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SEP 4 2010  / Strategy Article / Opinion Piece
When and How To Average Down In Stocks My 7 Rules
This article has two examples using RIM:
Example 1 - RIM Recovery Through Averaging Down and using Covered Calls

Example 2- RIM Recovery Through Averaging Down using Naked Puts and Covered Calls

If you have not read the 7 rules of when and how to average down please do so before studying this trade. It will make the trade understandable.
 

The purpose of Example 1 and Example 2 is to show how through planning, and establishing goals an investor can often recover from a serious stock decline, even though the stock itself may not recover to the same levels where the investor originally purchased stock. It is also to present strategies that show how buy and hold can often be a dangerous strategy. Instead through my two examples I have shown how an investor can buy, sell options, hold, be exercised and repeat the cycle. It also shows that often it is not necessary to always sell above the original cost basis and in fact, often it is impossible to do so. Instead it is important to examine the stock's chart and spot trends in the stock to determine valuations to buy and when not to buy. It is also interesting to review these trades and see how sometimes it is better to not sell options but wait for a move in the stock to take advantage of a rise or fall in valuation.

These examples are fictitious but prices for the options are based on actual prices for the days quoted.

 

 

EXAMPLE 2: STOCK: RESEARCH IN MOTION:

Recovery Through Averaging Down Using Naked Puts and Covered Calls

 

Fictitious Investor: Jason
Amount Of Capital Available: $40,000.00
Bought 300 shares of RIM at $112.00 = 33,600.00

 

In the first example this fictitious investor started with 300 shares of RIM which he bought Sep 12 2008 when he thought the bear market was ending and figured he was getting a great deal on RIM for $112.00. In our example we will

be using a combination of naked puts and covered calls

2) Naked Puts and Covered Calls for our recovery strategy.

 

This way you can decide which of the strategies worked best and perhaps which strategy suits your trading style.

 

 

Less than a month later Jason's stock has plunged to $64.00. Shocked, Jason is determined to get his capital back. But little does Jason know that RIM's shares are actually in trouble.

 

So on October 6 2008, with a 42% loss on his investment, Jason decided to act and he read my 7 rules for when and how to average down in stocks:

 

How Jason Applied My Rules:

 

Rule 1: The most important rule is stock selection. Stocks have to be large blue chip companies with strong dividends, solid balance sheets, low P/E ratios, good cash flow, low debt levels and reasonable payout ratios. This may seem like a tall order, but these stocks do exist.

Jason has studied my 7 rules and believes that RIM is a stock he is sold on. Sadly though RIM does not meet my rules as there is no dividend, but it does have good cash flow, low debt levels, low P/E ratio, a good balance sheet BUT a declining market share and profit margins. All in all it would not be my choice to own. However for the sake of my example I shall continue.

 

Rule 2: Set reasonable guidelines as to the quantity of stock and dollar amounts you want to invest in any one stock. 15% of your total stock portfolio in one stock is probably more than enough for most people.

 

Jason has committed $40,000 which is 15% of his overall stock portfolio so he feels he has met those guidelines.

 

Rule 3: After setting your guidelines as to the amount of stock you wish to purchase, average into that quantity over time, to take advantage of pullbacks. If not a Canadian retirement account, average into stocks through selling naked puts.

 

Jason broke rule number 3 right at the outset by jumping in and buying 300 shares rather than averaging into the stock over time. He did though believe he has bought on a pullback which occurred just a few sessions earlier. Looking at the above chart I would agree he bought near the low for the past 6 months. But by jumping in and buying 300 shares right away he has only $6400.00 left to invest. This will not buy him any shares in RIM at this point.

 

Rule 4: Use the selling of puts to generate income while waiting for a decline in stocks. Consider laddering your naked puts if required in order to keep to the strike point you originally selected. For example if you wanted to be in a stock at 30.00 and the stock rises to 45.00, you may have to go out 6 to 12 months to continue selling naked puts at the 30.00 strike. Remember that stocks move around a lot more than analysts might have you believe. A sudden run-up in a stock can be followed by just as dramatic a downturn.

