DARK HORSE HEDGE – Here We Go Again
By Scott Brown at Sabrient, and Ilene, at Phil’s Stock World
Here we go again
Here we go again and again
Wond’rin’ how it all began
Wond’rin’ will it ever end
Round and round we go
Where it’s going, nobody knows
Though I know we’ve been this place before
Someone keeps on moving the door
So I say hello again –John Lennon
HUSA is giving us another bite at the apple over $10 per share so we feel obliged to recommend another SHORT at the market. DHH called for a short on HUSA July 1, 2010 at $9.91 and covered on August 12, 2010 at $8.72. We hit replay again on August 18, 2010 at $10.54 for a quick cover 2 days later at $9.35. The reason behind the short is the same as in the past. (See Dark Horse Hedge -Covering HUSA, Dark Horse Hedge – Shorting HUSA, Again.)
Rolling Options
We also would like to demonstrate the practice of rolling options on covered positions for further yield enhancement. GME was recommended as a purchase on July 23, 2010 at $19.92. On August 17, we sold a call option against our position, i.e., a covered call). We chose to sell a $20 call option with a October 15, 2010 strike date, bringing in $1.31. (One call option is sold per 100 shares of stock owned.) The reason for selling calls at the time was that we believed stocks were on road to nowhere. When stocks are range-bound, sellling premium is one way to benefit from owning a stock that is not likely to either soar or plunge while the market bounces up and down. Selling calls allowed us to earning time premium while holding the shares.
GME is trading at $18.60 today and the Oct $20 call is now $.31 so we made $1/share in option premium while holding a quality stock the last 27 days. It is a good idea to roll these options when the premium gets under $.50 to a future date, thereby lowering our cost basis again and creating additional yield enhancement on the stock. The January $20 2011 calls (GME110122C00020000) are $1.19 and we recommend buying back the October $20 call for $.31 on GME and selling the January $20 2011 call for $1.19. This transaction gives us an additional $.88/share while we are committing to sell GME for $20 on January 21, 2011.
We will continue to monitor the market, positions, opportunities and options for further recommendations.
SELL SHORT HUSA (7.5% of virtual portfolio) at the market, Monday September, 13, 2010.
BUY (back) GME OCT $20 call (sold on August 17, 2010) at the market, September, 13, 2010.
SELL GME JAN $20 2011 call at the market, September 13, 2010.
