New Income Plays Could Net Traders Solid Returns in the Next 2 Months

Another options expiration has come and gone. This month, we had seven different covered call positions on the books that expired on July 19. We’ve got a lot of ground to cover, so let’s jump right in.

Agnico Eagle Mines (NYSE: AEM)

Precious metals and miners have been under pressure lately as the U.S. dollar has strengthened. The Fed has been discussing an exit strategy for their $85 billion monthly bond purchase program. A reduction (or curtailment) of the program is bullish for the dollar, as fewer bond purchases will result in higher interest rates.

This has provided short-term pressure for gold stocks, and for that reason, none of our gold miner covered call trades were assigned this month.

For AEM, we sold the July $32.50 calls, and on July 19, AEM closed at $28.31. This means that we were not obligated to sell our shares, allowing us to keep our stock position, and also keep the premium we received from selling the calls.

Since the weekend expiration, AEM has bounced a bit. This gives us a much more attractive opportunity to sell an additional round of calls against the position.


You may recall that we originally bought AEM at $41.01, and sold the May $42.50 calls against the position for $1.45. When those calls expired, we sold the July $32.50 calls, which were priced at $0.65. Today, we’re going to sell the AEM Sept 32.50 Calls for about $1.28.

The good news is that despite the significant drop in gold miner stocks, we have been able to lower our net cost basis along the way, dramatically reducing the level of losses to our account. By selling the September calls, we will further reduce our net cost to roughly $37.63 per share.

AEM is a great example of how the covered call strategy reduces the amount of risk that traditional stock investors are forced to endure. We may wind up taking a small loss on the overall trade, but our decline will be much less severe than if we had purchased the stock at $41.01 and simply held on while it declined.

Market Vectors Junior Gold Miners (NYSE: GDXJ)

The junior gold miner ETF had a 1:4 reverse split at the end of June. This means that for every four shares of stock that we used to own, we now hold one share. At the same time, the price of the ETF increased by four times. So the transaction was really just an accounting metric to allow the ETF to have a more respectable stock price.

As a result, our cost basis increased by four times. Netting out the $12.15 we paid for the stock, along with the $0.80 we received for selling the May $12 calls and the $0.43 we received for selling the July $12 calls, our cost basis was $10.92. Multiply that by four, and we now have a new cost basis of $43.68.

Due to the stock split, our July $12 calls were converted into July $48 calls, which were not assigned. So at this point, we continue to hold a profitable position in GDXJ.

Similar to AEM, the junior gold miner ETF has rallied over the last two days, giving us an excellent chance to sell additional calls against our position.

Today, I want to sell the GDXJ Sept 45 Calls at about $3.55. This will allow us to further reduce our cost basis to $40.13, and if the calls are assigned, we will be selling our stock at $45. That’s a pretty nice profit, considering the fact that our original purchase price for GDXJ was actually $48.60 (adjusted for the reverse split).

Barrick Gold (NYSE: ABX)

Our ABX covered call position was not assigned in July and we continue to hold shares. We originally purchased shares at $19.06 and sold the May $19 calls against the position for $0.91. When the May calls expired, we turned around and sold the July $20 calls at $0.97 per share. Netting out the cash that we received from these two option contracts, our cost basis for the stock is now $17.18.

Today, I want to sell the ABX Sept 18 Calls at about $1.40. Selling these calls will further reduce our cost basis to $15.78. Of course, we will be obligated to sell the stock at $18 in September (provided ABX is trading above this level), but this still represents a very attractive gain despite the turbulence in precious metal stocks.

BlackBerry (NASDAQ: BBRY)

Our BlackBerry covered call trade represents the only true “problem position” that we have on the books right now. Unfortunately, the company announced poor earnings in late June and Wall Street punished the stock.

Our covered call setup helped to cushion our position from some of the decline, but with a net cost of $12.77, we still have a loss. At this point, BBRY is beginning to stabilize and I want to sell additional calls against the position to try to make up some of our losses.

Today, we’re going to sell the BBRY Sept 10 Calls at about $0.35. Selling these calls will help to reduce our cost basis a bit to $12.42, and will also give the stock some room to rebound over the next few weeks.

Maximum Profits and Strong August Positioning

Our other three July covered call trades all realized the maximum possible profits for the month:

— Bridgepoint Education (NYSE: BPI) closed above the $12.50 strike price, and our shares were called away for a 14% gain in 44 days.

— Youku Tudou (NYSE: YOKU) closed above the $20 strike price, and our shares were called away for a 4.6% gain in 37 days.

— Perfect World (NASDAQ: PWRD) closed above the $17 strike price, and our shares were called away for a 6.9% gain in 31 days.

Over the next few weeks, I’ll be looking for additional setups that will allow us to put our new profits back to work in the market.

All four of our August covered call setups are currently trading in the money. At this point, I expect all of these positions to realize the maximum possible gains. It’s also comforting to know that as the market becomes more volatile, we have been able to set up positions that do a good job of protecting our capital.

As always, I welcome your feedback and questions. Send your emails to and mention this article on covered call trading. I look forward to hearing from you!