Thursday, January 23, 2014

DEFINITIVE DITM HEDGE



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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