Sadly, The Plan Worked

by JDH on November 15, 2013

NOTE: It appears there was a technical glitch, so if you missed last weeks’ very short commentary, you can read my thoughts on Twitter.

Two weeks ago, in my post titled What I Said Last Week, That’s What I Did, I said that, while I expect gold to ultimately go much higher, short term weakness was possible, so I “covered” my blue chip gold stocks.

I have explained covered option writing many times in the past and I don’t want to bore you with a long explanation, but for those who have no idea what I’m talking about, you can read a more detailed explanation on the covered call writing strategy page.  The short version is this: if you expect your stocks to stay at the same level or drop slightly, you sell call options against those stocks, and the premium you take in mitigates your losses.

All of the gold stocks I own had a good run in late October/early November, so I sold covered calls as follows (all for the month of November):

As “luck” would have it, after the close on the third Friday of the month (November 15 this month), all of the stocks listed above were trading below the strike price on the call options I sold, so all of the options expired worthless, and I kept the premium.

Of course if I had a perfect crystal ball, I would have simply sold all the shares at their peaks.  For example, I should have sold Agnico-Eagle on October 28 at $32.50, which is $2.70 higher than the $29.80 closing price on November 15.  Unfortunately I can’t see the future, so although the stock dropped $2.70, I mitigated my loss by $1.04.

More importantly, if I had sold the stock, would I be disciplined enough to buy the stock back today?  Or next week?  At what price should I buy it back?  That’s a difficult decision, but I have no worries, because I like the stock long term, and I still own it.  So, here’s the plan going forward:

If a stock has:

  • three up days in a row; or
  • a significant up day (like the 18% up day Agnico-Eagle had on October 24 when they announced good results)

… I will consider selling call options to protect the gains.

In theory, if I could sell calls for $1 every month, I would earn $12 per year, which on a $32 stock is a fantastic 37% rate of return.  Of course it doesn’t work that way in practice, because you can’t always get $1, and at some point the stock goes up and you lose the stock, which may or may not be profitable.

Regardless, until gold shows signs of a break out, which is not yet evident, I will bide my time with my covered call writing strategy.

Thanks for reading; see you next week.