Cycle Trading

[Duma]

When you or anyone else writes something I always read it until I understand if fully. Your post today was no exception. I am now in my 3rd rewrite of my answer to you because in answering you, new thoughts came into my mind. And I acted on those thoughts as I will explain later. This is why I am so proud of you guys and this board. All the thoughts that get posted can really trigger a new idea by someone else. You did it for me today. Now for the post.

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I agree with you totally about premium on 3x funds. Even though I watch the 3x charts, when I trade options, I always use 1x fund. Good that you made that point.

I have a good friend who is doing very good playing the covered call strategy on the same stocks that I am playing. He knows nothing about TA, so he just buys 100 shares of each stock and then sells 2 week calls. Even though he holds during the big draw downs he makes so much on the calls that I think he almost covers the downside losses.

As an example ROKU is now trading a 468. I could sell a 480 Aug13 call now for $23. So if the stock is called away he makes $35 or 7.5% profit. ROKU's last drop from the top was about $60 but that included a $20 spike, so really the drop was only about $40. This occurred over a 3 week period so if he made about $30 on calls during the drop, his loss was only $10. This would easily be made up on next cycle up.

So if funds are short, one can buy a call DITM instead. The big problem with that is that there is still a lot of TV in even a DITM call. As an example, ROKU closed today at 468.35. If I bought a Aug13 440c it would cost me 43.30. So with almost a $30 ITM call, there is still $14.95 of TV. This a huge number for having bought do deep ITM. My friend does not have to pay this cost, so he has another $15 in profit by actually buying the stock. As a side note, ITM calls demand a higher premium today than they did before the stock starting moving up strongly. You will see that in a second.

So my big problem with buying an ITM call and selling an OTM call is that the profits are limited. If a stock like ROKU can run $40-$50. I don’t want to limit how much I can make. Back in May I sold a OTM call and when the stock started to drop I sold the ITM call and thought I could just let the OTM expire. Well guess what, the stock surged again and I took a real bath. So that strategy is out.

So I have the following option open. I bought a ROKU call with a 40% delta for ROKU on 7/21 for 17.15. It closed today at 38.75, a profit of $2160. I think it would be hard to find a spread that would give this kind of profit. I keep wanting to sell a call but I had yet to figure out when to do it. Then it hit me writing this post. ROKU is up $44.37 from the time I bought the option. This is in the realm of how much this stock usually goes on a cycle. Luckily I had bought a 3 week option and still have 2 weeks to go. I also looked to see that I still have $17.90 TV in the option which is actually $.75 higher than when I bought the option. So guess what that means is going to happen in the next two weeks. If the stock price doesn’t keep going up, my profit is going to drop and a bunch.

So I said, now is the time to sell a call. I have a nice profit, I have lost none of my original TV and I think the top has to be near. Even if the top is not near, I will be able to make a nice profit anyway if my stock gets called away. If prices turn down, I will close both calls and take what ever additional TV decay has occurred on the short option. No holding a naked short call again.

So just before the close I sold a Aug13 490c for $19.80. That is a huge number and much higher that a call could have collected before the big price pop. The call is still $22 above the close of today, so I still have room for my ITM call to make me some more $. ROKU price dropped a bit going into the close, so I even collected $90 today.

Now I have a plan of when to sell a call thanks to you. I don’t think I would have ever come up with this idea if I had not be going through all the numbers to write my answer to your post. Maybe you will like my idea also. But still the most profitable plan is to just buy the stock. Good trading.