I'm starting a new strategy
buying calls, based on the "RSI(2) < 10" trigger. The process will be:
- Look at RSI(2) triggers, using a universe of Dividend Champions, Dow Jones stocks, and a number of index-based ETFs.
- If any are usable as a covered call play for a near-term weekly option expiration, either a "Dividend Play" or an "RSI(2) Play", do that. Or if any are feasible for the "RSI(2)/3" strategy on a near-term weekly option, do that. Otherwise, since covered calls aren't viable, how about the opposite side -- buying the call? That is:
- Check the calls for the monthly expiration date that is 45 to 60 days out. I chose this time period because most of the closed positions resulting from RSI(2) have closed by then.
- I'm basing my position size on controlling $35,000 worth of the stock, and setting a profit goal of $1,000 (the 3% profit goal I've used on the "RSI(2)/3").
- I've created a grid that allows me to look at annual ROI of a covered call (excluding dividend, for now) versus the run-up in price needed to match that profit goal. It will basically be a trade-off between larger cost and more likely success versus smaller cost and less likely success. I would like to make a choice mechanical, but haven't gotten to that point yet. Maybe utilizing the Greeks of the options?
One disadvantage to this strategy is it starts out in negative territory, based on having to buy it near the ask price and having to settle with selling it near the bid price.
For example, MRK is currently at an RSI(2) of 8.8. I didn't see a good covered call to write on it in a near-term weekly expiration, so I looked at the possible calls on the 2018-01-19 expiration date:
| Ticker/Input Expiry: | MRK | 01-19 | | | | | |
| Expiry: | 01-19 | | | | | | |
| Price: | $54.10 | | | | | | |
| Earn: | 02-02 | | | | | | |
| Ex-Div: | 12-13 | Est | | | | | |
| Div: | $0.47 | *** | | | | | |
| | | | | | | |
| Yahoo Ticker Symbols | Price/Bid | Ask | Strike | Extrinsic | aROI | Cost | Need |
| MRK | $54.10 | | | | | | |
| MRK180119C00045000 | $8.65 | $10.50 | $45.00 | $1.40 | 19.21% | $6,300.00 | 5.67% |
| MRK180119C00047500 | $7.70 | $8.05 | $47.50 | $1.45 | 18.84% | $4,830.00 | 5.76% |
| MRK180119C00050000 | $4.25 | $4.45 | $50.00 | $0.35 | 4.22% | $2,670.00 | 3.73% |
| MRK180119C00052500 | $2.30 | $2.43 | $52.50 | $0.83 | 9.61% | $1,458.00 | 4.61% |
| MRK180119C00055000 | $1.00 | $1.07 | $55.00 | $1.07 | 12.07% | $642.00 | 6.72% |
| MRK180119C00057500 | $0.31 | $0.36 | $57.50 | $0.36 | 4.01% | $216.00 | 10.03% |
| MRK180119C00060000 | $0.10 | $0.13 | $60.00 | $0.13 | 1.44% | $78.00 | 14.23% |
| MRK180119C00062500 | $0.03 | $0.06 | $62.50 | $0.06 | 0.66% | $36.00 | 18.72% |
So, just based on the higher aROI values, I'd rule out the $45, $47.50, $52.50, and $55 strikes. But the needed runup for strikes $57.50, $60, and $62.5 would rule them out. That would leave me with the $50 strike. However, that's a bit more than I'd want to invest in the strategy, so I'd pass at this time.
Having said that, I did start a position in MRK earlier today. It was one of three positions I started:
| Reason | Ticker | Bought | Paid | Ending | Closed | Days | P/L | C-ROI | C-aROI | Shares | Gain | Cost | Limit |
| RSI(2)/C | JNJ180119C00145000 | 2017-11-20 | $0.50 | $0.47 | -- | 1 | -$0.03 | -6.0% | -2190.0% |
300
| -$9.00 | $150.00 | $3.90 |
| RSI(2)/C | MRK180119C00057500 | 2017-11-20 | $0.33 | $0.34 | -- | 1 | $0.01 | 3.0% | 1106.1% | 600 | $6.00 | $198.00 | $2.03 |
| RSI(2)/C | TRV180119C00135000 | 2017-11-20 | $1.15 | $1.05 | -- | 1 | -$0.10 | -8.7% | -3173.9% | 200 | -$20.00 | $230.00 | $6.25 |
I have already set limit prices on each to sell them at their goal prices ("Limit" column above).
As an example of the "end play" on a position, here is a paper position I started over a month ago that would expire this Friday:
| Reason | Ticker | Bought | Paid | Ending | Closed | Days | P/L | C-ROI | C-aROI | Shares | Gain | Cost | Limit |
| RSI(2)/C | HD171124C00160000 | 2017-10-13 | $6.70 | $10.25 | -- | 39 | $3.55 | 53.0% | 495.9% | 200 | $710.00 | $1,340.00 | $11.80 |
If this were a real position, I would be closing it tomorrow rather than wait to see what the rest of the week holds.
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