Update on RSI(2)/C Strategy

In November, I did a short write-up explaining a new RSI(2)/C strategy I was trying out, where I would be buying some calls if they had very low returns if used with a covered call strategy.

Although successful, the market is up for the period (SPY is up 9.3%), so it may be more luck than anything else. The results of calls that I bought:

Reason	Ticker	Bought	Paid	Ending	Closed	Days	P/L	C-ROI	C-aROI
Hedge	PM180119C00110000	2017-12-05	$0.45	$1.50	2017-12-18	14	$1.05	233.3%	6083.3%
RSI(2)/C	TRV180119C00135000	2017-11-20	$1.15	$2.75	2017-12-19	30	$1.60	139.1%	1692.8%
RSI(2)/C	MDT180119C00082500	2017-12-04	$0.73	$2.10	2017-12-19	16	$1.37	187.7%	4281.3%
RSI(2)/C	JNJ180119C00145000	2017-11-20	$0.50	$1.57	2018-01-12	54	$1.07	214.0%	1446.5%
RSI(2)/C	MRK180119C00057500	2017-11-20	$0.33	$1.18	2018-01-12	54	$0.85	257.6%	1741.0%
RSI(2)/C	KO180119C00046000	2017-11-29	$0.44	$0.87	2018-01-18	51	$0.43	97.7%	699.4%
RSI(2)/C	XLU180119C00054000	2017-12-05	$1.68	$0.00	2018-01-19	46	-$1.68	-100.0%	-793.5%

The "Hedge" strategy is a similar one -- I bought a "low priced" call that I noticed when I was looking for calls to roll out an existing PM position. Since the dividend strategy stocks have always recovered within a fairly short time, I decided to buy that call that was priced too low for me to sell.

So, one loser out of six (or seven). And the loser is a 100% loss, as expected. Overall, I invested $2700 and made a profit of $2100. About a 78% return. Based on the highest traded price of each contract since it was purchased, the maximum ROI that could have been earned:

Reason	Ticker	Max ROI
Hedge	PM180119C00110000	262.2%
RSI(2)/C	TRV180119C00135000	282.6%
RSI(2)/C	MDT180119C00082500	594.5%
RSI(2)/C	JNJ180119C00145000	560.0%
RSI(2)/C	MRK180119C00057500	1778.8%
RSI(2)/C	KO180119C00046000	177.3%
RSI(2)/C	XLU180119C00054000	33.3%

In any case, my original limit prices were far too high. Only MRK would have sold at my limit price, and that was only because of a huge surge over the past week. Unfortunately,  I sold on the early run-up because the expiration date was approaching.

I was thinking maybe a better criteria for the limit price might be when it might make a good leg of a covered call strategy? But that would require periodic review, possibly triggered by a price run-up? On the "Hedge" strategy, my original goal was to earn $1 per share, so it was a much easier sale.
 

Intro to RSI(2)/C Strategy

I'm starting a new strategy buying calls, based on the "RSI(2) < 10" trigger. The process will be:

1. Look at RSI(2) triggers, using a universe of Dividend Champions, Dow Jones stocks, and a number of index-based ETFs.
2. 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:
3. 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.
4. 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").
5. 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.

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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.

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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).

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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.