Today is the last trading day of the week. We are having a terrific week so far. FFIV went up a lot, leaving my FFIV 95 calls expiring today in the money. As a result, my long FFIV shares are making lots of money. But since I sold FFIV calls at 95. For every share of FFIV ($107.86 now), the money above 95 is not mine. Some people may use this to argue against covered calls (covered call in its traditional sense has capped maximal profit). But using the following strategy, you can still keep that profit. Here is how (and this is what I just did today).
I placed a bull debit spread trade which was executed as follows: buying back my Apr. 21 FFIV 95 at $12.42/sh, selling May 21 $95 calls at $13.52 with a net credit of $1.1/sh. The total profit received today divided by the money I used (=margin maintenance requirement) = 3.72%.
Interpretation: Instead of buying the calls I sold for a loss, I rolled up my short calls to next month with a 3.72% monthly return (annualized return of ~45%). If FFIV stays above 95 and if FFIV continues to have the current time value, I should be able to roll up month after month for a 3-4% monthly return. Also keep in mind that this is a very safe investment. Why? Because my strike of 95 is ~12% in the money (ITM). In other words, even if FFIV loses 12% of its value, it will still not touch any of my profit. This is why I say using covered calls with modifications, you can make very handsome annual returns that can beat many Wall Street professionals.
One principle that I use when rolling up like this is that I almost never pay more money to roll up spreads, just in case the stock comes right back and fall below the strike price.
My other trades of the week, bull spreads of bidu, pcln, lvs and ffiv are making me very handsome money. All these spreads will expire or be executed today. Not counting my covered calls, just these spreads are making me more money than many people’s one year salary.
Nong Lao Luan. Good strategy.