Stock Trading Techniques

Our covered call play (CROX) is slightly negative. We bought 500 shares of CROX and sold 5 September $12.50 calls. This is called a “covered call” because we own the stock we are writing the calls against. A “call” gives the purchaser the right, but not the obligation, to buy our CROX shares anytime up to the third Friday of September for a price of $12.50 a share.

If CROX is selling for less than $12.50 on that date, we get to keep our CROX shares and also the premium we received from selling the call contracts. Each call contract is equal to 100 shares, so we received $650 ($1.35 * 500 = 675 - 25 commission = $650). After that September date we can sell our calls again (although they may not be $12.50 calls, depending on the price of CROX at the time), if we still have the shares. We can do this over and over until eventually our CROX shares get called away.

If CROX is selling for $12.50 or more, our shares will be called away, but we then make a profit on our shares (the difference between $12.50 and our buy price of $10.88 or $1.62 per share * 500 shares - $810) plus the premium from selling the calls ($650). That’s the good news. the bad news is that if CROX is selling for $50.00 at the time, we still only get $12.50. But we knew that going into this trade and the fact is that 85% of all options expire worthless, so this strategy is a way to generate income into our portfolio. If you think a stock is going to rise rapidly in the near future, you would never sell calls against it until it hit what you considered a peak, then you could sell calls to protect against a sell-off (but if its a volatile stock I’d just as soon enter a trailing stop).

Speaking of trailing stops, with a covered call strategy, you cannot use trailing stops because if your shares get stopped out, you now have a “naked” call sale. This is not allowed in an IRA and it is dangerous as your potential losses are unlimited. If CORX would reverse after you got stopped out and did go to $50, when the purchaser of the call contracts demands you sell them CROX for $12.50, you must buy them on the open market and deliver them (or go to jail). Since yu no longer own CROX, you will pay $50/share. Do not use sell stop orders with covered call strategies.

You can buy back your contracts then sell the stock. If a stock takes a temporary hit and the calls drop way down in value, I sometimes buy them back and wait for the stock to go back up, then sell the same calls again for a higher price than I paid to buy them back.

Moving on, CMIN is our gold play and has gone nowhere with the weakness in the price of gold recently. However, I expect gold to hit at least $1,200 this year, so CMIN should be OK.

DBA, our agricultural commodities play, will be a winner over time as agricultural prices continue to climb many fold over the coming years. the same holds true for GEX, our alternative energy ETF, which was discussed in the same article with DBA.

FXI is our China play and it’s had some highs and lows lately, running up into the $170s then falling into the $140s until finally moving back into the $150s. As China goes, so goes FXI. This is a good long-term play. FXI has had a 3-year average return of over 37% and I’ve seen projections of $300/share so we’ll stay with this one and see what happens.

PRW is our “story” stock. It’s up, but only slightly. This is a long-term speculation that will either go bust or return obscene rewards (I had two very wealthy individuals who have over 7,000,000 shares, bought at much higher prices, between them say they feel this could be a $100/share stock, but that was a few years ago). Only time will tell.

Remember, this is a “paper” portfolio and all information given is for educational purposes only. The author is not an investment advisor nor a stock broker-dealer. Any decisions you make based on information you read on this blog are strictly your responsibility.