Executing the Defensive Plan by Selling Covered Calls
On Monday, I stated that I was concerned about the stock market and listed several reasons why I thought I should assume a more defensive posture with regards to my retirement portfolio. Well yesterday, I began to execute my plan by selling covered calls on several of the stocks that I own.
In effect, selling a covered call is taking a bearish position on a stock since there is some benefit from a declining stock price. The premium received from selling a call option is added to the cash portion of the portfolio and can be kept regardless of the price of the stock at expiration. If the price of the stock is less than the strike price, then the stock can be kept and additional call options sold once the first contracts have expired.
Covered Calls Sold
I ended up selling covered calls on several stocks yesterday, bringing in cash to my accounts. I plan on using this cash to either purchase additional shares when prices are low or to use to purchase put options after the March expiration cycle.
The calls that I sold were for the April expiration date which occurs in a little over six weeks so there was a fair amount of time premium to be had. Here is a list of those that I sold followed by some rationale:
- AKS–Sold the April $7 calls
- SDRL–Sold the April $38 calls
- SLW–Sold the April $35 calls
- DRYS–Sold the April $3 calls
- INTC–Sold the April $26 calls
As you can see I was quite busy today. I feel that the market is going to be concerned about European debt and slowing growth in China. The prospect of a worldwide recession will be increasingly in the outlook so I suspect that many of these stocks will be hit. All of the calls were either at-the-money or even in-the-money when sold. I am preparing for a continued decline into April.
So What If I am Wrong?
That is the beauty of selling calls. I can be wrong and it won’t hurt me that much. I had previously sold higher strike calls when the stocks ran up in January and February. Of the stocks listed, I have outstanding March calls on SDRL at a strike of $42, SLW at a strike of $40, DRYS at a strike of $3.50, and INTC at a strike of $26. I would expect the calls for the first 3 to expire since I really don’t anticipate a rebound of 20% in the next eight trading days.
Once those calls expire, I might have a little more information that would suggest which way the market might start to trend. Then I can decide how to proceed. If the stocks rebound, I sell some higher priced calls or just let it ride. If the stocks continue to decline, then the current strikes will be out-of-the-money, and I can sell more to raise additional cash for purchasing more shares later. After all, the goal is to buy low and sell high.
Related articles concerning time premiums that you may want to check out.
- Selling Covered Calls and Time Value (cashflowmantra.com)
- More on Covered Calls and Time Value (cashflowmantra.com)
- More Factors Affecting Covered Call Premiums (cashflowmantra.com)