 

Jason is willing to try naked puts although he has never done this to work his way into stocks. He will also use covered calls.

 

Rule 5: If your stock declines dramatically, research the stock to determine if the fundamentals have not changed. If they have not, you could consider rolling down your covered calls and going further out in time. You can also consider placing a collar on your stock. (I will post another article on collars soon). Try not to sell below your cost basis however which can lock you into a loss situation.

 

Jason doesn't understand or like collars. He is not an options person and does not understand covered calls. But he is willing to learn. However upon researching his stock he determines that the fundamentals of RIM have changed since his purchase. RIM now has serious competitors. Market share is declining. Competitors have newer technology available. Competitors products seem more trendy. Security questions have also come up which are costing RIM more money. RIM is spending billions of research trying to catch up. All of this should tell Jason that RIM may be a bad investment. But he is determined to get his capital back.

 

Rule 6: I believe in keeping 30% of my portfolio in cash instruments in case my stocks should decline or a new opportunity presents itself. If you examine my Royal Bank trade or my Sunlife trade, you can see that my returns hinged completely on being secure in the belief that I could average down and add to my position as the stock declined. If I had not been able to do this with confidence, then my return would have been greatly reduced. So while Sunlife and Royal Bank saw dramatic declines along with other financial stocks, the fundamentals of both companies remained solid, making the decision to average down, easy.

 

Jason didn't do this at all. He is almost fully invested. At this point all he has is the $6400.00 in cash and the stock in his account which is marginable - (can be loaned against).

 

Rule 7: After averaging down, commencing selling covered calls immediately in order to protect the stock you just purchased from further declines and attempt to generate income to reduce your overall cost basis on all the shares you have purchased. If you look at my Sunlife trades you can see that I averaged down a number of times as the stock declined. I then immediately sold covered calls and if my cost basis was too high for covered calls, I sell covered calls on the most recent stock purchased.

 

Jason is ready to do this. So let's see how he can fare: No commissions are taken into account. Always use a full discount broker. Option prices shown are actual prices available on the respective day.

 

Original Capital Invested - $33,600.00
Additional Capital Available To Invest - $6,400.00

 

Position Summary:
Starting Capital Oct 1 2008: $6400.00
STOCK HELD:
Sep 12 08 Bought 300 shares @ 112.00

 

Oct 8 Stock Price - $64.00 - Jason sells 3 covered calls for Oct $70.00 - Income is $3.90 a share due to the high volatility which is beyond 54 on the VIX.

He also has $6400 available in capital. Jason sells 2 naked puts (margin being used for 100 additional shares) for October $64.00 at $5.55

Oct $70 strike - Covered Call Income - $1170.00 + naked puts income $1,110.00

 

Capital now available to invest - $6400.00 + $2280 = $8680.00

 

Position Summary:
Starting Capital OCT 1 2008: $6400.00
STOCK HELD:
Sep 12 08 Bought 300 shares @ 112.00 (holding 3 CC Oct 70 against)
COVERED CALLS HELD:
3 covered call - Oct 70 @ 3.90

NAKED PUTS HELD:

2 naked puts - OCT 64 @ 5.55
Capital available Oct 8 2008: $8680.00


THIS IS APPLYING RULE #4 and #7 - SELL COVERED CALLS IMMEDIATELY to protect the stock from further declines and attempt to generate income to reduce the overall cost basis on all the shares purchased. Sell naked puts to generate income and wait for the stock to decline.


