Home runs vs. singles

Saturday edition
To use a baseball analogy, I am a singles hitter. I hit for average, not home runs. I aim for a 80% or better win rate. That may sound high to some people, however, understand that most of my positions are hedged. If a stock is unchanged or a tad lower, I can still come out ahead. The wins are almost always for limited or small profits and some losses can be big ones. Once in a while the stars line up and I make a good sized profit on a hedged position, like the recently closed out GM (General Motors) that I bought at the end of December 2005.

Three keys are diversification, patience, and option premiums. I diversify so a big loss on one trade can be survived. Patience is required to wait for low risk opportunities. Overtrading has been the demise of many a trader. Some stocks don't have options, other options trade at a small premium so that a seller can't make much money. This third criteria eliminates a lot of stocks from consideration. In some cases, I may take a small unhedged position because the stock looks compelling enough.

On rare occasions I have been known to swing for a home run. As with most home run swings, there is high percentage of failure.

Trades
Sell AMD (option assignment) profit
Sell AMZN (option assignment) overall trade a loss, worst of the year
Sell PIXR (option assignment) profit
PDLI Feb call option expires

On both AMD (Advanced Micro) and PIXR (Pixar) the call buyer made more than I did. An unhedged position would have made more than my hedged position. AMZN (Amazon) was my worst overall trade of the year so far. I bought AMZN before the big dump on its earnings report. I rolled down the calls, but those call premiums did not help that much. The last batch of calls was at the 37.5 strike so it closed well in the money. Some might say the mistake was taking the risk of buying AMZN right before earnings. Yes and no, because right before earnings the option premiums are fat, so there is compensation for the added risk. I waited until after earnings to buy AMD, and the option premiums were down a good bit by then.

PDLI (PDL Biopharma) could be a poster-stock for covered calls. It has traded in a range for several months, with the stock going no where. I have sold three batches of calls on this stock, each at a decent premium. I have pocketed every premium and made a very good return while the stock has drifted lower from my buy point. All the call buyers would have taken a 100% loss if they held to expiration. That is the beauty of covered calls, a stock can be unchanged or even a bit lower, and the option seller can make a good return. That's one way I can get to that 80% win rate.