Thursday, January 23, 2014


As I have written copiously about DITM (Deep-In-The-Money) covered calls as being a safe haven for investors/traders seeking an alternative to less risky strategies, with my extensive testing of it for nearly five years, solid proof came today in my most recent trade. Although DITM missed out on much of the unexpected 30-someting point 2013 rally, the upsurge did provide a wider cushion with further ITM security. It also hedged this losing trade, which I finally gave up on - one of the very few, and first of 2014: Ensco (ESV).

Looking back, just about all of the DITM losses were a result of being in the wrong Sector(s) - Energy, Precious Metals, Natural Resources: CLF, VALE, QRE, PGH, etc.
ESV also belongs there.

I bought only 100 shares of ESV in May of 2013 for just over $62 - $6214; selling the Sept. $57.5 ITM call and again the Jan.2014 call, as well as  nice 5.1/2% dividends, I finally sold the shares today at $52 5/8, or$5253. Instead of suffering a $1000 loss on the 100 shares, my net loss was $57 - if I would have waited for an uptick I could have broken even!  So basically what I lost was Time - much like leaving $$ in a MMF at zero percent.

After four years of testing in my small IRA, which gained @ 11% per year average, 2013 was a flat year, partially due to my Sector selection (see above) expecting a reversal, and also the steadily rising markets produced a mild Volatility, which impacted the option prices negatively. That is why I moved much of my assets into another defensive strategy - more Reward and even less Risk, but a little more complicated for option tyros: LEAP Strangles ( buying $5 to 15 stocks and selling Leap Out-Of-The -Money Covered Calls
 and Puts against them. This is outlined in recent posts of my DITM blog:  

A few of my Leap holdings (not recommendations!) include F, BAC, FTR, NOK,

Thursday, January 16, 2014

DITM Recap 2013

As mentioned before in this blog, after 4 years of  11% average returns in my small IRA - the microcosm of the DITM strategy, 2013 finally hit stall speed; partly because the steady rise of the market killed Implied Volatility (IV), rendering the VIX @ 13-14, and partly because my stock selection happened to be premature - going into Energy, Chemicals, and gold.

Here is the non-GAAP best-efforts analysis of the round trip trades closed out in 2013:
First the winners - 20 total, averaging 12.70% with an average 5.1 month duration.
Losing trades were only 3, but which amounted to over 40% of the winners, since losses are usually quite a bit larger by the time they are under water and decided upon.

Since it is difficult to arrive at a profit/loss since the same money is used for more than 1 position during the year, the annualized percent of 7.16% is based on the net profit. Hopefully 2014 will be an improvement, especially of there is a substantial correction, which is hedged against, raising the Volatility and premium of the sold Call options, as well as the 3%+ dividends from the underlying. Hopefully the commodity sector will rebound this year as well.

Monday, January 13, 2014

Happy New Year

As readers have noticed there has not been much activity in DITM recently. After 4 years of successful 11% returns per year in my small IRA ( a surrogate for DITM) the Groundhog Day steady rise in the markets have crushed Volatility, and new positions and rollouts have been infrequent.

More concentration has been on the Leap Strangle strategy which I embarked on just over a year ago. This has done better, despite a errant reliance on gold and precious metals' stocks, which should recover in time. Those that do not will result in rolling down of the calls and taking on more stock via the sold OTM puts (in a sense, doubling down).

As of today, with the first position - BAC- taken in Dec.'12, and adding 1 or 2 laddered monthly through last week, where I leapt into YRCW! Quite a risky trade, but the IV was over 100 on both puts and calls, to where I brought in with option premium almost as much as I spent on the stock! There is a reason for high IV - RISK- which I saw the next few days, when the stock dropped to below my sold put, at least temporarily.

Even with a very recent paper loss in YRCW and four other gold, silver and coal stocks ( of the 17 now in the strategy) going negative so far, the winners have propelled the 13 month return to a cumulative 13.67%. This does not include any max loss requirement for the puts if done in an IRA.