Part of our covered call writing education involves looking back on both successful and unsuccessful trades and learning from them. A few months ago I shared with a premium member a trade I had executed the previous month and saved it (I have a collection of dozens of email responses for future blog articles or Ask Alan videos). Today’s article will highlight a trade I made last September and October with a happy ending.

Proto Labs Inc Com (NYSE: PRLB) was a stock on our Premium Watch List with outstanding fundamentals and technicals. I sold multiple contracts on this security but will use 100 shares and 1 contract to simplify the math. Here’s the overall trade:

  • 9/23/13: Buy 100 x PRLB @ $78.10
  • 9/23/13: Sold 1 x October $80 call @ $3.30 for an initial 1-month return of 4.2%
  • 10/8/13: Buy-to-close the $80 call @ $0.45 (slightly higher than our 10% guideline…that’s why I call it a guideline!)
  • 10/14/13: Sell-to-open the $80 call @ $1.40 (“hitting a double”) for an additional $95 credit/contract ($140 – $45)
  • 10/18/13: Allow assignment as stock is trading > $80 and there was an upcoming earnings report on 10/31/13
  • 10/19/13: Shares are sold for $80 for an additional $190 per contract (purchased @ $78.10)
  • Total profit = $330 + $95 + $190 =$615/contract = 7.9%, 1-month return

Let’s take a look at a 1-year chart which included this trade:

Covered call writing strategies

PRLB: 1-year chart

Please note:

1: Entered trade

2: Hit a double as share price declined and then recovered

3: Allowed assignment as share price was in-the-money at expiration

 

Let’s now take a closer look at the 1-month chart:

Covered call writing exit strategies

PRLB: 1-month chart

 

Summary:

Here is a summary of the BCI principles, rules and guidelines used in this successful trade:

  • Stock selection using fundamental and technical analysis as well as common sense principles
  • Option selection based on market assessment, chart technicals and risk tolerance
  • Exit strategy execution using the 20/10% guidelines
  • Expiration Friday decision based on earnings report rule

Next live seminars:

New York Stock Trader’s Expo @ The Marriott Marquis Hotel, New York City:

February 16th-February 18th

Visit us in Booth #5410

 

Market tone:

Adverse weather conditions impacted growth and that was reflected in a week of mixed economic reports which are still demonstrating overall growth:

  • Orders for manufactured goods declined by 1.5% in November however excluding the volatile transportation sector, factory orders were up by 0.2% for the 3rd straight month
  • According to the Labor department, US employees added 113,000 jobs less than the 175,000 expected
  • The unemployment rate dipped to 6.6% from 6.7% in December
  • The number of long-term unemployed workers decreased by 232,000 and has declined by 1.1 million during the previous 12 months
  • Non-farm productivity (4th quarter annual rate) rose by 3.2% bettering consensus estimates of 2.4%. Year-to-year the rate was up by 1.7%
  • The US trade deficit came in at $38.7 billion more than the $35.5 billion projected by analysts. Year-over-year the deficit grew by $0.4 billion
  • The ISM Manufacturing Index for January fell for the 2nd consecutive month to 51.3. However, any number above 50 still reflects economic expansion
  • The New Orders Index  for manufactured goods fell 13.2 points from November to 51.2, the largest monthly decline since November, 1980
  • The ISM Non-Manufacturing Index rose one point in January to 54, beating analyst estimates of 53.7. This service sector index has been above 50 for 4 years
  • Spending on new construction was up 0.1% in December and up 5.3% year-to-year
  • Private construction spending rose by 1%, with the number of construction projects at its highest amount since December, 2008
  • Construction spending for single-family homes was up 3.4% from November and 21.6% year-over-year
  • Construction for multi-family homes rose by 0.5% in December and 27% year-over-year

For the week, the S&P 500 was up 0.8% to 1797.

Summary:

IBD: Market in correction

BCI: Cautiously bullish slightly favoring out-of-the-money strikes 3-to-2

My best to all,

Alan ([email protected])

www.thebluecollarinvestor.com