of sharing my trades and thought processes with you. I won’t always be right, any more than you, but my goal is profit, not glory. I want to discuss one trade in particular: Amazon.com (AMZN):
| COVERED CALL - John Brasher |
|||||
Date |
Sym. |
Ident. |
Order |
Price |
Debit |
| 1/03/08 | AMZN | Amazon | BOT |
97.00
|
97.00
|
| 1/03/08 | ZQNAT | JAN 95C |
STO |
-4.80
|
92.20
|
| Stock falls to 90.67 |
|||||
| 1/03/08 | ZQNAT | JAN 95C |
BTC |
1.97
|
94.17
|
| 1/03/08 | ZQNBR | FEB 90P |
STO |
8.15
|
86.02
|
I’ve done well with AMZN - it has been berry, berry good to me. The more I think about etailers, though (and AMZN is the big dog in etailing), the industry is a bit overbought, with a P/E over 100. So when the stock dipped today with the market sell-off, I decided to roll the calls down and out. I bought back the JAN 95C (-1.97) and sold the FEB 90 Call (+8.15). This lowered my cost basis to $86.02 in a stock that cost $97.00. Thus if called on the FEB 90C, I make roughly $4.00 a share, or 4.3%.
FEB expiration is on 2/16, which is 42 days out. If called, my return will be 3.1% normed to a month [4.3% / 42 days x 30-day month). This means that absent further selling off I will make a return that is at least 3% per month. I’m doing several contracts, so trade costs are minimal.
Should I have rolled down? Well, AMZN has started to come back a bit, but who knows? If there is bad news, I will be happy for rolling down-and-out. If it snaps back, I will not cry about leaving money on the table. 3% a month is not bad where I come from, and I’ll take it happily.
January 4th, 2008 at 1:12 pm
Why do you write covered calls instead of writing naked puts? Esp. if you expect to be called away?
Thanks.
January 4th, 2008 at 1:45 pm
We do write naked puts OTM when quite bullish, usually below a strong and trustworthy support level. For this reason, CallWriter offers an extensive suite of Naked Put lists. When we think a fallen stock has bottomed at strong support on big volume, we sometimes write OTM puts.
For most traders, naked puts must be cash-secured, in which case the advantage of writing puts compared to covered calls largely evaporates. Also, it is easier to manage a covered call, since stock does not expire and options can be added or sold in tandem with the stock’s movement as advantage appears. Neither strategy is superior, and both have their advantages and disadvantages.
January 4th, 2008 at 1:55 pm
I have 2000 shares of xlf with a cost basis of $32.02. Any suggestions on how to make money from this situation? New to covered call writing. Need help badly. Thanks.
January 4th, 2008 at 2:29 pm
Hi Andrew - we cannot give specific advice about what to do with stocks. The best practice is to first decide your outlook on the underlying - bullish, bearish or neutral, based on the chart and performance of the related index. XLF is a toughie bcause volatility and IV are low, so time value premium stinks.
If bullish, I typically wait for the price to recover (because writing calls below basis results in getting called at a loss or having to buy back the calls to avoid this when the stock rises). I may also do add-on trades, such as write naked calls, buy calls or put on a bullish spread. Writing the June 32C for 0.78 in premium, for example, provides little downside protection and very little return. If bearish, I usually will buy ATM puts a couple of months out and may add a bear call spread.
Whatever you do should be driven by your outlook. You may be wrong, but anything else is a shot in the dark.
January 7th, 2008 at 6:53 am
Are you primarily a growth investor? From a value perspective, AMZN seems greatly overvalued at 100+ P/E ratio.
From a fellow covered calls investor
January 7th, 2008 at 9:36 am
if you were thinking of rolling down . read Larry mcMillan’s book “Options as a Strategic Investment”. In the book, he points out that if you write covered calls and you are afraid that the market will go down or if you worry that your rolldown will be unfavorable, then buy a protective deep out of the money PUT ( “protective PUT”) at the time you write the cover call. it only subtracts a small fraction from what you get from the “call write” and it adds a layer of protection should the stock fall. best wishes
January 7th, 2008 at 11:20 am
Buying puts can work well, if not too overpriced. Sometimes they are breathtakingly expensive, due to high IV. If the level of IV collapses, the put’s value will collapse even with no change in the stock. The dynamics of long puts and rolling short calls are quite different. Repairing a down stock with low volatility and almost no premium is a difficult feat. I agree that rolling down is not the answer, since the purpose of rolling protectively is to lower our cost basis and position the trade to still make money. If it does not accomplish both, it should not be done.
January 7th, 2008 at 12:55 pm
Jeff - I am usually a conservative call writer. AMZN has been a good friend over time and is an industry leader. I do risk being caught if etailers take a huge hit, due to high P/E.
January 30th, 2008 at 10:00 pm
John,
If you have an opportunity, please advise if you plan to continue to hold AMZN Feb90 covered calls position until expiration.
Thank you.
January 31st, 2008 at 2:14 pm
Hi Jeff, I have made several AMZN modifications since the first post, which I have not had time to update. My basis is now about $82.50, stock 74.87. I am not short any calls and will simply let it recover. I should have done the position as a SuperPut - I could have made about $20 selling the long put today… John