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June 16 2011  / Research In Motion - Stock Symbol RIM (TSX) or RIMM (Nasdaq)

Rolling Covered Calls Down On A Declining Stock

Can It Lessen Losses?

 

Rolling Covered Calls Down On A Declining Stock

Today I received an interesting email from a reader who was caught in Research In Motion stock in the latest sell off. In that stock sell off I would have preferred to purchase puts if I had been in the stock. Nonetheless the reader explained that he had many times in the past recovered his positions in what he felt was a quality company, by rolling his covered calls lower and biding his time for a recovery.

He sent me a number of charts of past stocks, all of which paid a dividend and were, what I would consider, higher quality stocks. I did agree with him that Research In Motion is a large enough company with plenty of cash and it should survive for some years to come. I asked him if I could reprint his Research In Motion covered call trades and make some comments of my own after emailing back and forth with him. He agreed and below are his trades to date.

The investor bought into Research In Motion on Feb 18 2011 which turned out to be the high for the year so far. I have placed my comments within the chart below. This is not a strategy I would pursue on a stock that has lost 50% of its value from Feb 18 2011. Personally I believe strongly that investors are better off getting out early or purchasing protective puts. The investor explained that he hates protective puts as often he has found that the puts cost more capital and often ended up expiring worthless, especially if the stock recovers. I can understand his reasoning as many investors feel the same way, that protective puts cost too much. It is always easy in hindsight to see the value of protective puts. Instead this investor loves to roll his covered calls lower.

Feb 18 68.90 Bought 1000 shares @ 68.90 1000   9.95 68,909.95    
Feb 18 68.90 Sold 10 Covered Calls March 66 @ 4.20
COMMENTS: By Selling the March 66 he has protected himself further and should the stock close at 66.00 he will realize a profit of $1.30 or 1300.00 less commission - about 1.8% for the month.
  $64.73 22.45 64,732.40 4177.55 4177.55
Mar 8 63.02 Bought to close 10 Covered Calls March 66 @ .45
COMMENTS: The stock fell below the average share value of $64.73. The investor closed the covered calls and reopened new ones.
    22.45   (472.45) 3705.10
Mar 8 63.02 Sold 10 Covered Calls Apr 62 @ 4.00
COMMENTS: These covered calls are still above the average share value.
  61.23 22.45 61,227.30 3977.55 7682.65
Mar 25 55.76 Bought to close 10 Covered Calls Apr 62 @ .33
COMMENTS: With today's bad news the stock fell $6.70 and the investor bought back the calls and sold into May
    22.45   (352.45) 7330.20
Mar 25 55.76 Sold 10 Covered Calls May $56 @ 3.20
COMMENTS: These covered calls for $56.00 are BELOW the investor's average share value
  58.40 22.45 58,402.20 3177.55 10507.75
Apr 25 51.02 Bought to close 10 Covered Calls May $56 @ .38
COMMENTS: The stock has fallen about 8% and the investor again rolls lower, into June
    22.45   (402.45) 10105.30
Apr 25 51.02 Sold 10 Covered Calls Jun $52.00 @ 2.49
COMMENTS: These are again below his cost basis. By selling into June, the investor figures that this will buy some time in case the stock recovers and he has to buy back and roll out further and possibly back up.
  56.34 22.45 56,337.10 2467.55 12572.85
May 2 45.79 Bought to close 10 Covered Calls Jun $52 @ 1.00
COMMENTS: Despite the 1.00 premium the investor feels that so much negative news will push the stock lower. He decides to roll down early.
    22.45   (1022.45) 11550.40
May 2 45.79 Sold 10 Covered Calls Jun $48 @ 1.92
COMMENTS: At $48.00 the investor has locked in a 7000 loss, if assigned. However the investor assumes the stock will move lower based on all the negative news and negative analyst reports. However if he had to buy this call back - he would roll to Jan $52 which is paying $3.90. This would put him at break even for the entire trade. (You can see how some people have exit strategies already in place at the time of the original trade)
  55.46 22.45 55,462.00 1897.55 13447.95
May 24 42.06 Bought to close 10 Covered Calls Jun $48 @ .37
COMMENTS: The stock is down another 8% from May 2. The investor buys to close the calls and then rolls into Jul and down another 4.00
    22.45   (392.45) 13055.50
May 24 42.06 Sold 10 Covered Calls Jul $44 @ $1.74
COMMENTS: The investor is again selling below his average share value. He is almost $10.00 below his average share value on the stock.  His exit strategy is, if the stock recovers he will roll out to Jan $52 which is trading for $2.40. This would bring him back to break even.
  54.14 22.45 54,136.90 1717.55 14773.05
Jun 3 38.15 Bought to close 10 Covered Calls Jul $44 @ .70     22.45   (722.45) 14050.60
Jun 3 38.15 Sold 10 Covered Calls Jul $40 @ 1.70   53.18 22.45 53181.80 1677.55 15728.15
Jun 14 34.73 Bought to close 10 Covered Calls Jul $40 @ .71     22.45   (732.45) 14995.70
Jun 14 34.73 Sold 10 Covered Calls Sep $38 @ $2.20
COMMENTS: He is now selling out to Sep figuring that it could take the stock some time to recover to the $40.00 range. His exit strategy is if the stock recovers to the $38.00 he will buy back his Sept covered calls and roll out to January or longer at $42.00.
  51.74 22.45 51,736.70 2177.55 17,173.25

SUMMARY

These are my comments and NOT the comments of the investor who sent these trades to me.
Personally RIM is as I indicated in all my comments about RIM, not a company to buy and hold stock. It is for traders who want to trade the shares and for option sellers and buyers who see opportunity in the options. Research In Motion is in serious trouble which you can read in many articles I have on my site. While I understand what the investor is doing and applaud the investor's fortitude and his ability to study the option premiums, set up his exit strategies, plan and stay consistent, I still believe this is not a stock for investors.

However I wanted to present his trades to show investors that often you can roll covered calls to follow a stock down, in a bear market. That said, I would still impress upon my readers that this strategy is not a substitute for holding protective puts or if rolling down, to consider rolling down ONLY on large cap, dividend paying stocks or ETFs. ETF's have the advantage of never going to zero.

RELATED ARTICLES

Research In Motion - Still Not For Investing; Just Trading
What Next For Research In Motion
Using The 10-20-30 Moving Averages To Sell Options In RIM
When and How To Average Down In Stock

 
 

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