The Money Tree

Safely Generating Income in Retirement

An Update on WFR

Posted by mounddweller on December 23, 2009

I sold a new round of calls this morning on WFR.  As I mentioned in an earlier post I was looking to sell either the JAN $12.5s or the FEB $14s depending on which direction WFR decided to take.  Well, over the past couple of days the direction has been up.  Thus, this morning I sold the FEB $14 calls for $0.80.  Some of you might be curious as to why I chose the FEB $14s instead of the JAN $14s.  My regular readers know I usually sell the near month calls and puts.  With WFR right now, that strategy just didn’t make sense.  The JAN $14s were only selling for $0.30-0.35.  Meanwhile the FEB $14s were at $0.75-0.85. 

Usually calls and puts with a strike price two months out trade at a multiple of less than double the price of the near month options.  That clearly isn’t the case with WFR right now.  I suspect traders believe WFR is going to continue trending higher but that they don’t have much faith that it will get above $14 by January expiration.  However, they are much more confident this will occur by February expiration, thus they are willing to pay a premium price for those options.

Below is a log of my WFR transactions.  As you can see my cost (net of commissions) is now down to $11.80.   If assigned at $14 in February my ROIC will be better than 17% in just 9 weeks.  Not bad.  If unassigned my ROIC will be around 8%. 

Merry Christmas,

Troy

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