New Approach to Entering a CC Position, Selling Naked Put, getting Assigned then selling Calls

On 11/16 we took a different approach to establishing a new covered call position on Smile Direct Club (SDC). The stock was beaten down after a good earnings call. Rather than buy the shares and sell call options we wrote Nov 20 $9.50 Puts for a credit of $.49. The stock went up and on 11/18 we purchased the Puts back for $.03 and sold Nov 27 $11 Puts for a credit of $.27.

On 11/20 we were assigned the 2,000 shares at $11. Out net price for the shares was $11 – $.46 – $.27 or $10.27 per share.

Following assignment we established the covered call by writing Nov 27 $12 Call options for a credit of $.45.

As of 11/14 we had a profit of $2,060 on the shares, profit of $1,798 on the options and a combined profit of $3,858 in 8 days, ROI of 17.5% or 800% annualized.

This is the first time I have used naked puts and assignment as a strategy to establishing a stock position then selling call options against the newly acquired shares. In this instance it seems to have worked out well…..but selling naked puts creates a temporary position with unlimited loss so you really need to be committed to owning the stock no matter what happens.

REGN Bull Call Spread……a challenge so far

On Oct 12 we established a BuCS on REGN purchasing May 21 2021 $600 Calls and selling Oct 16 2020 $620 Calls. Within a couple days of establishing the position the price of REGN deteriorated and has continued to remain down despite a couple of bounces. We rolled our short option position 9 times generating $10,131 in premiums but not enough to offset the $15,125 loss on the long call.

We remain optimistic on the position. Not sure why the stock hasn’t recovered more. Covid cases on a global basis are hitting record daily highs and REGN has one of the only proven treatments. Vaccines will eventually help contain the virus but a lot of opportunity exists for REGN in the interim period.

IB Account – Down from high, Up from Dip over past 30 days

Over the past month our IB account has reflected the market volatility. The account dropped from a high just of $347,000 to under $287,000 then bounced back to $315,000. In the charts below you can see the impact of the individual stocks. DXCM, SDC and PTON have had a rough couple of weeks. I will continue to hold the stocks and sell options against as I believe in their long term prospects. PTON was hit hard with the news about the vaccine…..so I did purchase more shares on the drop. PYPL is a wild ride. I like the stock, liked the quarterly results but it moves around so much it is difficult to make money with.

Tough Week…..and Oct month end

Last week was a tough week for my covered call positions. Price decline in many of the stocks exceeded the protection offered by the call premiums. Over the past two weeks I would have been far better off with some “collars” (use call option premium to purchase an OTM Put option to establish a floor on potential losses) to protect on the downside. Collars would prevented the loss of tens of thousands of dollars on DXCM, PTON, SDC across my accounts. I have used collars before…..and like most people it seemed like I was wasting my money on the “insurance”. When the stocks didn’t drop it felt like you just gave away the money…..but I would have gotten everything back in last few days.

YTD the IB account is outperforming the S&P by 50%. Good result…but it look much better at the end of Sep than Oct.

You can see the impact of the last week with the steep drop in the chart above and below. In October we lost $26,975 or 8.5%.
I didn’t sell options against PTON, PYPL, REGN, or SDC. I like the stocks and am prepared to balance the risk of further drop against price increases this week. I sold off 300 of my 700 shares in DXCM to raise some cash to protect against a margin call this week.

Hope the election results are conclusive one way or the other and we see more stability by the end of the week.

DXCM – Hard to Understand a $90 Drop and how we responded

Dexcom announced excellent quarterly results…..which resulted in a $90 drop in the stock price. I copied the earnings announcement at the bottom of the post.

How to react when one of our stock implodes …..

The “covered call” offered some protection (it was sold for $28.82 a share or $57,640 on 10/16) but the drop (2,000 shares x $90) resulted in losses far beyond what the call premium could offset.

Dexcom has a history of big swings around earnings so we expected some volatility but nothing this extreme. Based on the earnings announcement and content of the call we decided to purchase more shares as it dropped. We purchased shares at $349 when we started to see a bounce…..but we should have waited as the stock bounce was short lived and hit a bottom just over $330. The stock did bounce back from the bottom to $349 by the end of the day. We don’t anticipate hanging onto the incremental shares but selling if the shares continue the upward trend.

We also rolled our 20 Nov 20 $410 Call options to Dec 18 $370 Calls for a credit of $18.22. Things were happening very quickly when I did the roll down…..and the Schwab system defaulted the Dec 18 option into the Diagonal Roll template when I thought it was Nov 20 option. I didn’t notice the Dec date until the confirmation came in. I might roll this back to Nov 20 today as I feel the stock will come back over the next couple of weeks.

