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.

DXCM “Ladder” Approach to CC Position, Protecting Capital Gain and Leaving Upside

DXCM has been on a wild ride since early March (low of $182.07 to high of $428.59). Covered Call writing is not the right strategy when a stock goes on a run like that. Writing calls restricts the upside potential. The call writer maximizes the profit potential but leaves a lot of money “on the table”.

Stocks that rise as quickly as DXCM will correct or stabilize. That started to happen over the past week. During the week DXCM stock was under $340, down $88 from the high. Covered calls offer downside protection but are not designed to protect against volatility of this magnitude.

What happened to our position as the stock was falling? We were not able to protect all of the gain. In the chart below the decline in stock price is partially offset by an increase in value from the calls we are short. Stock lost $90,775. Options gain $59,265. Net loss $31,510 which is much better than just owning the stock.

Despite the loss the position has a profit of $90,305 in 44 days.

The preference is to not have the stock called away and trigger short term capital gains. Ideally we will hold the stock for 12 months and pay long term capital gains.

How do we protect our gain…..but leave room for appreciation if the stock regains momentum? We put a “ladder” of Jun 19 calls under the stock price. We are short calls with strike prices of $350, $360 and $370. The combination gives us downside protection of 4.8%. If the stock remains above $370 our potential gain is an additional 2.8%. The options create $71,400 of downside protection ($45,325 “in the money” and $26,075 of Time/Volatility). The time and volatility will erode until it hits $0 on Jun 19.

Covered calls are adaptable and flexible but are not always the answer. Sometimes it is better to just own the stock. When we enter a position we make an assumption about the range where the stock will trade. When the stock moves outside the range the CC strategy will not be as effective as other strategies.