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Has anyone employed a covered call strategy in an IRA. I began one in my ROTH IRA a few months ago. I am cdurrently using Ensco (ESV) a stock on which I am also long in my margin account.

I like ESV for this strategy because of:

1. First, I am willing to own ESV long.
2. Has high volatility (as do many of the drillers and Oil stocks)
3. ESV is part of the OIH. This increases volatility because the big wall street traders manipulate the OIH at least in the short term against the individual components of the OIH (e.g., ESV).

ESV closed Friday at $55.28. The last trade for the Jan 07 55 calls was $2.83 and the last trade for the Jan 07 $60 calls was $1.00. The last options are $5 OTM and cost $1 for 35 days.

My trades so far have been

Date Action Security Net
11/3/06: Buy 400 ESV ($19,996.91)
11/3/06: Sell to open 4 Nov $50 Call $592.43
11/16/06: Buy to close 4 Nov $55 Call ($67.55)
12/8/06: Sell to open 4 Dec $55 Calls $312.46
12/15/06: Dividend Paid $10.00
12/15/06: Calls Assigned ESV at $55.28) $22,000.00

In less than two months I have had the following results:

Total Gain: $2,850.43 (14% Gain) (84% annualized return)

Gain on Options & Dividends ONLY: $847.34 (4% Gain) (24% annualized return)

These are stupendous returns especially when one considers they are TAX FREE being in a ROTH IRA account.

I calculated the Options and Dividend Only return to reflect the situation if ESV had not risen from $50 to $55 while I held it. If ESV had fallen to $45, I would have written one month $50 calls for which I would earn about $1 in call premium. At $45, I would also sell some put spreads in my margin account.

Has anyone else used this type of strategy? I think the key to this strategy is to have a stock you are long on that is volatile, and do this in a tax advantage account. In a margin account the gains would be cut down by about one-third in taxes.

I would appreciate the thoughts of any of the more experienced options traders out there.

Emmette
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Emmette,

I consider my IRA the 'pay me' portfolio and tend to have covered calls written on most of my holdings in those accounts.

Your initial trades on 11/3 generate 3% return if called in 15 days. This is a great return for a short period, but leaves you with another decision should the stock move up slightly. I require all my option position to be a minimum of 10% total return if called. I want to get paid for my decision making of finding a good stock. 3% just isn't enough commission, even if it is a short term trade.

I'd have done a Dec 55 on 11/3 and probably gotten $1.25 or better (22% AINC). I'd have made less than you in this situation, but I'd have known I was going to get my 10%+ if called away.

How much of your success was based on having the good fortune of ESV dropping from 53+ to just over 50 in order to allow you to close your initial 50 call to write the 55? How would this look had the stock been at $51 or 52 instead of back to $50?

I don't like buying a stock and hoping that it doesn't go up. I'd prefer to just hope it doesn't go up too fast in the short term, but if it does, I'm getting paid.

John
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I don't like buying a stock and hoping that it doesn't go up. I'd prefer to just hope it doesn't go up too fast in the short term, but if it does, I'm getting paid.

John

Thanks for your ideas. Although I may not have been clear, I also view the oil sector as an ideal trading sector at this time. My trading strategy in this account uses covered calls to play on the volatility with short term covered writes (e.g., 7-14 days). The remainer of the time, I plan to be either long the stock or holding cash like I am right now.

I let my shares get called Friday rather than rolling. My anticipation is that Natural Gas prices fall (bearish for ESV) next week, and if that is the case ESV should also fall. Last week saw Natural Gas inventories fall (bullish for ESV) and this week, with the warm weather across the USA and predicted warmer than average Christmas, I expect ESV to pull back towards 50 and as it pulls back I will buy back in and write some Jan 07 55 calls.

I think this stratgey is good for the drillers and for big oil right now. You just need to know what your stock is most sensitive to (e.g., refining margins, Gas prices, crude prices etc.). I will share my results as I continue this strategy.

I have thought about call spreads on ESV and other drillers, but the premiums don't seem to justify the risk. Therefore, I have stuck to call and put writing in this sector.

I like your "pay me" name for your IRA account. I let my IRA sit for years without taking the most advantage of the tax free nature of the ROTH.

Emmette
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