Covered Call Play with AMD

In my search to find different and new (to me) ways of making money, I came across something called a "Covered Call".  I will provide my play with AMD as an example rather than rehashing the concept of a Covered Call.  You can read/learn about it here: http://en.wikipedia.org/wiki/Covered_call


Today Oct 6, 2011 I purchased 300 shares of AMD @ $4.75 with intent on writing a covered call (Scenario A).  Here are the various possible scenarios:


Scenario A - Going Long with AMD and Writing a Covered Call

• Buy 300 shares of AMD @ 4.75
• Sell Nov $5.00 Call Options for $.40
• Instantly realize a profit of 300 * $.40 = $120 before fees

A couple of possible outcomes:

1. AMD hits $5.00 or higher on or before Nov 19, 2011 and the Option is executed

My shares of AMD is called away at $5.00 (aka sold at $5.00) so I realize a profit of $.25 * 300 = $75.  Add this to the Call Option that I sold for $120, my total gain is $75 + $120 = $195 before fees.  That is an approximate gain of 13.68% before fees, in a little less than two months. Not bad.

2. AMD stays under $5.00 up until Nov 19, 2011

I get to keep the 300 shares of AMD and the $120 from selling the Call.

Scenario B - Going Long with AMD

• Buy 300 shares of AMD @ 4.75 with hopes of it appreciating; let's say to $5.00 in the various examples
• $5.00 - $4.75 = $.25 profit per share
• 300 * $.25 =  $75.00 before fees ~ 5.26% profit
• Or I can hold until a higher price is achieved

Summary:

By going with a Covered Call, you can view it as buying insurance at the cost of limiting your gains.  In this example, my gains will be capped at 13.68% and I can sell AMD at $4.35 to break even (not accounting for taxes nor fees).

I plan on providing an update on or after Nov 19, 2011. Good Luck!

Update 11/21/2011:
AMD closed at $5.47 on Friday 11/18/2011 and that means the Call Options I sold were in the money.  Since the options were in the money, they were 'called' away and they sold for $5.00; just as outlined in Scenario A1.  I realized a profit of $195 before fees for a gain on 13.68% and after fees, the realized profit was $151.35 for a gain of 10.55%; not bad for holding a stock for about 6 weeks.  I'm off to a good start in the world of writing options. A nice little Christmas present for myself or for a loved one.


As an encore, I purchased on S (Sprint) on 10/13/2011 and sold Jan 2012 $3.00 options for $.42.  I'm also looking to other stocks and perhaps large cap dividend paying ones.  Until next time.

Current Holdings

Here is a list and breakdown of my current holdings:

• Maybe I'll do a breakdown of why I went with these stocks and how they are performing (in future articles)

Name	Symbol	Percentage
Altria Group, Inc.	MO	9.45%
Philip Morris International Inc.	PM	21.09%
Lorillard Inc.	LO	2.93%
AT&T Inc.	T	8.49%
Verizon Communications Inc.	VZ	4.46%
Frontier Communications Corp	FTR	1.03%
Johnson & Johnson	JNJ	5.86%
The Procter & Gamble Company	PG	5.24%
Microsoft Corporation	MSFT	8.54%
Intel Corporation	INTC	9.84%
Cisco Systems, Inc.	CSCO	2.30%
Computer Sciences Corporation	CSC	1.26%
Unnamed Tech Company		6.61%
Unnamed Insurance Company		2.58%
General Electric Company	GE	2.20%
RadioShack Corporation	RSH	2.39%
Best Buy Co., Inc.	BBY	0.82%
Target Corporation	TGT	0.86%
Energy Conversion Devices, Inc.	ENER	0.74%
Broadwind Energy Inc.	BWEN	1.85%
Pacific Ethanol Inc	PEIX	0.18%
Northstar Realty Finance Corp.	NRF	0.70%
Aeropostale, Inc.	ARO	0.59%

ZAGG - Investment Thoughts

Note: Original article was an email amongst friends; contents on this email is as of 7/6/2011 and have been edited for grammar (to the extent possible) and calculations.


A friend of mine bought a few shares of ZAGG on July 6th.  My friend has been keeping his eye on the stock for quite a while now.  He notified me that he placed an order and it executed.  I did not have time available to perform an exhaustive due diligence research and deferred to his judgement since:

1. He's been watching a stock for a while now
2. He's made other investments and predictions that came true
3. I did not have much money to put in and the amount of effort required to perform due diligence would have not been worth the opportunity cost

Due to the first part of reason three, I decided to go into ZAGG with a Call Option instead of buying the stock itself.

I bought $16 Feb 2012 options for $1.44

There are a couple of ways to make money here:

• ZAGG increases to over $16 on or before Feb 2012
• ZAGG increases but not quite to $16 on or before Feb 2012

Example A:

Let's say ZAGG increases to $18.00 between now and Feb 2012; I can:

1. Execute the options (300 * $16 = $4800) and sell (300 * $18 = $5400), netting $600 and then subtracting the cost of the options of $432 for a profit of $168 before fees.  Not a lot of money in absolute terms but it is a 38.89% gain.

2. Sell the options for $2.50 (300 * $2.50 = $750) and then subtracting the cost of the options of $432 for a profit of $318 before fees.  This is decent money and equates to a 73.61% gain. Fuzzy math projection based on ZAGG options that are about $2.00 in the money (today's price is $12.50 and the options I looked/compared are the $11 options).

