Last week BCRX received FDA approval for a drug. The market has been anticipating the approval and driving the price up as you can see by the increasing profits in the stock (blue line in the chart below). In response to the good news and jump in stock price we rolled our Dec 18 $4 Calls that we were short to Jan 15 $6 Calls. We purchased the Dec calls for $1.72 and sold the Jan Calls for $1.13 for a debit of $.59. We invested an additional $.59 to increase our short strike price by $1.50. When we do a diagonal roll up to an ATM strike it usually costs $.70 per dollar of roll. The stock was trading above $6 when we did the roll so it should have cost us $1.05 vs $.59 so we are happy with the trade.
The stock is likely to decline “post news” and we might be overly aggressive with the roll to $6 but we do plan on continuing to hold the stock and writing options. Post approval the volatility is likely to decline resulting in smaller premiums when we sell the options in the future.
We opened our CC strategy on BCRX on May 14. Despite the stock price dropping and creating a loss of $4,388 the overall position is making a profit as the options have generated a profit of $13,708. Ideally the stock will climb back over $4 heading into the Sep 18 expiration.
IB account continues to perform well. MTD it is up $6,284 or 2.75% vs S&P +1.74%.
We are profitable in 6 of 7 positions. EW stock price continues to lag and we have not been selling calls anticipating a rise in stock price. Time to either double down or exit.
Yesterday (7/8) we did a vertical roll on BCRX from Jul 17 $4 to $5. Net cost for the transaction was $.83. When we sold the $4 calls on June 19 the calls were “at the money”. We were conservative as the stock had been moving down. The stock has rallied to $5.43. Our deep in the money call was providing little additional upside. The position has generated a profit of $6,916 in 56 days, 18.3% or 119% annualized.
On June 16 we increased our covered call position from 500 shares and 5 contracts to 10,500 shares and 105 contracts. Additional shares were purchased at $4.04 versus original shares at $5.04. On Friday the BCRX shares closed at $4.83. Profitability of the position is now $4,632 in 43 days, 12.2% ROI or 104% annualized. Our position would be more profitable had we sold Jul 17 $5 calls versus the $4 calls. Selling the $4 call offered $.77 of downside protection which seemed like a good idea with the stock dropping from $5.04 to $4.04.
The 10,000 shares of BCRX were called away at a price of $4 and returned the account to the goal of 100 Covered Calls. This is an illustration of an alternative to “rolling” if you cannot get a fair price on the roll. It does come with risk (if the stock had dropped from $5.09 to below $4 on Friday) but sometimes it is beneficial to take the risk. Stock dropped in price yesterday but the short option dropped more to generate a small gain on the day ($150). The Daily P/L column is tracking the end of day position and feeds the chart at the bottom. After a couple of down days when the position was first set up it has been a good trade so far. With current market volatility I wish this stock had “weekly” options as a lot can happen between now and Jun 19.
If BCRX stays above $4 today (closed 5/14 at $5.08) the position will have earned a healthy profit.
Yesterday (5/14) I attempted to do a Diagonal Roll (Strike price from $4 to $5, Expiration from 5/15 to 5/22) to avoid the BCRX shares being called away. Volatility on the stock is high as it conducts a clinical study on a compound similar to Remdesivir. As clinical data gets leaked the shares are likely to jump around.
To buy back the May 15 $4.00 Call option the premium was $.15 higher than the intrinsic value with only a day and a half left. I didn’t want to pay $10,000 x $.15 associated with volatility and time but the market would not execute the trade at a lower price. Rather than pay the excessive premium the alternative was to establish a new covered call and let the existing shares get called away. This would remove the $.15. The downside was more capital (buying additional shares) and a risk of owning double the shares if the stock fell from $5.08 to under $4.00 on Friday and the shares don’t get called away.
Established a new covered call by purchasing 10,000 shares @$5.00 and selling the Jun 19 $5 Call for $1.12. I will use the higher priced shares as the shares to be called away from the May 15 $4 (capital loss – buy $5.00, sell $4.00).
Thinking about investing some of the profits into downside protection as the stock could fall dramatically if negative clinical data come out.
Table below is a summary of the original CC at the close yesterday.