OCT 17 2008 - Expiration: RIM Closes $70.25

 

Jason is exercised of all shares. Total capital now available- $29680.00

 

Position Summary:
Starting Capital OCT 18 2008: $29680.00
STOCK HELD:
COVERED CALLS HELD:
3 covered call - Oct 70 @ exercised

NAKED PUTS HELD:

2 naked puts - OCT 64 @ expired
Capital available Oct 18 2008: $29680.00

 

On the Monday Oct 20 the stock falls from $71.11 to $64.88 which is 8.7%. It is obvious to anyone including Jason that we are in the midst of a market panic. There is no need to rush in and buy all the stock here. Instead he picks up 100 shares and sells a call.
Now Jason will apply Rule 3: Average into stocks over time to take advantage of pullbacks.
He will also use Rule 4 - Sell Naked Puts for income and wait for the stock to decline.

 

 

OCT 20 2008: Buy 100 shares of RIM at $64.88 - SELL 1 COVERED CALL NOV $66.00 for $5.55

Capital still to invest - $23,747.00

 

OCT 21 2008: Buy 100 shares of RIM at $61.54 - SELL 1 COVERED CALL NOV $62.00 for $5.40

Capital still to invest - $18,133.00

 

On October 22 the stock closed at $60.52 which meant selling a Nov 62 covered call. Jason already has a $62.00 covered call so he does not do any buying today.

 

OCT 23 2008: Buy 100 shares of RIM at $58.19 - SELL 1 COVERED CALL NOV $60 for $5.25

Capital still to invest - $12,839.00

 

OCT 24 2008: Buy 100 shares of RIM at $52.00 - SELL 1 COVERED CALL NOV $54.00 for $6.90.

Capital still to invest - $8,329.00

 

OCT 24 2008 With Rim at $52.00 - Jason sells 3 Naked Puts (using margin for 100+ shares) NOV $48.00 for $4.25

 

CAPITAL LEFT TO INVEST - $9604.00

 

Position Summary:
Starting Capital OCT 18 2008: $29680.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88 (holding 1 CC Nov 66 against)
Oct 21 08 Bought 100 shares @ 61.54 (holding 1 CC Nov 62 against)
Oct 23 08 Bought 100 shares @ 58.19 (holding 1 CC Nov 60 against)
Oct 24 08 Bought 100 shares @ 52.00 (holding 1 CC Nov 54 against)
COVERED CALLS HELD:
1 covered call - Nov 66 @ 5.55
1 covered call - Nov 62 @ 5.40
1 covered call - Nov 60 @ 5.25

1 covered call - Nov 54 @ 6.90

NAKED PUTS HELD:

3 naked puts - Nov 48 @ 4.25
Capital available Oct 25 2008: $9604.00
Margin being used - $4796.00

 

 

Above is the chart for those wild October days. Options premiums were all over the place as volatility kept climbing each day.

However Jason is now holding November calls on 400 shares of stock, that range from $52.00 to $66.00 and 3 Naked Puts at $48.00


 

Above is the stock chart for the days leading up to Nov 21 2008. On that day the stock closed at $57.45.

NOV 21 2008: Expiration: RIM closed at $57.45

 

Jason is exercised of Nov 54.

 

Position Summary:
Starting Capital OCT 25 2008: $4796.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88
Oct 21 08 Bought 100 shares @ 61.54
Oct 23 08 Bought 100 shares @ 58.19
COVERED CALLS HELD:
1 covered call - Nov 66 @ expired
1 covered call - Nov 62 @ expired
1 covered call - Nov 60 @ expired

1 covered call - Nov 54 @ exercised

NAKED PUTS HELD:

3 naked puts - Nov 48 @ expired
Capital available Nov 22 2008: $15004.00
Margin being used - $0.00


3 Naked Puts at $48.00 expired 
Total capital now available- $15,004.00
Covered calls to sell again- 1 X $66  1 X $62  1 X $60

 

November 24 2008: The following Monday RIM ranged from 59.26 to 55.27

Jason sold 1 DEC 66 call for 2.75  1 DEC 62 calls for 4.10  and 1 DEC 60 calls for $5.70

 

Total capital now available - $16,259.00


Now Jason has to decide when to buy next. It's actually simpler than it seems. Jason should buy on down days when the stock moves into a lower range. For example, look at the chart below. On Nov 24th RIM traded pretty well in the same range as expiry. Not a lot of reason to buy 100 shares. Next day though RIM moved lower. Jason buys 100 shares on Nov 25.

