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.

53 Days Into INMD Covered Call Strategy Profit $4,476, ROI 15.2% or 105% Annualized

On July 13 we opened our covered call position on INMD. We rolled the options up from Jul 17 $30 to Aug 21 $35 on July 17. On Aug 21 the options expired worthless. We didn’t open a new option position until Sep 3 after the stock moved up over $4. Based on market volatility we were conservative selling a Sep 18 $30 for $5.00.

We have generated $3,706 in profit on the stock and $770 in profit from the options.

New Covered Call on NIO, after 7 days profit of $1,700, 12.3% or 642% Annualized.

On 8/20 we established a new CC on NIO purchasing the stock at $13.80 and selling Aug 21 $14 calls. Stock has significantly moved up closing yesterday at $19.88. We are making a profit of $1,700 on the position so far….but the return would be higher had we not covered the position. So far we have done a calendar roll on 8/21 and a vertical roll on 8/26. Planning on a calendar roll today. Option premiums will be high on this volatile stock.

Update on ABT CC, Profit $8,497 in 87 Days, 31.1% Return or 130% Annualized

Our Covered Call strategy on ABT was established on May 26. Since that time we have added to the position with 300 shares on 6/25 and 400 on 8/21. Covered Calls on Abbott have performed well aided by a strong upward move in the stock. We have rolled the options 13 times and had two expirations. Abbott is attractive for CC Writing as it trades weekly options, potential for growth on the stock price and pays a dividend.

IB Account – YTD +61% vs S&P +9%

Our portfolio continues to outperform the S&P by a wide margin YTD.

Current holdings in the account. All six positions are profitable. Selling options has helped on three of the six positions. On Friday we did a weekly diagonal up on EW . Our option on PYPL expired and we sold a new call at $195. Five of the six stocks are in the health sector.

Changes over time in the profitability of the individual positions are shown below.

Covered Call on PYPL, -$330 in 5 Days, -.4% or -27% Annualized.

On 7/13 we established a CC on PYPL. Stock fell over the next couple of days. On Friday we opened a second CC purchasing the stock at a lower price and writing a lower priced option ($175). We also did a calendar roll on the $177.50 call options for a net credit of $2.04. PYPL has performed well during the COVID recovery as more people are seeking non cash payment methods (Venmo).

DXCM stock falls $23.46 – How Covered Calls Helped Reduce the Loss

DXCM stock was on a roll the past eight weeks rising from $182.07 to a high of $428.59. Yesterday the stock closed at $381.79 down $46.80 from the peak. We currently own 2,500 shares. Without covered calls for downside protection the drop yesterday would have cost $58,650. The loss would have been giving up a portion of the gains accumulated during the recent rise but nobody likes to “give up” gains. When the stock dropped the Jun 19 $380 Calls decreased in value by $25.15 and the Jun 19 $370 Calls decreased in value by $17.35. Since we are short the calls it is a positive gain when the calls drop in price. We gained $43,475 in value from the short calls. Overall we lost money on the DXCM position but the loss was reduced to $15,175 versus $58,650 if we just owned the stock.

The overall position remains profitable with a gain of $108,565 in 41 days.

As profit from the stock falls we get a partial offset from profit from the calls.

What do we do now? Will DXCM continue to fall?

The 2,000 stock covered by the $370 calls have downside protection of $25.04 ($11.79 of intrinsic value or amount the option is “in the money” + $13.25 of time and volatility). The break even price is $356.75 ($381.79 – $25.04).

The 500 stock covered by $380 calls have downside protection of $18.95 ($1.79 of intrinsic value + $17.16 of time and volatility). Break even price is $362.84 ($381.79 – $18.95).

Depending on the stock this morning we can “roll down” one or both of the options to a lower strike price and increase our downside protection (at the expense of upside if the stock stabilizes or goes up).

Pre market futures indicate the market should open up which is a good sign although yesterday in a good day DXCM stock went in the opposite direction. Too early to see pre market activity in DXCM.