How does this one sound? 

Buy an Canroy Income Trust  that  pays a monthly dividend  and sell  an in the money long term call. Make sure the time value exceeds the monthly dividend amount to reduce the chance of call being excercized early. Since the dividend is paid monthly the  risk of having the stock called is less then it would be if it was paid quarterly.

An example

Buy HTE at 25.70 monthly dividend was just cut to .30 cents (CDN).

Sell May 08 22.50 call for say 3.60. Time Value is .40 cents.

or Sell May 08 25.00 call for 2.25 Time value 1.55

Either significantly reduces the amount invested  while boosting the ROI. Selling the May 22.50 call brings the yield north of 16%

Of course there is Single company risk, currency risks and political risks involved. But OTOH how risky is an oil company right now. I put on a similar trade last month  using the Feb 25 option. Even though the stock is down I'm still in good shape.

Terr7
 

Hi Terr. I am just trying to get your perspective on the stock. So when May rolls around and the stock price has not moved much, you are willing to simply let the stock be called, am I correct? So this is just a pure income enhancement strategy with no considerations of having the stock called away at expiration?

If so, then sell the option with the most time value, which would be the strike closest to the current stock price. I would only sell the lower strike price if you wanted more downside protection. But the at-the-money strike offers the most time value and would enhance your income the most. But at either strike price, I would let the stock be called at expiration, and as you pointed out in your example, as long as significant time value still exists in the position, it is unlikely to be called before expiration, but even if it did get called early, you have enough time value to justify the position.

Now, if you plan on holding the stock and do not want it called away, I would not write any calls on it at all, let alone an ITM call.

JMHO

Steve

Steve,

Yes your points are generally correct

I don't care if the stock is called away. The main goal was to provide downside protection. The secondary goal was to boost rate of return as the money received from selling the call reduces the capital invested. The idea comes from a tiny very  basic intro  book "A Short Book on Options" by Mark Wolfinger. His basic idea is to win by  minimizing losses by selling deep in the money calls with a rather long time to expiration. Thats a bit different the the typical advice of shorter time to maturity and  at the  money or out of the money calls which as you say would maximize gains. He says this strategy is the best for begginers not the best strategy around. . It seemed to me applying it to a high yielding stock that pays a monthly dividend turns it into a good income play with a low chance of assignment before expiration.

BTW: . HTE closed at 21.98 today proving I'm far from a good  CanRoy stock picker But selling the 22.50 call certainly minimized damage from buying at the higher price in the $25 dollar range.

Also BTW: I was on vacation or would have replied sooner

Terry.  

Should have said "in the money calls" not "deep in the money calls". There must be enough time premium to make it worthwhile. Too deep in the money and there is no time premium left.

Terry
.

Terry,

How's the strategy working? Any experiences on your game plan?

Steve

Good question.  So far  in my actual trade I'm down a little over $400

Some tedious detail .

On 9/19 I purchased 200 shares of HTE  @ 26.48 for a total cost of 5296.

Current value is 4216 for a net unrealized loss of -1080 

On 9/28 Sold  2  Feb 25  contracts for 530.49. On 11/12 rolled down and out to a lower strike call. Bought back the 2 Feb 25 contracts for 199.50 for a realized gain of 330.99. On same day sold 2  May 22.50  contracts for  414 . Current value is 240 for an unrealized gain of 174

To date I've received 2 dividends of 77.79 and 77.35. My current net position (loss)  is -419.87

If nothing changes by the May expiration date. I'm  guesstimating 6 more dividends for a total of  377.35 dollars in dividends. Add in the 240 remaining value for the sold calls that would expire and I would yet eek out 197 profit for a cd like  5% (annualized) profit on the net initial investment (stock - call money) Of course the stock could go up giving me another 280 max or the stock could go down and I could lose substantially more. I likely will buy back the 22.50 call at some point if its value continues to decline. Am certainly open to suggestions going forward.