 

November 25 2008: RIM closes at 50.77 - Jason buy 100 shares at 50.77 and sells a DEC 52 Covered Call for 5.10

Capital Now Available - $11,692.00

 

 

The next 4 days RIM stays within the same range as Nov 25. Therefore there is no reason to buy on those days, but On Dec 2 RIM moves lower again. Jason buys another 100 shares on Dec 2.

 

December 2 2008: Buys 100 shares at $45.00 - Jason sells a Dec $46.00 covered call for $6.05

 

Total Capital now available - $7797.00 

December 2 2008 Jason sells 3 Naked Puts Dec $44.00 for 4.10 (again using some margin)

 

Position Summary:
Starting Capital NOV 22 2008: $15004.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88 (holding 1 CC Dec 66 against)
Oct 21 08 Bought 100 shares @ 61.54 (holding 1 CC Dec 62 against)
Oct 23 08 Bought 100 shares @ 58.19 (holding 1 CC Dec 60 against)
Nov 25 08 Bought 100 shares @ 50.77 (holding 1 CC Dec 52 against)
Dec 2 08 Bought 100 shares @ 45.00 (holding 1 CC Dec 46 against)
COVERED CALLS HELD:
1 covered call - Dec 66 @ 2.75
1 covered call - Dec 62 @ 4.10
1 covered call - Dec 60 @ 5.70

1 covered call - Dec 52 @ 5.10

1 covered call - Dec 46 @ 6.05

NAKED PUTS HELD:

3 naked puts - Dec 44 @ 4.10
Capital available Dec 3 2008: $9027.00
Margin being used - $4173.00

 

 


DECEMBER 19 2008 - Expiration: RIM Closes at $53.32.

 

Jason is exercised of Dec $52 and $46.00

December $44.00 Naked Puts expire
Total capital now available- $18,827.00
Covered calls to sell again-  1 X $66  1 X $62  1 X $60


Position Summary:
Starting Capital DEC 3 2008: $9027.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88
Oct 21 08 Bought 100 shares @ 61.54
Oct 23 08 Bought 100 shares @ 58.19
COVERED CALLS HELD:
1 covered call - Dec 66 @ expired
1 covered call - Dec 62 @ expired
1 covered call - Dec 60 @ expired

1 covered call - Dec 52 @ exercised

1 covered call - Dec 46 @ exercised

NAKED PUTS HELD:

3 naked puts - Dec 44 @ expired
Capital available Dec 19 2008: $18827.00
Margin being used - $0.00

 

Below is RIM for the days after Dec 19 expiration:

 

 

On Dec 22 Jason Sells 1 Covered Call for JAN $60.00 at 1.75 - Sell 1 X FEB $62.00 for 1.80 and 1 X FEB $66.00 for .50

Total capital available - $19,232.00

 

On Dec 22 the stock closes at $50.03 - Jason Buys 100 shares at $50.03 and sells Jan 52 Covered Call for $5.10

Note how the premiums are beginning to decrease as volatility in the market is reducing.

 

Capital available: $14,739.00

 

On Dec 23 and Dec 24 the stock stays within the same Range and Jason does not buy any shares.

