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August 22, 2003
After
the Expiration
by John Brasher, CallWriter Publisher
| Last week I
explored what to do following expiration of a covered call,
using an actual trade we called in USG Corp. (USG). The
stock was purchased for $15.11, and the AUG 15 Call was
written for $1.03 (a 6.08% return for a 17-day
holding period - so far.) USG closed down slightly ay $14.87.
The following week our USG shares were again free and the stock
was up again over $15. Here's what I did... |
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Take Your Profits...
After examining
the position, we decided on the following Tuesday to place an order
to sell USG to close the position entirely - limit $15.40. The sell
order was filled at an average of just a hair over $15.40. USG was
briefly as high as $15.65 earlier in the day but not for very long,
so I missed the day's high. No matter; I have never actually suceeded
in buying at the day's low or selling at the day's high. I'm always
too early or late, and have never had a hole in one, either. USG
is an anomalous stock in that many of its option series have comparatively
high volume but the stock itself is not a high-volume stock normally.
In trading it is rare to catch the actual highs or lows.
Here is how
the trade worked out - a net return before trade costs of $1.29:
| Bought
USG |
-$15.14 |
| Wrote
AUG 15 C |
+$
1.03 |
| Sold
USG |
+$15.40 |
| Net
profit |
+$ 1.29 |
That's an
8.52% return for a 21-day hold - without using
margin - which works out to a 12.17% monthly return. Using full margin would
have doubled that return. Traders don't always make the most money
possible on a trade, and our goal is consistent monthly returns
with no drawdowns, not making the maximum possible return on each
trade.
You may wonder
why we closed USG instead of writing a new call. Even when USG moved
up that day, the bid on the SEP 15 Call really didn't increase;
we never saw the bid on that call go over $1.10. We kept thinking
that the September premium would increase as the stock moved up
and we could pounce on it. But the market just isn't seeing USG
as very volatile right now and isn't putting a big premium on the
SEP 15 Call. Put differently, if the stock can move from $15.25
to $15.70 in a day and not put any additional premium in next month's
call, a new USG write for September didn't make sense to me.
In my view,
writing the SEP 15C as USG moved up would have been letting the
market pick my pocket, compared to other trades available. The reason
is that USG was up ($15.40) and I could sell the stock at that price. That
is, instead of writing the SEP 15 Call for another $1.10 in premium
(only 0.70 was time value, remember, because the call was ITM and
I would have to sell at $15), I simply elected to take the profit
off the table. The return offered was not nearly as sweet as the
AUG write.
Another trader
might have decided that one differently and happily written the
SEP 15C. Neither he nor I would be "wrong" - it is
a matter of how you want to trade. Other traders might prefer to
write a good stock they still owned, and that would not be a wrong
decision; it just wasn't mine.
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