Is DIA Just Dipping or Rolling Over? A Covered Call Options Trader Wants to Know
Pick good undervalued dividend stocks with active and liquid stock options that can be used to generate weekly and monthly income by selling covered calls and puts options.
By Donald E. l. Johnson
Cautious Speculator
DIA and the Dow Industrials are either dipping or rolling over.
Unless I buy my 8.19.22 DIA $338 calls back, I’ll sell my DIA at a loss. That’s not good when you’re trying to do income trades by selling covered calls.
I can buy the options back and sell calls and puts next week instead of taking the loss.
A couple of trading scenarios for this kind of situation are outlined below.
The Dow Jones 30 Industrials index is either dipping before its next run up, it’s beginning to roll over or a major correction.
DIA, the ETF that is pegged to the Dow index, closed Thursday at $340.58, which is $2.58 above the $338 strike price on my DIA covered calls. They expire after Friday’s close.
Do I pay $2.58, more or less, to buy the options back and hope that I’ll get my money back if my DIA continues its recent run back to my $354 purchase price?
Or, given that I’ve collected enough dividends and puts and calls options premiums to reduce my net debit to about $345, should I take a small 3.1% loss in a taxable account and wait 32 days (to avoid turning this into a wash sale for income tax purpose) before I trade it again?
As I’ve noted before, I think that because the Fed is still raising rates and the world is a crazy place, we’ve been in a bear market rally. It is too early to tell whether the bear market rally is ending or not.
There is about an 25% probability (delta .25) that DIA will top $345 when markets close in 28 days on September 16. The December 30 probability is about 55%.
This point and figure chart from StockCharts.com is bullish with a $415 price objective for DIA.
One strategy, which could be used with any stock or ETF in this dilemma, would be to back the 8.19.22 calls for about $2.50. That would put the net debit and breakeven over $48.
Then sell DIA 12.30.22 $341 strike calls for about $14.60. That would provide a 4.12% cushion against further declines and a return on risk of 4.12%, or an annual return on risk of about 11.32% plus the 0.45% dividend.
If DIA really rolls over, the price of the call options will plunge and I will be able to buy them back at a nice profit. Then I would have to decide whether to bail on DIA or sell calls again. The sooner I can buy the calls back at a nice profit, the higher the RoR will be.
At the same time, I could continue to sell DIA puts every couple of weeks.
If I sold DIA 9.2.22 (14 days) $330 strike puts (delta -.18 with an out of the market of about 81%) for about $1.15, I would get about a 7.75% ARoR. With luck, the DIA puts wouldn’t be assigned and I could sell them every week or couple of weeks until I’ve generated enough premiums to give me a profit on the trade. That assumes the stock doesn’t fall below the $330 strike and I have to buy the puts back at a loss or buy more DIA shares.
A trader also could buy back the calls and sell weekly or monthly calls to cover the losses on this trade in a few weeks or months.
Late Friday, I’ll decide what to do. Watch the comments and use them to tell what you would do.
LINKs:
Home Page. See previous articles on other stocks and watch lists. If you read several of these articles, you’ll learn how this strategy is meant to work. No guarantees. Links to useful web sites are on the lower right corner of the home page. Scroll down.
Read about some of the trades that I did last week on the home page.
20 Ideas for Adjusting Your Stock and Bond Portfolio, by Christina Lourosa-Ricardo.
How to Beat Inflation Tax, Bear Market Tax With Dividend Stocks, Covered Calls, Cash Secured Puts, by Donald E. L. Johnson.
Wars Breed Inflation, Rising Interest Rates, Market Turmoil, By Donald E. L. Johnson.
Ways to use StockRover.com to analyze stocks
Calls vs Puts Options: What’s the Difference?
A video on how to place options trades on Think or Swim.
DIA is down $6.41, or 1.89%. That suggests to me that the market is looking for hawkish (bearish) speeches from the Jacksonhole, WY, meeting of central bankers. That the Fed is likely to continue raising rates in its fight against inflation is a major reason I've suspected that the bear market rally would soon end. It clearly failed its attempted breakout, and that looks bearish.
In two or three days, we'll have more and better information. Meanwhile, it looks like there is a buyers strike. That puts the bears in charge.
My DIA was called early this morning at $338. The purchase price was $354 less $5.76 in puts and calls premiums and $5.7088 in monthly dividends equals a net debit of $342.533. The net loss on the trade was 1.32% not including commissions.
I'll wait 32 days to buy DIA again if puts are exercised. I can sell puts at any time without worrying about income wash trade laws so long as they expire and are exercised at least 31 days from now. I have DIA puts expiring worthless today and probably next Friday. If next Friday's puts look like they'll be exercised, I'll buy them back.
At the moment, DIA is at $337.26. So my calls would have expired worthless as I expected. But someone called them at $338 and has a small loss on the trade.