 

On Dec 29 the stock falls to $46.50 before closing to $47.36- Jason buys 100 shares at $47.36 and sells 1 January $50.00 covered call for $4.90 Jason sells 3 Naked Puts (again using some margin) for JAN $44.00 at $3.15

 

Position Summary:
Starting Capital DEC 19 2008: $18827.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88 (holding 1 CC Feb 66 against)
Oct 21 08 Bought 100 shares @ 61.54 (holding 1 CC Feb 62 against)
Oct 23 08 Bought 100 shares @ 58.19 (holding 1 CC Jan 60 against)
Dec 22 08 Bought 100 shares @ 50.03 (holding 1 CC Jan 52 against)
Dec 29 08 Bought 100 shares @ 47.36 (holding 1 CC Jan 50 against)
COVERED CALLS HELD:
1 covered call - Feb 66 @ .50
1 covered call - Feb 62 @ 1.80
1 covered call - Jan 60 @ 1.75

1 covered call - Jan 52 @ 5.10
1 covered call - Jan 50 @ 4.90

NAKED PUTS HELD:

3 naked puts - Jan 44 @ 3.15
Capital available Dec 29 2008: $11438.00
Margin being used - $1762.00

 

Over the next few days the stock stays in the same range and Jason does not buy any more shares.


By Jan 5 RIM is above 50.00 and closes at $53.17. With the stock in a new range, Jason buys 100 shares today at $52.00 and sells 1 covered call for Jan $54.00 for $4.10.

 

Position Summary:
Starting Capital DEC 29 2008: $11438.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88 (holding 1 CC Feb 66 against)
Oct 21 08 Bought 100 shares @ 61.54 (holding 1 CC Feb 62 against)
Oct 23 08 Bought 100 shares @ 58.19 (holding 1 CC Jan 60 against)
Dec 22 08 Bought 100 shares @ 50.03 (holding 1 CC Jan 52 against)
Dec 29 08 Bought 100 shares @ 47.36 (holding 1 CC Jan 50 against)
Jan 05 09 Bought 100 shares @ 52.00 (holding 1 CC Jan 54 against)
COVERED CALLS HELD:
1 covered call - Feb 66 @ .50
1 covered call - Feb 62 @ 1.80
1 covered call - Jan 60 @ 1.75

1 covered call - Jan 52 @ 5.10
1 covered call - Jan 50 @ 4.90
1 covered call - Jan 54 @ 4.10

NAKED PUTS HELD:

3 naked puts - Jan 44 @ 3.15
Capital available Jan 5 2009: $6648.00
Margin being used - $6552.00
 

Below is RIM for the days leading up to Jan 16 expiration:

 


 


 

JANUARY 16 2009 - Expiration: RIM Closes at $63.75

 

Jason is exercised of JAN $60.00, JAN $54.00, JAN $52.00 and JAN $50.00
All Jan $44 Naked Puts Expire.

 

Position Summary:
Starting Capital JAN 5 2009: $6648.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88 (holding 1 CC Feb 66 against)
Oct 21 08 Bought 100 shares @ 61.54 (holding 1 CC Feb 62 against)
COVERED CALLS HELD:
1 covered call - Feb 66 @ .50
1 covered call - Feb 62 @ 1.80
1 covered call - Jan 60 @ exercised

1 covered call - Jan 52 @ exercised
1 covered call - Jan 50 @ exercised
1 covered call - Jan 54 @ exercised

NAKED PUTS HELD:

3 naked puts - Jan 44 @ expired
Capital available Jan 16 2009: $28248.00
Margin being used - $0.00


Total capital now available- $28,248.00
Covered calls left - 1 X FEB $66 and 1 X FEB $62


Here is RIM following Jan 16 options expiry. On Jan 20 Jason buys 100 shares at $63.00 and the stock soars to $66.00. He sells 1 X FEB $64 covered call for $7.90. On Jan 26 the stock falls to $60.50. Jason buys 100 shares on the way down at $61.00 and sells 1 X FEB $62 covered call for $6.55. On Jan 29 the stock moved from $66.25 to $67.10 and Jason buys 100 shares at $66.50 and sells 1 X FEB $68.00 covered call for $3.80. Jason see no opportunities for naked puts at these levels. He prefers to sell naked puts at 50.00 or below.

