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.

New Bull Put Spread on PTON

PTON stock had a big decline today despite announcing their first $1B revenue quarter. Sounded like a key issue is trying to fill the order backlog if in a timely manner…..not a bad problem to figure out.

Based on the expectation the stock will bounce back once the “earnings traders” fade away we purchased 25 Bull Put Spreads. Stock was at $143 when we made the trade.

Sold Feb 12 $150 Puts for $8.90 and purchased Feb 12 $145 Puts (protect the position against unlimited loss should the stock not bounce back and decline further).

Should the stock be above $150 next Friday Net price was $3.20 credit. If the stock closes above $150 next Friday we would keep the premium. Max loss is $1.80 per share should the stock close below $145.

New Diagonal Bull Put Spread on ATEC

In our Schwab 401K account we have had success with a covered call strategy on ATEC. We established the CC position in Oct 2020. Since then we have rolled the options 7 times resulting in an overall profit of $22,864. Based on the success with the stock and favorable outlook and recommendation by Canaccord we expanded our position to include a Diagonal Bull Put Spread.

We established a “defined risk” put spread versus just selling the puts naked. We sold “at the money” Mar 19 $15 Puts for $1.64. and purchased Jul 16 2021 $12.50 Puts for $1.71 as a “back stop” to our short put position.

Our maximum risk is the spread between the long ($12.50) and short ($15.00) strike prices (= $2.50 per share).

Our goal is for ATEC to remain above $15 allowing the short Mar $15 puts to expire at $0 then sell April puts (hopefully followed by May, Jun and Jul Puts).

We are prepared to add to our ATEC stock position if the trade goes against us and we have to purchase the shares for $15.

This is not investment advice….just sharing a personal trade.