- 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.
Posts
To answer your question on Greeks, you can use Delta as an approximation of the probability that the stock will rise to a price that would achieve your "Limit". For your MRK position, my rough estimate of Delta is 9% -- a long shot to say the least. Likelihood is that you will lose 100% of your investment in all 3 positions if held until expiration.
ReplyDeleteInteresting experiment, but I'm confident you will ultimately conclude that we make money by SELLING options, not buying them. Stick with Covered Calls!
Best wishes,
Jeff
I see Barchart.com has a "Theoretical Value" of the call (i.e. "the hypothetical value of the option, calculated by the Black-Scholes Option Pricing Model"). I'm thinking of only looking at calls where that is 20% (or more?) above the current ask price.
DeleteThe "long shot" method is up 38% after 9 days. :)
DeleteBut that's just an example of their volatility. We had a good day in the market today. A portfolio with the number of controlled shares of each underlying would be up just over 2%. Still seven weeks to go. The advantage I see is that I can only lose what I paid out for the calls, versus what it would have cost to own the shares. I've limited my losses to $578 to control $100K of stocks for two months (just over a half-percent). I'm sitting with losses on some covered calls that are quite a bit more than that. And I can get a lot more diversity of stocks with small investment amounts.
Oh, well. Time will tell. One way or the other.
Keep in mind that the "Limit" isn't necessarily the price the stock has to reach, but the option. It will also have some extrinsic value. But, let me ask you this -- would you have SOLD calls at the prices I bought them at, given the near 100% probability of them expiring worthless? Allowing some leeway for margin of error, it's not an absolute buy or sell decision, but isn't there a point at which one should switch from one to the other? How would you define that point?
ReplyDeleteThis comment has been removed by the author.
ReplyDeleteNo good point to 'switch' from sell to buy -- primarily because of theta (https://www.investopedia.com/terms/t/theta.asp). Also, extant academic research has demonstrated efficacy of selling options, not buying them.
ReplyDeleteJeff (partlow@cox.net)
Oh, come on. With SPY currently trading at $260, you wouldn't buy Friday's $235 call for a penny per share? I'd buy at least several thousand contracts, if someone was stupid enough to sell them. And then exercise them immediately and sell the shares. Besides, the fact that options trading is a negative sum game demonstrates their lack of efficacy (as a whole). That proves nothing about individual opportunities. Same for selling options. Proving the efficacy of selling options proves nothing about each individual contract. There will be positive and negative situations.
DeleteI'm not understanding your last comment. With SPY closing today at $259.76, this Friday's $230 SPY calls are bid/ask $29.57/$29.78, so your comment about $.01 is confusing to say the least.
ReplyDeleteYou said there was no point at which you would switch from sell to buy. Would you buy that $230 SPY call if it was a penny instead of the $30 it should be? If yes, then there **IS** a point at which you would switch. How about $5, $10, $20, $25, $29? I'm trying to define the price point. Friday's expiration is a lot easier, but what happens when looking at expirations 2 months out?
DeleteA different thought occurred to me today -- the opposite of writing a covered call is not to buy a call. It would be to buy a put.
ReplyDelete