October 18th, 2009Covered Call Adjustments On Mosaic
There are several posts on covered calls at Geldpress, including:
- Time for cover – the covered call
- Covered Calls – Scottrade, Tradeking, Fidelity
- The VIX index and covered calls
- Covered Call Writers Love High Volatility
- Picking A Strike Price For Covered Call On McDonalds
- Covered calls – removing the covers and going naked
I successfully use covered calls, married puts and collars within my own accounts on a regular basis. My recent trading activity in Mosaic (symbol MOS) will show some examples of covered calls and their adjustments. It is not necessary to keep a covered call on though the expiration date. When the underlying stock within a covered call drops significantly, there will often be an opportunity to buy back the covered call (BUY TO CLOSE) for a modest profit. Buying back the covered call early leaves the shares naked, and fully able to capitalize on a rebound in share price, without the limits of the profit restricting covered call. It is purely a judgement call on exactly when to buy back the calls, but as a general rule consider buying back covered calls early for the following reasons:
- You are still bullish on the underlying shares, and happy to own them naked (without the protection of the covered call)
- You can realize a significant profit on the covered calls by closing them early, and there is a potential for a rebound in the share price.
- The potential for realized profit occurs with at least 1-2 weeks prior to expiration.
A summary of the points regarding the activity above:
- Purchased 400 total shares at an average price of $51.39
- Sold (2) MOS Sep calls for $2.86 and (2) MOS Dec calls for $6.91 – SELL TO OPEN
- On Sep 10th, I rolled the Sep calls to October for more protection and to collect more premium. This resulted in a $210 realized profit from the (2) sep 50 calls when they were closed (BUY TO CLOSE).
- On Oct 5th, with Mosaic stock down, I bought back the Oct 50 calls for a $566 realized profit.
- Mosaic reported earnings on Oct 5th at the close. To prepare for a potential disaster, I protected the Mosaic position by buying (4) Sep 45 puts. (married put)
- With earnings over, I sold off the puts on October 6th. I took a realized loss on the puts of $376.
- On Oct 6th, I re-covered some of my naked Mosaic position by adding (1) Nov 50 covered call. The final 100 shares were left naked to gauge the reaction of the market on Mosaic over the next few days.
- On Oct 16th after a small rally in Mosaic (I was hoping for a major rally, but settled for a small one), I covered the remainder of my shares with another November covered call. Note that by waiting, the second covered call sold for $120 more than the first.
- My current position is long 400 shares of Mosaic, short (2) November covered calls, and short (2) December covered calls.
The point of the above is only meant to display one such example of trading, rolling and adjusting covered calls, and not to dissect all the other possible trading ideas possible – better or worse. Trading is a judgement call, and the above is a recent history of my own trades and adjustments based on how I felt at the time the trades were made. You are free to have your own opinions.
Disclosure: Still long Mosaic covered calls.
Disclaimer: Trade at your own risk! The above is an example only of recent activity in my own account, and not to be considered an opinion or trading advice of any kind.
For more information on covered calls, please consider purchasing one of the following books:
Covered Calls and LEAPS–A Wealth Option + DVD: A Guide for Generating Extraordinary Monthly Income (Wiley Trading) by Joseph R. Hooper