One of the more successful investment strategies utilized by TradeStops members is a simple option strategy known as a covered call. Many of the newsletter editors we follow use this strategy to increase income for their subscribers.
The strategy involves buying a stock and selling a call against the stock. It is simple to execute and understand. An advantage of this strategy is that you know everything that can possibly happen during the time you own this trade – the potential gain, the potential loss, and the break-even point.
And TradeStops is here to help you set up and monitor these covered call trades in your portfolios.
For this example, there is a trade in SLW we’ve been following since late March.
We originally set up a Watch portfolio that contains the top holdings of the GDX ETF.
As you can see, all of these stocks have active SSI Entry signals in place. SLW triggered an SSI Entry signal on 3/28/16. It has had a strong move up in the 5+ months that the SSI Entry signal was initiated.
We still like SLW and believe that it could have more upside, but maybe a bit of caution is warranted. Let’s look at selling a covered call against our position.
We determined that there was good value right now in selling the October 32 calls. The option premium is $0.84 per share. That’s a return of about 3% for only six weeks’ worth of time and the strike price is 10% above the current price of SLW.
This is how the trade shows up in the TradeStops portfolio.
The first thing you probably notice is that the option itself does not have an SSI signal. It is impossible to develop SSI signals or Volatility Quotients for options.
The vast majority of options expire less than one year after they are created. So we set up our alert on this trade using the VQ% of the underlying stock, in this case, SLW.
In this case, SLW has a VQ of 34.7%. We used the closing price of when we entered the option trade as our basis for this trade. Here is the Alert Description as it shows up in the “Alerts” tab.
And this is the current Alert State.
The TradeStops program subtracts the premium received from the sale of the option from the price paid for the stock. Even though we actually paid $17.23 for the stock, we want to use the current price as our basis. This way our alert will trigger at a higher price than if we used the actual cost basis.
If the price of SLW continues to move higher and closes above $32 by option expiration, we could sell our shares by having them assigned. Of course, we could always buy back the call and sell another one that expires in a later month.
We also have an SSI Alert set up for SLW itself. The current SSI Stop price is $20.15. Should SLW continue its recent move lower, we can get out of the trade quite easily by buying back the option (which will be almost worthless), and then selling the stock.
TradeStops continues to make monitoring your options trades easy. And our development team is working on further upgrades that we will announce in upcoming months.
Please let us know if there are any topics you would like covered. We appreciate your support.
To much option success,
Tom Meyer,
Member Services, TradeStops