 

Total capital now available- $11,023.00

 

 

Position Summary:
Starting Capital JAN 16 2009: $28248.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88 (holding 1 CC Feb 66 against)
Oct 21 08 Bought 100 shares @ 61.54 (holding 1 CC Feb 62 against)
Jan 20 09 Bought 100 shares @ 63.00 (holding 1 CC Feb 64 against)
Jan 26 09 Bought 100 shares @ 61.00 (holding 1 CC Feb 62 against)
Jan 29 09 Bought 100 shares @ 66.50 (holding 1 CC Feb 68 against)
COVERED CALLS HELD:
1 covered call - Feb 66 @ .50
1 covered call - Feb 62 @ 1.80
1 covered call - Feb 64 @ 7.90

1 covered call - Feb 62 @ 6.55
1 covered call - Feb 68 @ 3.80
NAKED PUTS HELD:

none held
Capital available Jan 29 2009: $11023.00
Margin being used - $0.00

 


FEBRUARY 19 2009 - Expiration: RIM Closes at $51.30

 

 

Jason is exercised of no shares and can resell all his covered calls.

 

Position Summary:
Starting Capital JAN 16 2009: $11023.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88
Oct 21 08 Bought 100 shares @ 61.54
Jan 20 09 Bought 100 shares @ 63.00
Jan 26 09 Bought 100 shares @ 61.00
Jan 29 09 Bought 100 shares @ 66.50
COVERED CALLS HELD:
1 covered call - Feb 66 @ expired
1 covered call - Feb 62 @ expired
1 covered call - Feb 64 @ expired

1 covered call - Feb 62 @ expired
1 covered call - Feb 68 @ expired
NAKED PUTS HELD:

none held
Capital available Feb 19 2009: $11023.00
Margin being used - $0.00

 

 

Over the next few days here are the covered call premiums earned:

FEB 20 Sells 1 Covered Call APR $60.00 for 3.90
FEB 20 Sells 1 Covered Call APR $62.00 for $3.10
 

On FEB 23 Jason Buys 100 shares at $46.83 and Sells 1 Covered Call MAR $50.00 for $4.90

On FEB 23 Jason Sells 3 Naked Puts MAR $44.00 for $5.20 (using margin)

On FEB 26 Jason sells 1 Covered Call APR $64 for $1.40

 

On FEB 26 Jason sells 1 Covered Call Apr $66 for $1.15 and 1 Covered Call May $68 for 1.10

 

Position Summary:
Starting Capital FEB 19 2009: $11023.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88 (holding 1 CC Apr 66 against)
Oct 21 08 Bought 100 shares @ 61.54 (holding 1 CC Apr 62 against)
Jan 20 09 Bought 100 shares @ 63.00 (holding 1 CC Apr 64 against)
Jan 26 09 Bought 100 shares @ 61.00 (holding 1 CC Apr 60 against)
Jan 29 09 Bought 100 shares @ 66.50 (holding 1 CC May 68 against)
Feb 23 09 Bought 100 shares @ 46.83 (holding 1 CC Mar 50 against)
COVERED CALLS HELD:
1 covered call - Apr 60 @ 3.90
1 covered call - Apr 62 @ 3.10
1 covered call - Apr 64 @ 1.40

1 covered call - Apr 66 @ 1.15
1 covered call - May 68 @ 1.10

1 covered call - Mar 50 @ 4.90
NAKED PUTS HELD:

3 Naked Puts Sold Mar 44 @ 5.20
Capital available Feb 26 2009: $9455.00
Margin being used - $3745.00

 


MARCH 20 2009 - Expiration: RIM Closes at $51.30

 

Jason has just 1 covered call in Mar and is exercised at 50.00

The 3 March $44.00 naked puts expire

 

