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.

IB Account Wk Ending 10/16 – Trades and Positions – +$13,917 or 4.2% in the week

Good week for the account with a net gain of 4.2%. We didn’t add or eliminate any positions. Nice rebound by Dexcom (DXCM) helped with the performance.

Six of the seven positions are profitable. PYPL remains our only negative position. PYPL stock had a good week…but we were short $195 calls so didn’t get to benefit in the rally. It was another week when our cautious position of selling “in the money calls” left money on the table. The DXCM roll up on Friday from $400 to $420 was really surprising. Rolling up $20 we generated a credit premium of $17.51…..pretty amazing. Someone is optimistic about where DXCM stock will be by Nov 20 (has to be $420 +$17.51 = $437.51 for them to break even vs current $405). In my Schwab account I rolled to Dexcom $450’s.

Prior to making the trades on Friday I was expecting to exit positions with monthly options and wait until after the election before starting new ones….and then I saw the premiums and couldn’t resist rolling. I might regret the trades post election…..

IB Account Holdings and Update, +$23,742 or 7.5% in last 30 Days

Our IB account continues to hit new highs…..despite my trepidation about remaining “all in” with the pending election and uncertainty about what may happen following the close of the polls.

The recent market run up has driven profits from the stocks up….but increased losses on the options (we are short the options). Six of the seven strategies are making money. PayPal is our only “loser”. We have been too conservative in the PYPL strike prices….missing most of the benefit of the recent price bounce up.

The stock positions have generated profits of $102,282. Stock options have offset about a third of the stock profits as stock prices have run past our strike prices. Overall the positions have generated net profits of $71,419.

Graphs of the positions follow with comments.

BCRX is generating all of the profits from the short option positions. The stock price has risen recently accelerating the net profits.
Dexcom stock price is down from highs over $430 in late August. Profit gains on the options helped offset some of the lost stock profit. Recent gains in the stock price helping to push the net profits higher.
NIO was a new position for the portfolio. The stock price had a big move up in late Sep causing the increase in stock profit that was mostly offset by offsetting losses on the options. Overall the trend is good as the stock price has settled and the high option premiums are starting to pay off.
Peleton has just been on a roll. The stock has run up, and up, and up. Our net profit is continuing to increase but we have left a lot of money on the table as the strike prices on the options we have sold are too conservative. However making money is making money…..
Our strike prices on PYPL have been conservative….influenced by the steady decline in price between early and mid Sep. We have missed some of the upside as the stock has rebounded.
SDC stock had a big jump in early October. We also missed most of the upside associated with the bounce due to the loss on the options as the stock rose.
Steris has been a pleasant surprise. Net profits have grown steadily since mid June. Recent jump in stock price also ran by our strike price so we missed some upside.

New Covered Call on ATEC

Yesterday we established a new CC on ATEC, a medical device company in the ortho/spine space. The company pre-announced a great quarter with impressive revenue growth despite the negative impact Covid has had on ortho surgical procedures.

Kyle Rose is an analyst I follow with Canaccord Genuity. Here is a clip from his article yesterday:

Details on the transaction are in the table below. Disregard the ROI calculation at the bottom as it needs at least a day for the math to work.

Follow Up on STE Covered Call Strategy, Stock Price Run Up

STE stock has had a quick run up making our Oct 16 $170 Call deep “in the money” (reflected in blue line). For most of the time we have had the strategy in place the covered call strategy was outperforming just owning the stock (black line versus blue line). That changed this week making stock ownership alone more profitable. With the surprising run up we will have to increase our investment in the position to “roll up” the $170 Call to $190 if we wish to maintain the position.

Over 129 days the position has generated profits of $5,023, ROI of 16.3% or 46% annualized very respectable considering the conservative nature of the company.

We will likely roll up the call and maintain the strategy. We have collected two dividends during the holding period.

Is Smile Direct Club (SDC) a good candidate for Covered Calls?

Visual of Position Profits

We have had success with SDC in a covered call strategy over the past 172 days. We had the good fortune of buying shares of SDC at $4.50 and $4.67 in late March/early April when the price had dropped in response to the Covid pandemic. The strategy has generated profits of $206,322 generating an ROI of 229% or 486% annualized. Position remains open with 34,700 stock as the basis for writing calls (write 347 calls a week).

Over the 172 days we have rolled the weekly options 29 times (rolls up, down, diagonal, and calendar).

On a weekly basis an “at the money” call option sells for between $.30 and $.40….great premium for a $12 stock (2.5 to 3.5%).

If you believe in the market opportunity Smile Direct Club is chasing the stock appears to be a good candidate for holding and writing calls against. Recent stock jump has created a higher return on just holding the stock versus writing the calls….but I like the 2-3% downside protection the options offer in these volatile times.

My adult son and 50+ sister-in-law have both used SDC with success. It is easier to invest in a product where you know satisfied customers.

Crazy Market…somehow generating great ROI!

On Wednesday afternoon during a late lunch break (working outside at the cottage) I reviewed my covered call positions and decided to roll a few positions up based on the strength of the market. Seemed like a good idea at the time. Checking back at the end of the day and find the market tanked just after I rolled up the positions….now it looked like a bad idea to roll up……and then yesterday Trump says he will play ball on some sort of stimulus package and the market jumped up…and it seemed like a good idea to roll up again. The chart below shows the day to day volatility of the account. $10-$20,000 daily swings on a $300,000 account. My Schwab account is swinging $50-$60,000 a day. Volatility was predicted going into the election….but this is unreal.

Overall trend looks good for the past 30 days today…..but wait until tomorrow!

YTD the account has now doubled, up 105% vs SPX up 13%. Not bad for covered call writing that is supposed to be more conservative than just buying stocks!

Peleton (PTON) Covered Call Strategy +$2,771 in 33 Days, ROI of 17.9% or 198% Annualized

On August 31 we initiated a covered call position in PTON with the purchase of 200 shares at $77.26 and sale of 2 Sep 4 $77.50 Calls for $3.03. Over the 33 days we have rolled the options five times in response to movements in the price of the stock or the options expiring. The table below has the transactions. For example…the Sep 4 $77.50 calls we sold on Aug 31 for $3.03 were repurchased on Sep 4 for $1.94 generating a profit of $218. On Sep 4 we also sold Sep 11 $77.50 (Calendar roll – same strike, one week later) for $6.54. During the week leading up to Sep 11 PTON stock increased in value. When we repurchased the Sep 11 $77.50 option on Sep 11 we paid $12.41 generating a loss on the option trade of $1,174. The transactions continued as shown below.

PTON stock has increased in value from $77.26 to $107.51 over the 33 days. The CC strategy has been profitable (198% Annualized ROI) but not as profitable as just owning the stock. The position remains open looking for the stock to stabilize around $105 this week.

Yesterday I ordered a Peleton+ bike for about the amount of the profit…..does that make it free???

Goldman Sachs (GS) Covered Call Assigned, Profit of $455 in 44 Days, ROI .5% or 4% Annualized

On Friday we allowed our Oct 2 $195 options to expire resulting in the shares getting assigned. The chart below shows the profitability of the position over the 44 days. In early September the position profitability peaked at $3,385. After that the profitability of the position declined as GS stock moved down and reached a low profitability point of ($5,600) on September 23rd. GS stock price has rebounded and the position returned to profitability but rather than continue to invest in the position we decided to exit and look elsewhere for a higher return.

GS does pay a good dividend which generated $625 of income. Without the dividend the overall position would have lost money.