How I'm Trading AMZN, JEPI, CAT And DVN Covered Calls Stock Options That Expire In January

Donald E.L. Johnson - Stock Picking, Options Trading for Income - Tue Dec 12, 2023

By Donald E. L. Johnson

Cautious Speculator

Trading JEPI, AMZN, CAT, MSFT and other covered calls stock options at the money is done when an investor wants to take profits on a dividend stock or exchange traded fund.
If a stock or ETF is called, an investor can move on to another equity, buy the stock again if it was sold at a profit and sell covered calls on it or sell cash secured puts on the stock until it is called.
My 12 December expiration covered calls trades are yielding about 18.2% annualized.
Four January expiration covered calls trades are yielding about 21.7%.
See my redesigned spreadsheet below.

JP Morgan Equity Premium Income ETF (JEPI) gets four stars at Morningstar.com and is highly recommended at SeekingAlpha.com.

It is a great dividend investment for older people who are seeking high yields in a well managed and relatively safe exchange traded fund.

This is my new covered calls spreadsheet. Please click on the images and zoom in for better views

I think I can get better yields and capital appreciation by picking stocks that have more potential when it comes to capital appreciation and will give me more liquid and higher yielding covered calls and cash secured puts options.

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I've been in JEPI since late last year. My average cost is $54.39. My Net debit after accounting for dividends is $52.26 a share.

Yesterday with JEPI at $54.69, I sold Jan. 19 expiration $55 per share strike covered calls for $0.25 a share.

JEPI's point and figure chart price objective is $61.57 on StockCharts.com.

My strategy to take short-term gains, collect January 1 dividends and sell covered calls for options premium income on this 39-day trade. I hope to collect the dividends on Jan. 2. If JEPI is higher than my $55 strike, on Jan. 2 or earlier, the stock will be called and I won’t get the dividend. It is at $54.87 at this writing.

If JEPI is called, I'll decide whether to sell JEPI $54 or $53 strike puts, buy JEPI and sell calls again, or do something else. I'm almost fully invested in our IRAs. I think that I can find stocks with better potential for capital gains and AROR on puts and covered calls trades on other stocks. So I'm trying to sell my JEPI.

As an old guy, I'm most focused on generating 15% to 20% ARoR on my covered calls and cash secured puts trades. So far, my first four January covered calls trades are yielding about 21.7% annualized in options premiums. I expect to do at least eight or nine more January covered calls trades compared with 28 December covered calls trades on 27 equities.

The stocks involved offer an average of 8% dividends. Besides JEPI, the stocks that I’ve done January expiration covered calls trades on include Amazon Inc. (AMZN) , Caterpillar Inc. (CAT) and Devon Energy Corp. (DVN) .

I'm trading puts and calls closer to the money than I was during most of 2023. The delta, or probability on the trades shown above is .46. That indicates that there is a 46% probability that the JEPI calls will be exercised and I’ll get my gain on the investment. There is a 56% probability that JEPI will close on Jan. 19 out of the money. If that happens, I collect the dividend and covered calls options premium for about a 13.6% annualized return on risk. The ARoR calculation assumes that similar 39-days trades can be done with the same RoR 10 times during the next 12 months.

If all four of my covered calls trades are called, my short term capital gains will be slightly greater than my total JEPI options premiums income.

The risk is that a black swan or late December tax loss selling or early January profit taking will send stocks and ETFs sharply lower by my Jan. 19 options expiration date. If that happens, I'll keep the stocks and sell covered calls on them again unless I decide to take losses on some of the stocks involved.

Another risk is that after JEPI is called, it will continue to go up before I can buy in again. These risks often can be managed by buying the calls back at losses or smaller returns than I expected when I did the trade. I’ve had stocks run away on the upside after they were called. Sometimes I don’t chase them when I should.

For example, on Nov. 16, Kinder Morgan (KMI) was at $16.81 a share. It cost me $16.99 a share. I sold KMI 12.15.23 $17 covered calls for $0.26 a share. The ARoR was about 20% on the 29-day trade.

Today, with KMI at $17.17 and sinking, I moved to keep KMI from being called. I bought the calls back for $0.24 a share. That put me at about breakeven after commissions and fees. Fine. My net debit is $16.43 per share. The dividend yield on the net debit is 6.88% in an IRA.

KMI’s point and figure chart price objective is $19.98. I’m also short some KMI 12.22.23 $16.50 puts that I now can take (buy the stock) if the puts are exercised without having to buy the puts back to avert an income tax wash trade.

Last year I sold CAT covered calls and had it called at $210 per share. Its 52-week high after I sold CAT was $293.81. I finally bought CAT again for $257.21 a share and sold CAT 1.5.24 $260 covered calls for 31.68% ARoR. The delta on that trade was .35 and the OTM probability was 67.9%. I want the stock to be called so I can do the trade again in February. I’ve done dozens of CAT covered calls and puts trades over the years.

For me, trading CAT and its options is like being a wheat, copper or gold trader. It’s a job.

Lately, I’m trading AMZN, Newmont Mining (NEM) , Microsoft Corp. (MSFT) , Pfizer Inc. (PFE) , KMI, Merck & Co. (MRK) and Vertex Pharmaceuticals (VRTX) the same way. I’m short VTRX January puts. I will trade PFE options after their December puts and calls expire on Dec. 15.

I have found that the more you trade a stock, the better you know the stock and company and the easier it is to make trading decisions.

I am trading covered calls and cash secured puts well above my usual delta .20, or 20% or lower probability that they will be called because I think that in these markets, it’s worth taking bigger risks that stocks will be called. With higher risks come higher ARoR. That is, I’m trading for higher returns knowing that I’m taking higher risks.

Investors who don’t want their stocks and ETFs to be called can trade options at lower deltas and higher OTM probabilities.

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