Example B:

Let's say ZAGG increases to $16.00 between now and Feb 2012; I can:

1. Execute the options (300 * $16 = $4800) and hold for a paper loss of $432 before fees (the cost of the options)

2. Execute the options (300 * $16 = $4800) and sell (300 * $16 = $4800) for a realized loss of $432 before fees (the cost of the options)

3. Let the options expire for a realized loss of $432 before fees (the cost of the options)

4. Sell the options for $1.90 (300 * $1.90 = $570) and then subtracting the cost of the options of $432 for a profit of $138.  Not a lot of money in absolute terms but it is still a 31.94% gain. Fuzzy math projection based on ZAGG options that are about $2.00 under the money (today's price is $12.50 and the options I looked/compared are the $14 options).

These 6 scenario should pretty much cover it.  There are a few ways to make money, let's see what happens.

Update 7/21/2011:

ZAGG $16 Feb 2012 are currently valued at 2.10 which means the options have increased by $0.66 which makes it a 45.83% gain before fees if I were to sell.  I am current watching and may sell at any time.

Yahoo Ticker for ZAGG $16 Feb 2012: http://finance.yahoo.com/q?s=ZAGG120218C00016000

Update 7/25/2011:
I sold the ZAGG options for 2.35 today.  Total profit after fees is $245.60 and is a 55.10% gain for holding for 20 days or so.  I look forward to the next tip from the wise sage.

June and 2nd Quarter 2011 Investment Status

O my where does the time go?  The performance of my portfolio underperformed the market by a good margin.  My portfolio is skewed towards cigarette stocks and they performed poorly during June; they [MO, PM, and LO] make up approximately 33% of my overall portfolio.

Overall, the portfolio is still outperforming the market (since I started keeping track daily on 4/1/2011), albeit by a smaller margin.

	April	May	June	2nd Quarter	YTD*
KAI	+5.25%	+0.66%	-4.22%	+1.47%	+1.47%
SP500	+2.90%	-1.36%	-1.59%	-0.11%	-0.11%
DOW	+3.87%	-1.89%	-1.45%	+0.43%	+0.43%

*YTD begins on 4/1/2011

May 2011 Investment Status

The performance of my portfolio relative to the Market in May.  May was a difficult month; nevertheless, I was able to eek out a small gain.

Upcoming articles:

• Investment Approach
• Breakout of Portfolio

	April	May	YTD*
KAI	+5.25%	+0.66%	+5.95%
SP500	+2.90%	-1.36%	+1.50%
DOW	+3.87%	-1.89%	+1.90%

*YTD begins on 4/1/2011

April 2011 Investment Status

My investment buddy and I chat on a daily basis (more or less) and every so often I would let him how how our respective portfolios are doing and how they are doing relative to the Market.  After a good number of exchanges, I thought it would be a worthwhile exercise to track our daily performance and the performance of the Market.  I saw several benefits to this:

• We can determine whether our portfolio is performing better or worst compared to the Market
• We can compare our perfomance since we have a slightly different investment strategy and perhaps one would perform better than the other
• We can put up pretty charts like mutual funds

So here it is.  I will try to publish monthly status of my portfolio as well as quarterly summaries (and perhaps analysis; crossing my fingers).

	April
KAI	+5.25%
SP500	+2.90%
DOW	+3.87%

Selling Losers

An email I sent to a few of my dearest friends:

Most of my emails regarding my stock trading/investing have been focus around my winnings and superb picks.  As with all portfolios, mine contains a few losers as well.  This newsletter will be focused on them; how did I get to this point and what are the potential next steps.

I picked up ENER (Solar Manufacturing Company) and BWEN (Wind Power Manufacturing and Servicing Company) during the 1st and 2nd quarter of 2010.  Several reasons and expectations help me arrive to the decision to buy (including but not limited to):

• Reputable Yahoo Forums Poster recommended these two stocks; and he did so for a good period of time
• He made the right calls on the stock that he and I were holding at the time TNK
• He also made the right calls on other stocks
• I did research and it confirmed/was in line with the information and analysis he provided

I probably had some initial paper profits but they quickly evaporated.  I researched (as well as the Yahoo Poster) some more and determined that this would be an even better time to buy since it dropped some more.  That turns out to be not the case... And in hind sight; it was pretty foolish of me to buy another stock he recommended (that bet ended badly as well).

So now that I have these losers, what should I do?

• Hold them until I am back in the green?
• Sell them?

I think I gave it away since this is an article about selling losers and I think I've held them long enough and do not see them returning any time soon (Opportunity Cost).  Currently I have a combined paper loss of about $6500 on these two stocks.  Uncle Sam allows you to cancel out your gains with your losses; and as a kicker, Uncle Sam also allows you to deduct up to $3000/year towards your Income Tax (you can also carry forward losses if it is more than $3000).

I've set Good Till Cancel orders for the initial positions for these two stocks at a price slightly higher than the current price.

Let this serve as a cautionary tale; it is possible to lose money even though your research says otherwise and even if the pick comes from a reputable person.

However, remember what I ended with the last article:  With investing, it is not necessarily important to call it right all of the time; it is calling it right more often than not and being able to make money from it.  The decision ultimately comes down to you and with each decision comes a lesson (with profit [hopefully] or heartache).

In this case, there is a lot of heartache. LOL

Reference Materials

http://www.investopedia.com/terms/t/taxgainlossharvesting.asp

http://www.bogleheads.org/wiki/Tax_Loss_Harvesting