Aug 22 2009 Options expirations

I had several options positions expire over the weekend. Puts I wrote on PCL (Plum Creek Lumber) MDT (Medtronic) and MOS (Mosaic) all expired un-exercised. That capital is now free to be used in new trades. I plan to sit on it for a while until the market dips.

Shares of SLV were put to me; I immediately used these to write Jan2010 calls at a $17 strike price. I was paid $0.50 a share for these, for a total of $450 income on the 9 contracts. If un-exercised, my return will be 2.9% for the trade or 0.6% per month--negligible compared to puts, but acceptable for a covered call since the risk is significantly less. As detailed below, SLV is in my portfolio only to generate income via puts and calls.

I had written covered calls against VZ (Verizon) and MCK (McKesson). VZ was called away, fairly close to my $31 strike price. My MCK calls, however, had a strike of $45--when my shares were called away, I could have sold them on the open market for $56!

That's the risk of covered calls; you may not make as much money as you could have. My initial buy price on MCK was $23.70, so when it was at $44, I was happy to agree to sell it for $45. I never dreamed the price would increase so dramatically in less than two months.

Stop-loss orders triggered

Over the past week, my stop loss orders on GE, AAPL, and MRO (Marathon Oil) have triggered. These are all stocks I'd buy back when or if they drop 25--30% from their current levels.

LNN puts

I finally wrote puts on LNN. I wrote one contract December $35 puts, for $1.90/share. These puts will pay 5.4% [(1.90/35.00)*100 = 5.4]. I'd be happy to buy this stock at $33.10 ($35 - $1.90 = $33.10). It's currently trading around $43 after a recent price run up. This is a small cap (it's market cap is only around $525 million!) so it's price is extremely volatile. I think the market currently overvalues the stock, so I'm not willing to buy it outright.

A trade purely to generate income

One of my stop-loss orders triggered today. I used the proceeds to secure a new put position. I "sold to open" 9 contracts (900 shares) in SLV (iShares Silver Trust). These were $14 puts which I sold for just $0.25 each. They expire August 22, so this 1.78% return is generous for an 11 day commitment. The stock is trading at $14.09 now, so there's a good chance I'll get the shares. If I'm put the shares, I will immediately write covered calls on them. This is an income trade; I expect to make money by selling puts and calls on this stock, not capital gains from the stock itself.

The equivalent in real estate would be buying a house in a part of town where I don't expect property values to increase significantly. I would buy that house purely for rental income, not with plans to sell it later for a profit. If you aren't going to be writing covered calls on this stock, it isn't worth buying.

In addition, I'm making only $225 on the puts; a nice return for an eleven-day wait, but not huge (especially considering transaction costs). If I wasn't buying a large number of contracts, I would just buy the shares outright. For a smaller trade, it isn't worth the trouble or the wait.