Position Summary:
Starting Capital FEB 26 2009: $9455.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88 (holding 1 CC Apr 66 against)
Oct 21 08 Bought 100 shares @ 61.54 (holding 1 CC Apr 62 against)
Jan 20 09 Bought 100 shares @ 63.00 (holding 1 CC Apr 64 against)
Jan 26 09 Bought 100 shares @ 61.00 (holding 1 CC Apr 60 against)
Jan 29 09 Bought 100 shares @ 66.50 (holding 1 CC May 68 against)
COVERED CALLS HELD:
1 covered call - Apr 60 @ 3.90
1 covered call - Apr 62 @ 3.10
1 covered call - Apr 64 @ 1.40

1 covered call - Apr 66 @ 1.15
1 covered call - May 68 @ 1.10

1 covered call - Mar 50 @ exercised
NAKED PUTS HELD:

3 Naked Puts Sold Mar 44 @ expired
Capital available Mar 20 2009: $14455.00
Margin being used - $0.00

 


Over the next few days Jason does the following and the chart below shows the next few days in March 2009.

March 25 2009 Buys 100 shares at 52.39 and sells 1 Covered Call April $54.00 for $5.55

March 25 2009 Sells 3 Naked Puts Apr $48 for $3.10

 

By April 1 the entire stock market was climbing rapidly and on Apr 3 RIM hit a high of $75.00.

 

Position Summary:
Starting Capital MAR 20 2009: $14455.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88 (holding 1 CC Apr 66 against)
Oct 21 08 Bought 100 shares @ 61.54 (holding 1 CC Apr 62 against)
Jan 20 09 Bought 100 shares @ 63.00 (holding 1 CC Apr 64 against)
Jan 26 09 Bought 100 shares @ 61.00 (holding 1 CC Apr 60 against)
Jan 29 09 Bought 100 shares @ 66.50 (holding 1 CC May 68 against)
Mar 25 09 Bought 100 shares @ 52.39 (holding 1 CC Apr 54 against)
COVERED CALLS HELD:
1 covered call - Apr 60 @ 3.90
1 covered call - Apr 62 @ 3.10
1 covered call - Apr 64 @ 1.40

1 covered call - Apr 66 @ .68
1 covered call - May 68 @ 1.10

1 covered call - Apr 54 @ 5.55
NAKED PUTS HELD:

3 Naked Puts Sold Apr 48 @ 3.10
Capital available Apr 1 2009: $10701.00
Margin being used - $3699.00


 


APRIL 17 2009 - Expiration: RIM Closes at $83.35

 

Jason is exercised of all positions except May 68:

Position Summary:
Starting Capital APR 1 2009: $10701.00
STOCK HELD:
Oct 20 08 Bought 100 shares @ 64.88
Oct 21 08 Bought 100 shares @ 61.54
Jan 20 09 Bought 100 shares @ 63.00
Jan 26 09 Bought 100 shares @ 61.00
Jan 29 09 Bought 100 shares @ 66.50 (holding 1 CC May 68 against)
Mar 25 09 Bought 100 shares @ 52.39
COVERED CALLS HELD:
1 covered call - Apr 60 @ exercised
1 covered call - Apr 62 @ exercised
1 covered call - Apr 64 @ exercised

1 covered call - Apr 66 @ exercised
1 covered call - May 68 @ 1.10

1 covered call - Apr 54 @ exercised
NAKED PUTS HELD:

3 Naked Puts Sold Apr 48 @ expired
Capital available Apr 1 2009: $10701.00
Margin being used - $41301.00

 

Jason has his capital returned and in May the 68 covered call will be exercised as the stock closed on May 15 2009 at $85.23.

 

Total amount in the end would be - 48,101.00 for a return of 20%. Yet RIM as of March 2011 has not recovered to the original purchase price of $112.00.

This trade is just an example to show various trading strategies and how they can be applied to assist in recovery of capital despite a declining stock. I have done my best to review all the calculations. If you note an error please contact me and I will adjust the calculations for any miscalculation.

 

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Disclaimer: There are considerable risks involved in all investment strategies. Trade at your own risk.
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