Update on SPY Ladder

Today we closed our remaining June SPY Iron Condor (it has 21 DTE) and opened a Jul 30 IC. We currently have 9 open IC’s in the month of July. Profitability of the ladder has been improving and reached a new high today of $4,686. This is a 9% return on capital or 26% annualized. Capital required to carry the positions is $53,463 (equivalent to max loss of all the positions). The 26% annualized return has been steadily improving over since the low in late April. Although max loss is rarely incurred the risk/reward ratio needs to be monitored.

SPY volatility has reduced during the recent run up, decreasing the premium received when we open positions.

Open positions are in the table below. Colors break out the individual IC’s.

Assigned on NIO on 5/29/21, Profit of $24,073 in 258 days, Return on Capital of 84.9% or 120% annualized

On Friday I was assigned on a covered call strategy for NIO. We opened the position 9/16/20 and have been rolling the short calls since then. I had an order in to roll the options but the order did not get filled and I was not able to check and adjust the order…..so I end up with a short term capital gain instead of holding on for another 107 days to get to long term capital gains.

We did not maximize the profit of the position. In early February before NIO stock started trending down the position had a profit of over $32,000 (black line in the graph below).

Overall NIO has been a good stock for a covered call strategy due to the excellent option premiums. Both the stock and options contributed to the overall profit…..a difficult combination to achieve. I will reopen a new CC strategy in NIO in the near future.

Graph shows the daily progress of the profitability of the position over the 258 days. How could I have improved the profitability….in October of 20 the stock went on a nice run. Profits could have been increased by either selling more “out of the money” strikes or just sitting on the stock. I did become more aggressive with strikes in December. When the stock started declining the contribution from the options became positive.

Assigned on DVN, profit of $1,070 in 8 days, return on capital of 4.4% or 200% annualized.

Yesterday life was too busy and we didn’t roll up our expiring DVN short calls….so we got assigned. When we entered the position on 5/20 we were planning on collecting the dividend of $.34 (ex div 6/11). Unfortunately the stock got called away. Return on Capital is good so not complaining…but missing $340 of dividends. We will likely reopen a similar position on Tuesday morning to capture the dividend.

Graph below shows the daily profit/loss for the position since opening. The drop in the blue line (stock) and increase in orange line (option) reflects the assignment.

Amazon Covered Call Strategy….One Year….Profit of $97,760…44% Annualized

Over the past year I have “managed” a covered call position on Amazon. During the year the short call options have been rolled 123 times. The rolls have been to keep the short strikes “at the money”. Both the stock ($83,839) and short options ($13,921) have both contributed to the profit.

The stock has dropped recently but gains from the options have offset some of the losses.

Reaching 365 days is a key part of the position strategy. The gains on the stock will now be taxed at the long term capital gains rate of 15% (assuming we hold on to the gain) versus short term capital gains.

Chart above shows the daily profit/loss for the stock/option and net starting January 24th.

Covered Call on CVS, positive contribution from stock, option premiums and dividend….Unrealized profit of $1,098, 5.1% return in 49 days or 37.8% annualized.

It doesn’t happen often when a CC position is profitable on the stock, option premiums and dividends. Our position in CVS is currently positive with all three. Early on the stock dropped (blue line) so we were losing money on the stock and making money on the options (red line). Recently the stock has run up. In the table at the bottom you can see our option rolls as the stock increased in value. Our rolling could have been more aggressive (higher strikes) as the option profits have declined as the stock pushed higher. We remain bullish on CVS and like the dividend. Plans are to continue rolling the options and hold the stock. On Mar 15 we purchased 300 shares and sold 3 Apr 23 $74 Calls to start the position.

Lumber prices are ridiculous….CC on WY (Weyhauser) ….can we make enough on the CC to offset some of inflated lumber prices on reno?

Lumber prices have gone crazy. Rather than complain about the prices we decided to establish a CC on one of the top lumber companies, WY. This “approach” has worked in the past with Peleton. We wanted to buy a Peleton so we set up a CC and paid for the bicycle 50x over. I don’t think WY has the same upside as PTON had but we might make some money and offset some of lumber costs on our porch expansion at the cottage.

On Friday we purchased 500 shares at $38.53 and sold 5 Jun 18 $39 Calls for $2.00. After one day we have made $191…..enough to buy a few boards!

We did look at the charts and liked the entry point. Company financials are in good shape and it pays a dividend that yields 1.75%. Based on the current housing shortage, lack of inventory at building outlets and consumers with lots of money for renovations we plan on holding the position and roll the calls. Q1 results were announced yesterday. We took advantage of the dip to establish our position.

The Value of Dividends with Covered Calls… an example with PBR

On April 6 we established a CC on PBR when we bought the stock for $8.43 and Sold Apr 16 $8.50 Call for $.17.When we set up CC we were planning to collect the $.29 dividend (ex date Apr 15).

The stock dropped in value after we established the position (blue line in graph). Our $8.50 Call option expired and we wrote Apr 23 $8 Call which we rolled up and out to Jun 4 $8.50 as the stock price recovered.

The $145 in dividends we collected have made this position profitable (black line). Without the dividend we would be losing money. Dividends can make the difference between a winning or losing short term trade. We like the yield on PBR and plan on continuing to roll the options and hold the stock.

With CC’s the profit can come from the short option, stock appreciation up to strike price or from the dividend.

VIAC CC Recovering ….slowly becoming profitable

Patience with the VIAC CC is starting to pay off. On April 1 when we established the CC and bought the stock at $45.12 we thought VIAC had hit bottom….but the stock continued to decline (blue line showing profit/loss on the stock). Despite the drop in the stock we resisted the temptation to roll the May 21 $45 Call down. As the stock recovers the short option has remained profitable. Had we rolled down we would have offset some of the gain from the stock recovery. Plans are to keep the position and roll the calls as we approach 21 days to expiry.

The position has become profitable….we can almost buy a case of beer!

Covered Call versus Covered Call + Bull Put Spread

The charts below show two investment strategies around Covered Calls. We had a similar outlook on both stocks when the positions were originally set up (bullish long term). Both stocks pay a good dividend.

The top example is Abbott (ABT) and the bottom one is Lincoln Financial (LNC). With ABT we established a covered call and added bull put spreads (BuPS) over time. With LNC we only used covered calls. In both scenarios we rolled the options. ABT allowing weekly rolls and LNC monthly. Key to understanding the impact of adding the BUPS is tracking the return on the options (red line).

By adding BuPS to the Abbott strategy the loss on the short call options as the stock increased in price was offset by the gains on BuPS. With LNC the loss on the short call options offset much of the gain on the stock. The gap between the blue line (stock profit) and yellow line (net profit) is key. With LNC the gap continued to widen as the stock increased in price. We realized very little from the recent stock appreciation. In hindsight we could have written more aggressive strike prices on LNC (usually write ATM so we have a reasonable level of downside protection).

Take away for me…..after opening or when opening a covered call if you continue to feel bullish on the stock adding BuPS can offset losses on the short calls as the stock appreciates. Return in both examples is acceptable….but we left money on the table with LNC. CC versus just BuPS allowed us to capture the dividends. In these examples the dividend isn’t playing a significant role due to stock appreciation…..but this is the exception. Collecting the dividend can represent a key contribution in some situations.

Charts are showing impact from Jan 24, 21. Positions have been open for 332 and 302 days. We are getting close to the stock gains becoming long term capital gains.