Many investors have long-term core stock holdings that have been in their portfolios for years. Many of these stocks earn dividends and have seen dividends increase.
Many investors would benefit from using Covered Calls on these long-term stock or ETF holdings but are afraid to use covered call strategies for fear of losing their stock. Other investors believe that option strategies of any kind are risky. Through using the Hide and Seek Covered Calls Strategy investors can avoid exercise, earn income and profits and also protect against market corrections and bears. The Hide and Seek Covered Calls Strategy is designed to pinpoint entry and exit positions on covered calls, show rescue scenarios on covered calls caught In The Money and assist investors in determining if a stock is under-valued and should be bought for a possible gain.
More than 25 years ago I developed a strategy I called the Hide and Seek Covered Calls Strategy which allows me to sell covered calls almost indefinitely with limited fear of losing my stock holdings. I have applied the Hide and Seek Covered Calls Strategy to dozens of stocks over many years including Johnson and Johnson Stock for 21 years, Coca Cola Stock for 23 years and Exxon Mobil Stock for 19 years without being exercised from any shares.
Recently I received an email asking for assistance from an investor whom I will refer to as Ted, regarding his in the money covered calls and how to save his shares of Johnson and Johnson Stock from being exercised out of his long-term core holdings. As soon as I read his problem, I knew exactly that the Hide and Seek Covered Call Strategy would be the perfect solution.
I dusted off my Hide and Seek Covered Calls Strategy paper and updated it. This strategy paper is available in my shop through this link. FullyInformed Members do not need to purchase this PDF strategy paper. Part of the strategy paper is in the Members Section and I will have all of the paper up shortly. For Fullyinformed Members use this link to access this post.
Hide and Seek Covered Calls Strategy PDF
This PDF Strategy paper is 31 pages in length and illustrates the various techniques and scenarios using two types of stock, JNJ Stock which is less volatile and XOM Stock which is more volatile. The years examined are 2001 through the 2002 market collapse, 2007 to 2008 market collapse and November 2012. For a detailed description of this strategy please go to the shop here.
Here is an excerpt discussing rescuing In The Money Covered Calls to avoid exercise.
Ted’s JNJ Stock Covered Calls Problem
Ted wanted to earn more income than the dividend AND protect his position from a possible downturn. If readers recall, twice this year both on July 19 and Oct 10 analysts downgraded Johnson and Johnson Stock and both times the stock fell only to recover.
Johnson and Johnson Stock Downgrades for 2012
The July 20 downgrade saw Johnson and Johnson Stock fall 3.8% to $67 and the Oct 5 downgrade saw JNJ Stock lose 1.9% in value.
Selling 5 covered calls options against his 500 shares at the $67.50 call strike made sense to Ted as it gave him some decent income and offered him some additional protection in case Johnson and Johnson Stock should slide back to $65.00 which is fair value in my opinion for Johnson and Johnson Stock.
Ted’s Covered Calls Dilemma in Johnson and Johnson Stock
The problem now is Ted rolled into November 17 options expiry on his 500 shares of Johnson and Johnson Stock at the $67.50 call strike and sold his Covered Calls there. With the stock trading close to $70 (Nov 9 2012) it is above the $67.50 call strike leaving his 5 covered calls deep in the money.
Ted does not want to lose control of his shares and be exercised out of his Johnson and Johnson Stock.
Just to add to the problem, on November 23 Johnson and Johnson stock will trade ex-dividend and Ted is sure to lose his shares if he doesn’t do something to protect his position before November options expiry on November 17 2012.
Rolling In The Money Covered Calls on Johnson and Johnson Stock
The key to understanding this trade is to treat all the trades previously done as completed and separate. There is no point in selling covered calls and then losing the original call premium earned by trying to rescue the covered calls that are caught in the money.
The use of the Hide and Seek Covered Calls Strategy to rescue these in the money covered calls is total independent and should be looked at as a new trade. The Hide and Seek Covered Calls Strategy works to remove the threat of exercise and roll the covered calls to more advantageous strikes for a net credit to continue to earn income in the portfolio. This strategy can be applied to many stocks caught in the same circumstances.
To read more of this article Members can gain access through this link or login here. Non-members can join here or purchase the complete Hide and Seek Covered Calls Strategy PDF in the shop for $25.00.