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.
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 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.
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.
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!
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.
We continued with our SPY ladder. As IC’s approached 21 DTE we rolled them out or up and out. . Where possible we did a vertical roll on a few of the IC’s using the credit from the Put side to roll up the Call side (want to minimize any incremental investment so limited the ability to roll) . In most situations we could only roll up the calls a few dollars.
In the graph below you can see an improvement in the return when the SPY fell for a few days…..followed by a decline when the SPY started to rise again.
Little hesitant going into June based on the upcoming dividend. Rolling calls that remain “in the money” will create a risk of assignment and I want to understand the risk associated with assignment.
In May 20 we established a CC on AMAZ. Since that time we have rolled the short calls 100+ times. The goal has been to make the options “additive” to the profits. After 11 months the options are only contributing $2,543 to the position. When AMAZ price dropped the options helped offset some of the drop helping the account volatility; As AMAZ price bounced back the options gave up the gains. We have mostly sold and adjusted each week (and mid week) to “at the money” strikes. Position has generated good return but disappointed with the net from the options. I did get more aggressive with strike prices but not enough when the stock started to run. In one more month the gains on the stock will become long term provided I don’t get assigned in the next month.
I switched the tracking system 1/24/21 so the graph doesn’t show the early period. When the position was set up in May 20 everything was at $0.
NIO CC Strategy established 9/16/20 has been able to hold onto most of the profits (black line) despite the erosion in stock profits (blue line). NIO call premiums have remained at a reasonable level due to the volatility. As the stock profits declined the option profits (orange line) has been offsetting. Overall the position is generating a profit of $23,184 a return on capital of 77% or 130% annualized. We would like to hold the shares until 9/16/21 so we pay long term capital gains on the stock.
Our VIAC CC strategy has not worked out very well so far. We bought the stock after the steep decline thinking it was a good entry point. Unfortunately the stock has continued to decline (blue line) and the profits from the short calls are not able to offset the stock decline. We will continue to hold the strategy and roll the calls as they expire as VIAC pays a good dividend and we feel confident the stock will eventually bounce back.
Our IB account has been “stalled” since early February. To protect the gains from 2020 the account went from carrying margin of $150,000 to $200,000 in cash. We missed the opportunity with the recent rally but feel comfortable that we protected the gains. We have opened some new small CC positions primarily in stocks where we like the growth and dividend. Plans are to continue writing covered calls against the positions.
Current positions in the account are generating a net profit of $135,572. Six of the positions are more profitable due to contributions from the options. 8 of the 11 positions are profitable overall. Last Friday we had options on SDC and DGX expiring. We didn’t like the roll prices so we let them expire and have not sold new calls yet. ABT, DGX, MPLX, PBR and VIAC were all Dividend Capture Strategies (plus covered calls).