One Covered call story

I am full time engineer part time trader who actively trades in US market with equities and options. Every now and then I try to come up with some or other strategy to minimize risk and maximize returns using either stocks or / and options. I have divided my portfolio in two parts. 75 % is based on low risk , high dividend stocks and rest is my high risk high return positions.

I would like to share an strategy that has been quite successful to me even in this down market. That is covered call strategy for a high dividend paying stock with reasonable volatility. I am going to share what I did with Total (TOT) and would like to know comments from readers, if I could have done something better.

Generally I follow this principle. The day before a high dividend paying stocks like TOT, ABT etc who have good average daily volume and volatility, I buy stocks and sell in the money calls for a current or next month. I always make sure I am getting a premium (in time value) is less than the dividend issued. So for example if TOT is issuing 1.42 $ dividend, and if I am selling a call for current month or next month which is 2-3 $ in the money I can easily get a time value premium of 0.5 to 0.8$. So if I am selling 4-5 options, I may get an easy premium of 200 to 300$. Since the option is in money and time value premium is less than total dividend, 9 out of 10 times I get called / assigned for the options sold. Since these transaction are settled mid night with my broker, Options House, I even don’t pay for any margin interest.

If I don’t get called then things get interesting. And this is the story of that. In July 2011 TOT was 59.XX and I bought covered call with Aug option Strike price of 55 and it cost me 54.XX $. I traded 4 spreads of these. Since the dividend was 1.42$, I was hoping I should get called in for the options and I would pocket easy 160 $ or so (before commission and assignment fees of 5$). Unfortunately I did not get called in and I was stuck with 400 TOT stocks. Good thing was that I received dividend of 1.4X$ per share resulting in dividend of 640$. On EX dividend date I rolled over August option to Jan 2012 options and received additional premium of 1.3$ per share pocketing 520$ more. (5.XX % effective annualized return without dividend)
As time was going by, and stock price was above 55, I was not so worried about anything. But then things started going south with S&P downgrading US followed by uncertainty associated with Greece and French banks. When it was hovering @ 52, I made another trade with covered call (assuming option will hedge me against further drop), I bought covered call with Jan 12 50 strike call options. I got this spread for 48.XX. (9 % return annualized basis).
But the down fall continued with TOT going 52 week low of 41.XX or so. Since I use options as hedge, I made another trade for one covered call spread with 42.5 strike which cost me 37.XX$. Luckily market rebound and I closed it @ 40 with profit of 250 $ in next two days. (10 % in two days , not bad).

Apart from that i bought 50 stocks couple of times and sold them at profit.

Following table shows my trades since July and my resulting price per share for current TOT positions with and without dividend.





Today TOT closed @ 50.94$ and my effective stock price of 50.83$ is well @ break even. TOT has huge potential of bouncing back to 60$ sometime soon. Most likely I will book good profit on them or will be selling options again.

Not to forget I received 1.42 X 400 + 0.8 X 600 = 1120$ in dividends so far and will be receiving more.

I am always in search of stocks with this kind of volatility with higher time premium with good dividend yield. With this strategy one can earn 10 to 12 % effective return combined with dividends.