Fri 16 May 2008
Anatomy of an ETF Covered Call - OIH
Posted by RichSlick under MMO, Money Trades
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OIH is on fire! A while ago, Mrs. Micah asked, “Do You Have an Investing Exit Strategy” and I couldn’t help but associate that question with my ETF Covered Calls investing strategy. Let’s review a specific journey on a specific investment I recently made.
In December of 2007, I bought 200 shares of OIH at $189.45 and sold 2 contracts for January $190 strikes for $5.00/each to rake in about $1000.00. In January OIH dropped to around $170 and stayed near there through April when it started climbing back into the $180’s.
In April 2008, I sold 2 contracts for May $190 strikes for $5.55/each to rake in about $1100.00. So the total profit for the trades were about $2100 or 5.5% from December through May expiry.
OIH is now hovering around $210 but is now the time to sell? Has OIH had it’s run and will it slide back down or is it just catching its second wind and about to climb to $250?
Look at the graphical diagram (click for larger image).
As you can see from the image, OIH hit a “dry well” for a brief period from January thru April so should you have cut and run or stayed in it for the long haul? This is why I love ETF Covered Calls because you’re partially quasi-long and you’re profiting by selling calls (short). It’s the best of both worlds. As obvious as it sounds, you make money selling not buying and I’ve sold calls and soon I’ll sell my shares to bank the profits.
As for my current investment, if OIH closes above $190 today (which looks like it will), I’ll be forced to sell my shares at $190 and revert to being in cash in my account. Once in cash, it’ll be time to look for more opportunities and I’m glad. I’m getting the feeling that OIH might have run its course and I’m not willing to re-buy OIH at these levels. Perhaps if OIH drops back down to $170’s I’ll pick it up again. If you find this interesting, check out www.ETFCoveredCalls.com to learn more.
May 17th, 2008 at 1:35 pm
Correct me if I am wrong, but you will have made a total profit of $2210 right? You will have made $1000 for the first set of options, $1100 for the second set of options, and $110 for the price maturing 55 cents each on 200 shares.
If you had instead bought OIH and held it until the same day to sell it you would have made $4110 for the price increase of $20.55 per share over 200 shares over the same time period.
Is my analysis correct here?
May 17th, 2008 at 7:27 pm
You are absolutely correct. I love these examples because they illustrate the point of the strategy. I had absolutely no way of knowing that OIH would be at way over $200.
But the point is the same, when do you sell? If you bought at $190 do you sell at $195? $198? $200? $205? Do you hold hoping for $250?
When is enough enough?
Of course if OIH drops down to $180 next month you’ll be kicking yourself for not selling at $210 right?
There is no emotional attachment here. I managed to make 5.5% in 5 months. On an annualized basis that’s over 13% per year and I’m not including dividends!
I’m now sitting in cash and I’m glad because OIH is way overheated right now and not where I want to be so now I’m looking for greener pastures that aren’t so over eaten.