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: http://ditmcalls.blogspot.com/
A few of my Leap holdings (not recommendations!) include F,
BAC, FTR, NOK, et.al.
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