It is hard to watch a position devolve and see tens of thousands of dollars disappear from your account. Knowing how you will react helps…..but it is still tough emotionally….and makes you wonder what else you should have done to prevent the loss.

Summary of account activity Wk ending 10/23 – risk and margin reduction via diagonal roll downs

Majority of trades on Friday were diagonal roll downs. AMZN, DOCU, PTON, BYND all had significant drops. DXCM had a good week which helped offset losses in other stocks. We rolled many of strike prices down to ITM/ATM strikes due to uncertainty heading into the election. The market is forecasting high volatility immediately after the election so we are being conservative with our call pricing. It has been a good year and hanging onto the gains is more important than taking risk over the next couple of weeks. Rolling down generates credits which reduce margin and risk in the accounts.

Schwab general account was down .2% for the week. 10 of 11 positions are profitable. We opened a new position in REGN (Regeneron) which is negative. 5 of the 11 positions are more profitable due to the options. Current positions are carrying net profit of $657,406.

Schwab 401 account was -1% for the week. 11 of the 12 positions are profitable. A new position was established in REGN this week and is negative. Overall current positions are carrying net profit $115,585. 8 of the 11 positions are more profitable due to the options.

IB account hit a new high this week. Account was up .7% on the week. 5 of the 7 positions are profitable. Only one of the positions is more profitable due to contribution from options. Overall current positions are carrying net profit of $115,585.

Follow up to ABT post on 10/21 about buying back Oct 23 $107 Calls

Market had a positive day yesterday which helped Abbott with the bounce back up. Abbott was up by as much as $4 yesterday.

We reestablished the covered call position selling October 30 $111 Calls for $1.31 when the stock was trading at $110.

The combination of buying back the Oct 23 $107 call, selling the Oct 30 $111 call and rebound in stock price added over $7,000 of profit to the position which is generating $18,342 in profit.

Buying back short calls when a stock drops isn’t an automatic strategy we employ….but when we are confident in the stock it can generate short term profit.

EW (Edwards Lifesciences) stock had a similar experience to Abbott yesterday after announcing good quarterly revenue and earnings. Stock dropped $4. With market poised to opend up it could follow a similar trend as Abbott….but don’t take this as a recommendation….just identifying a similar pattern on another high quality medical device company.

Adjusting ABT Covered Call in reaction to announcement of good quarterly earnings and raised guidance…..and stock drops $2…..

Yesterday we adjusted our ABT covered call position based on the $2 drop following the earnings announcement. The earnings call was positive with the company communicating excellent results and increasing annual revenue and earnings guidance. So why the drop?

Historically we have found opportunity when a stock we like announces good results and it drops…..usually a temporary dip influenced by short sellers and investors who play the news. Our experience is within a week the stock is likely to rebound. To take advantage of the dip we buy back the short options and wait a few days before selling another call to return to a covered call strategy.

Yesterday we bought back the Oct 23 $107 Call options for $.85 (sold on Oct 19 for $2.87). We are looking for a bounce over the next few days with plans to sell Oct 30 calls to re-establish the covered call position.

We established the ABT covered call on 5/26 and adjusted (rolling up, down and out) the short calls on a weekly basis over the past 148 days. During this period the company has also paid two dividends of $.36 generating $1,440. Overall the position is generating a profit of $11,192,ROI of 41% or 101% annualized (2,000 shares).

We like Abbott as a candidate for covered call writing. Weekly options. Growth stock. Quarterly dividend. Reasonable premiums (usually 1-2% per week).

Schwab Account Wk Ending 10/16 – Trades and Positions +$24,245 or 1% in the week.

All 14 positions in the account are profitable. Five (ILMN, LNC, MDT, MS, RGEN) are more profitable due to covered calls. The other 8 positions would have been more profitable just holding the stock (stock prices have moved up faster than planned in covered call strategy). On the weekend we had three positions assigned (ISRG, MDT and MS). Having the shares called away will help manage the amount of margin in the account which has been increasing each week due to the costs of “rolling up” to higher strike prices as the stock prices have been increasing.

We established the ISRG Covered Call strategy on 8/10 and held it for 67 days. Each week we would roll the options depending on what happened to the stock price. With the assignment the position generated a profit of $5,822, 4.35% or 23% annualized. ISRG has the volatility needed to generate good option premiums and we would consider establishing another covered call against the stock.

The Covered Call on Morgan Stanley (MS) was established on July 24 and held for 85 days. Similar to ISRG we rolled the options every week. The position generated a profit of $2,320, 4.6% or 20% annualized.

The Medtronic (MDT) covered call was established on 9/1/20 and held for 45 days. The position generated a profit of $2,540 in 45 days, 2.4% or 19% annualized.