UPRO Covered Call - Too gd to be tru? Please advise

Discussion in 'Options' started by Cereal, Dec 9, 2012.

  1. Cereal


    Please, I appreciate any opinions on the following potential trade:

    I bought 100 stock UPRO for 87.04 per share.

    What do you think of the following covered call at today's prices? :

    Sell Covered Call Expiry Jan14 strike price $90 for 14.80.

    My calculation of possible ROI are as follows:

    a) If UPRO is $90 or higher and am exercised:
    -$8704 Initial invested in buying stock
    +$1478 net recvd from covered call after -$2 commission
    +$8985 will receive from exercise after -$15 commission
    Net Result Gain: + $1759 which is +20.2 % over initial 8704 invested amt.

    b) If UPRO is lower than 87.04, I wld be down whichever amount in the price of stock but still keep the +$1478 from sale of the C.C.

    c) If Upro higher than 87.04 but lower than 90, I'd gain those dollars per share plus keep the + $1478 from sale of C.C.


    What can go wrong here? It just sounds too good to be true on first sight, but then again the expert hands are sure to give me some better point of view.
  2. 1) What is it exactly that you believe is "too good to be true" with that position? :confused:
    2) What can go "wrong"? You can lose a lot of money if UPRO greatly declines in price. You can miss out on a lot of money if UPRO were to skyrocket in price. :eek: :( :mad:
    3) You have to be fully prepared and willing to wait until the 3rd week of January, 2014, to let the position run its course, all the while ignoring other trade opportunities along the way. :cool:
    4) It's easy to have a hypothetical understanding of your a), b) and c) outcomes but they are not as "simple" as the appear. :)
  3. Cereal


    Thanks, you are right in that the stock going much lower is a bad deal.
    When I said too good to be true I meant the return percentage should the stock go over 87.04 from now till then.
    Opportunity cost of losing bigger gains on the stock can be worth it with a > 20% return...
  4. 1) Okay. We have different senses of proportion and risk perception. :cool:
    2) Regarding risk, the ~+20% return may never occur during the life of the trade or you may have to tolerate a 10%, 20% or even 50% loss before the gain comes about. :eek:
  5. Initiating a brand new position to merely go long stock and short calls is an inferior position for many reasons that I will not go into since its been talked about here a million times. You should just simply sell the equivalent of uncovered puts; not to the point where you over-lever yourself but cash secured or the equivalent to how ever many long shares you would have purchased. So if you wanted to buy 400 shares; that equals 4 put contracts. The 80 strike puts are bidding nearly $16 range right now. Plus that gives you even more cushion.

    But I would never look at this kind of trade so far out personally unless an extreme move of the markets had happened one way or the other. Plus these leveraged ETFs are a bit more than just meets the eye on paper. Look at the past 52 week range on this in the low $50's. There are other factors to consider in terms of how some of these ETF's utilize leveraged instruments that can often inaccurately track the index in terms of a depreciation like effect etc. and compound against you on a daily/weekly/monthly/annually basis.
  6. Cereal


    Thanks you both.

    O should have clarified that I already have the shares, and that I definitively did not buy them because of the covered call possibility, just simply because I wanted to catch some of the possible "Santa Claus Rally"

    The covered call is just a possibility I saw today and thought that it does offer a good ROI overall. With a whole year to expiry I'd expect to be able to close the option before expiry and hopefully with some gains, even if not the 20% mentioned.

    But yes, these 3x leveraged ETFs are not be trusted.

    By the way, tks for the idea of selling cash secured puts. It is something worth looking into here.
    I see on my platform (thinkorswim) Jan14 Puts sell for:
    strike 80: 15.30
    strike 85: 16.60
    Stock closed at 86.45 last Friday.
  7. Cereal


    After considering the advice received I have finally sold a very near term covered call that I calculated still gives a decent ROI plus lowers the risk of holding UPRO for a lengthy period in these volatile and uncertain markets.

    Yes, I gladly give up the opportunity cost of higher gains should I be exercised because stock went to the moon or wherever.

    Sold Call Exp Dec12 strike $89 for 1.45
    If Upro goes to 89 or beyond and am exercised the gains calculation is:

    -$8704 Initial invested in buying stock
    +$143 net recvd from covered call after -$2 commission
    +$8880 will receive from exercise after -$20 commission (special rate commission when exercised is higher than the usual buy and sell)
    Net Result Gain: + $319 which is +3.66 % on initial 8704 invested amt., around 43% on an annual basis.

    Risk: That the stock goes lower than my buy price. I'd still keep the + $143 though, and I was planning on holding UPRO until beginning January anyway to try and catch the "Santa Claus Rally", if we get one this year.

    Too bad there's no way to make quick anonymous payments in this forum because if there were I would gladly send a little for a coffee or beer to each of the two gentlemen who helped me on this one. Thanks again, I find it necessary for others to confront my "brilliant" (so they seem sometimes in my little brain) trading ideas so as not to do something too stupid.
  8. ?...... ! ..... you can go to Amazon.com, buy a $50 "gift card" and then send the "code" to me via the private message function. :cool: :cool:
  9. iggy9807


    I'll go out on a limb and say that this will probably be a losing trade considering the "cliff" and current overall complacency in the market.
  10. Cereal


    I said a coffee or a beer...that's all this trade gives; it's only one contract. Are there $5 "gift cards" ?
    If there are and if by options expiry the options side of the trade is succesful I will gift that.

    I looked at the gift cards and one can set the dollar amount. Give me your email address (I think that's all that I need) by PM and if the trade is successful I will send you a thank you $5 card.
    #10     Dec 11, 2012