CCJ trade: Some checkpoints for monthly covered calls
Courtesy of Rev. Todd, Rev Todd’s IRA Plot
This is a repost from the PSW list on Wednesday, August 18:
This morning I am looking at CCJ, which is already on the PSW buy list. For those of you following the strategy, read http://www.philstockworld.com/2010/03/27/7-steps-to-making-40-returns/ because that is a great summary of what I’m trying to do in my IRAs.
Buy CCJ at $25.64 and sell the Sept $25 call at $1.45. Cost basis is $24.19. If called out in Sept. this is a 3.78% profit and you get a 7.93% downside protection.
Here are the technicals I look at for covered call writing.
- CCJ is above the 50 day moving average (50 MA) and just regained the 20 SMA. I like to write on stocks moving back upward.
- There is support at the 50 SMA, which is at $24 pre-market. Remember the cost basis is at $24.09
- Volume just moved up nicely yesterday. I like to buy things as others are buying it, instead of selling it.
- Open interest on the option is 3244. I like it to be over 2500 so there is plenty of liquidity. If I have to kill this trade or roll it down, I want to be able to move in and out of it easily.
- CCJ will not report earnings before Sept expiration. I do not like to write calls with earning ahead of expiration because it is hard to say what will happen to the price. Phil has some nice trades to take advantage of the volatility at earning, which I do in my margin account, but with covered calls I want predictability and as much safety as possible. I want to hit a very high percentage of these trades, say 90 percent or better.
- I also like to look at the sector and see how it is doing. Phil has already done the fundamentals on this, but right now uranium miners seem to be doing well with a lot of demand out there.
So that is the basics of what I try to do. The numbers here will move around a little as the market get going. In fact if you can only get $1.35 for the $25 calls that drops the profit to around 2.8% and downside protection is only 5.25%. I would want to get a little more and get closer to 3% profit. I like to be at least 5% in the money. Otherwise I would wait it out a bit and try to get $1.40, but I would not chase this below $1.35.
If you want to watch the profit and downside protection percentages live, I suggest getting an optionsexpress account for free. You can put in the call symbol for a covered call trade and they will update the numbers live. Then you can see if you want to pull the trigger on the trade or not.
Let me know what you think of the idea. I consider this CCJ trade adequate, but not great. I generally like more downside protection, but it is a good stock and I wanted to start with something on the buy list. This is more to illustrate the strategy. Most posts will be much shorter with a quick summary of the technicals I look at.