They say the risk is in the underlying and my timing and security selection was poor.The only consolation is It could have been worse. The  sold calls and rich dividends have cut my current position loss in half. The timing of the original post was even poorer right before HTE took its big dive.

BTW: The prices include commisions which explains the funky amounts for the calls. I didnt deduct the 15% of the dividends withheld by the Canadien govt. for taxes but that should be returned on my income tax (I think) as a tax credit as long as its under 300. I also will be paying taxes on the dividends and profit on the first set of calls this year but wont realize the loss on the stock until next year. . I purchased another 100 shares in Nov for around 23.50 and sold an additional May 22.50 call but left it out as just a complicating factor and really is in roughly the same boat. No warranty on the accuracy of the math.

Terry
 

Terry, sorry to hear about the position, but it's not over yet.

You are absolutely right in that the risk is in the underlying security. Selling a covered call gives some downside protection, but you are finding out that if the stock continues to decline below your break-even point, you can still lose money. And even though the covered call reduces your risk by reducing your average cost on the stock, if the stock continues to decline, all of the risk is in the stock, just like stock ownership without the call.

The way I manage my positions, if I still have confidence in the stock, I stick to the position. I am very slow to roll down because I've been whipsawed before. I only roll down if a key technical support has been broken below a price that I didn't expect to see happen. Then I'll act. But I am slow to act because of the volatility and unpredictability of this market. I have confidence in my initial position, generally, until it's clear that I need to change it.

like I said, it's not over yet. If you have confidence in the stock, stick with it. If you've lost confidence with it, just dump the entire position and learn from the experience.

Steve

Well, first, Canroys (Canadian Royalty Trusts) are risky beasts to bet on in the best times. There is a reason the dividends are currently 9-17%!  Among them are a 2011 tax law change in Canada that increases trust taxes, fluctuations in natural gas and oil prices, and  possible changes in US taxation of trusts. 

There is no telling what way Canroys will go, given that current dividends amortize over half the purchase price by 2011, they are either really cheap or something else.

Combine that with the rather difficult paperwork for taxes that comes with canadian trusts ( dividends will be part long period and part return of capital, and if your dividend is qualifying you pay tax only on the actual part of the dividend that not return of capital ( you pay tax on it anyway, just higher if non qualified.) Then you have to track the cost of all your stock and reduce or increase the basis on the proceeds of the calls.  If you are not aware of this, I suggest you sell TOMORROW and close the stock position before Jan 1 rolls around and you end up with a huge headache.

I used your same strategy two years ago to lose $14k on canadian trusts :) 

Ernie, 

Well, I was vaguely aware of extra tax effort but didnt know it would be that bad. It would have been a deterred me from the trade. I'm stuck with the tax burden this time but may just bail if the hassle is too great.

That you had significant losses following a similar strategy shows this is a lot riskier then I'd estimated.  .

Oh well I decided to hold on to the shares for now as I think in the stock isnt going much lower. Their refinery is back online after scheduled maintenance and I read that refining margins are improving. But my stock forecasting record this year has been dismal so this is not a recommendation.

That said I don't intend holding for too long as 2011 tax changes adds a lot of uncertainty. I think HTE is considering  either becoming a regular corporation or become a US based trust. There is always the chance of  buyout as well. Selling ITM options may be a way to exit with a few extra dollar.

I appreciate your comments and Steve's as well.  

Well at this point if you hold you get the benefit of qualified dividend status if you hold long enough and the tax calculation is not that bad. If you are lucky, HTE will declare 2007 100% dividend, no return of capital. PWE did that last year for me. Not that big a deal.

I got caught in the Haloween massacre, when a 20% overnight drop in share price occured. I still hold PWE and actually am considering buying PVX.

 A few years ago I had to calculate long and short term dividends and return of capital on about 19 separate lots of PGH.  Took a day on an excel spreadsheet.

2011 may or may not be priced into the stocks right now. PWE says they will continue to pay dividends and have the tax writeoff for three years after. We will see.  I see the Canroys right now like housing stocks or banks.  It might be the first opportunity in years for a great bargain, or the worst. LOL