Rollover IRA Purchase: 400 F @ $12.88

Yesterday afternoon I decided to take a nibble of Ford while options premiums were inflated due to the volatility spike. As with earlier purchases F is intended to be a permanent part of my portfolio. This purchase represents about 20% of a full position.

After yesterday's wild ride all of my option positions are safely out of the money though this morning's futures indicate that might not be the case for long.

Rollover IRA Purchase: 800 HCP @ $39.25

This trade wraps up my current activity in the Rollover IRA. As with ED and MRK, I used a Buy/Write to create a conservative entry point.

I've invested the money I transferred from my 401(k) as fully as I intend to, though there's still a  small cash position of about 5.9%. From now until I actually retire all have to do is monitor the calls to prevent any position from being assigned prematurely.

Rollover IRA Roll Out: Avoiding Early Exercise

Probably the #1 reason that covered calls are exercised early is to capture a dividend. This happens when an equity nears its ex-dividend date and the time value of an in the money call is less than the value of the dividend. This week my position in ED/Sept 18 65 Call was in just that situation.

Using the "Ask" price we have:

With a $0.65 dividend coming up and only $0.53 worth of time value you can be pretty sure that these options are going to be exercised. So what can I do?

The obvious answer is "buy to close". That would have cost $1,100.00 (plus commission). And we'd end up like this:

That's not too bad. We end up with a theoretical $110 gain, collect the dividend September 15 and all is well, right? Well, maybe not. On the ex-dividend date we can expect the equity to trade lower by the amount of the dividend. In our case that's 500 shares times $0.65 for $325.00. I do want to keep the stock in my account so let's look at another possibility: Roll Out.

Thursday I executed the order you see above. I simultaneously bought the 9/18 65 to close and sold the 11/20 65 to open for a net $0.75 credit or $375.00 (less $16.74 in commissions) and preserved my September 15 dividend of $325.00. The ex-dividend date for the December dividend will be the sometime about the first week of November so I'll need to keep an eye on this position when November rolls around. 

Rollover IRA Purchase: 600 MRK @ $57.45

As with ED I'll need to keep an eye on this position as expiration approaches. That's because I used the September 11 weekly call rather than my usual monthly approach. I did that because the weeklies have tighter strike prices so I was able to snag a pretty good entry point for what amounts time-wise to a "normal" monthly position.

However, September 11 happens to be the ex-dividend date for MRK so if the position is in the money on the 10th by more than option premium (which will include the dividend amount at that point) I'm likely to get exercised. Since the dividend will be $0.45 I'll be watching for a price higher than $58.95.

Commission shown is for buy only

As with ED, MRK is intended to be a permanent position in my Rollover IRA.

Rollover IRA Purchase: 500 ED @ $64.25

This morning I opened the first of my Rollover IRA positions with a Buy/Write of Consolidated Edison (ED) against September 18 $65 Calls (ED 09/18/2015 65.00 C). This results in a conservative entry price of $64.25 ahead of the September 16-17 FOMC meeting. Nearly everyone expects that meeting to be the first interest rate increase in years, likely 0.25%. Although the talking heads seem to believe that this rate increase is "baked in" I believe that rate sensitive stocks (like ED) are likely to take a small hit. As a result I'm hopeful I won't need to roll out on the 18th.

So what's my potential in this position?

Commissions $12.70 each way, dividend payable 9/15

That's if the position is assigned at expiration (i.e. ED is above $65.00 at the close on 9/18).

Now, the September dividend's ex date is Monday 8/17. Ex dates are 2 days before the record date, so there's a possibility I'll get hit with an early exercise on Friday 8/14. If that happens, I'll take the 1.16% profit in 4 days and open another position. It'll be a bummer to miss the dividend, but that's just one of the factors you need to be aware of when writing covered calls.

ED is intended to be a permanent member of my IRA portfolio. The equity leg of the trade is set to reinvest dividends and will remain so until I need the dividends for income.