First posted on 2 Nov, updated as and when new trades are executed.
Positions Entered
Covered Calls
BLDR
Stock: BTO
Date Entered: 9 Nov
Price: 67.68
Options: STO 17 Dec 70 Call
Date Entered: 9 Nov
Days to Expiry: 38
Price: 2.3
ROO: 2.3 / 67.68 = 3.4%
Return on Upside: 2.32 / 67.68 = 3.4%
Pros
Stock passed the IBD screen tests with strong technicals and has just announced earnings.
Cons
Stock gapped up and may close the gap. Stochastic is at 80.00 and indicates that stock is overbought. Very few OTM strikes available and OI is low (but bid-ask spread is decent).
Remarks
I decided to sell an OTM strike to test it out. Given that the stock gapped up and the stock market rally seems pretty overstretched, selling an ITM strike would be more prudent. Nonetheless, I want to experience a trade going against me and see if I can execute an appropriate exit strategy.
ENPH
Stock: BTO
Date Entered: 12 Nov
Price: 251.91
Options: STO 17 Dec 250 Call
Date Entered: 12 Nov
Days to Expiry: 35
Price: 18.65
ROO: (18.65 – 1.91) / 250 = 6.7%
Pros
Stock passed the IBD screen tests with strong technicals.
Cons
Stock price is out of my budget range. My intention is to buy stocks that cost less than $200. However, I couldn’t find suitable candidates and decided to stretch my budget a bit. In real-life trading, I would probably stay away from this stock. In addition, although the options open interest and volume is relatively high, the bid-ask spread is quite big. I tried playing the bid-ask spread and used limit orders that is slightly below the mid-point of the bid-ask spread. I did not have problems getting them filled, but am not confident the same will be true for live trading.
Remarks
Wanted to sell an OTM option initially, but the bid-ask spread was huge. The spread seems to fluctuate quite a bit throughout the day. Didn’t take a screenshot when I entered my positions, but here’s a screenshot comparing the bid-ask spread at two different timings:
Given that I can’t stay awake (since my timezone is 12 to 13 hours different from Eastern Time), I should probably rely more on limit orders. Perhaps, I need to explore other order types, so that I do not end up with a stock bought and no options sold.
PRFT
Stock: BTO
Date Entered: 15 Nov
Price: 140.65
Options: STO 17 Dec 145 Call
Date Entered: 15 Nov
Days to Expiry: 32
Price: 4.6
ROO: 4.6/140.65 = 3.3%
Return on Upside: 4.35/140.65 = 3.1%
Pros
Stock passed the IBD screen tests with strong technicals.
Cons
The bid-ask spread for the option is a bit big, about 50 cents.
Remarks
Wanted to sell an ITM option initially, but the open interest was too low (16 at the moment). Also wanted to sell a delta 30 PUT for the wheel strategy portfolio. However, the bid-ask spread was too big (about $1.10). Decided to only sell the OTM CALL option, with an open interest of around 300 and a spread of about 50 cents.
AMD
Stock: BTO
Date Entered: 15 Nov
Price: 147.12
Options: STO 17 Dec 150 Call
Date Entered: 15 Nov
Days to Expiry: 32
Price: 6.95
ROO: 6.95/147.12 = 4.7%
Return on Upside: 2.88/147.12 = 2%
Pros
Stock passed the IBD screen tests with strong technicals.
Cons
Everything looks good, except that the stock is near the overbought zone.
Wheel Strategy
BLDR
Options: STO 17 Dec 65 Put
Date Entered: 9 Nov
Days to Expiry: 38
Price: 2.25
ROO: 2.25 / 65 = 3.5%
Pros and Cons
As above
Remarks
I sold the PUT option with delta 39. The next OTM strike is at delta 19, with a very low ROO. Very few OTM strikes available and OI is low (but bid-ask spread is decent).
ENPH
Options: STO 17 Dec 230 Put
Date Entered: 12 Nov
Days to Expiry: 35
Price: 8.5
ROO: 8.5 / 230 = 3.7%
Pros and Cons
As above
AMD
Options: STO 17 Dec 140 Put
Date Entered: 15 Nov
Days to Expiry: 32
Price: 4.7
ROO: 4.7/140 = 3.4%
Pros and Cons
As above
Positions Rolled
Covered Calls
CROX
Date: 18 Nov
Options: BTC 19 Nov 150 Call, STO 17 Dec 175 Call
Days to Expiry: 1 (Nov), 27 (Dec)
Cost to Roll: 17.3
Original Stock Price: 150.42
Current Stock Price: 176.98
ROO: (175-150-17.3)/150.42 = 5.1%
Comment
I need to pay $1730 to roll out and up to the Dec 175 Call. Previously, I sold the Nov 150 Call. By rolling out and up, my stock is now worth the new strike price of 175, instead of the previous strike price of 150. Hence, as long as CROX does not go below 175, my gain is 25*100 = 2500. Rolling out and up to the 175 CALL will be worth it as long as CROX does not go below 150 + 17.3 (cost of new position) = 167.3.
Tried to roll out and up previously on 16 Nov. Entered a limit order (for a diagonal spread) and did not get filled. I realise that it is not easy to get filled when your options is deep ITM, as the bid-ask spread can be enormous despite an open interest of more than 2000.
INMD
Date: 18 Nov
Options: BTC 19 Nov 82.5 Call, STO 17 Dec 90 Call
Days to Expiry: 1 (Nov), 27 (Dec)
Cost to Roll: 2.25
Original Stock Price: 83.86
Current Stock Price: 92.62
ROO: (90-82.5-2.25)/83.86 = 6.3%
Comment
The stock chart for INMD is less bullish as MACD has turned negative. However, there is no option to roll out to a DEC 82.5 CALL option as this strike is not available.
Decided to roll out and up to a 90 CALL at a cost of $2.25*100 = $225. Doing so is worth it as long as the stock does not go below 82.5 + 2.25 = $84.75, which represents a 9.2% drop from current stock price. Decided to take this risk.
Tried to roll out and up previously on 16 Nov but did not get filled.
INMD
Date: 30 Nov
Options: BTC 17 Dec 90 Call, STO 17 Dec 85 Call
Days to Expiry: 17
Credit: 1.35
Original Stock Price: 83.86
Current Stock Price: 77
ROO: Not too sure how to calculate
Maximum Profit Possible
Cost of stock = 83.86
Cost of rolling out and up previously = 2.25
Credit for rolling down = 2.8 – 1.45 = 1.35
Credit for selling stock if assigned = 85
Maximum profit = 0.24
Comment
Option hit the 20% mark on 30th Nov. Managed to buy back at 1.45 (even though I put limit at 1.6). Proceeded to roll down to the 85 call. Put limit at 2.6 but filled at 2.80. As a result, managed to roll down for a credit of 1.35. I believe I can only get a credit of around $1 for real trading.
The stock did breach the 7% drop below my entry price of $83.86. However, if I close the position now, I will incur a loss of $1046.
The most disciplined thing to do is probably to sell the stock and stomach this loss. The next correct thing to do is to roll down to the $80 strike, which results in a loss of about $356.
I chose the riskiest thing to do, because I do believe in this stock since there is no negative news and the overall market has been weak. Even though the stock has been underperforming S&P500 for the past 20 days, it is still overperforming for the past 60 days. I am inclined to think that this decline is a pullback given its recent massive gain.
If I am trading with real money, I would likely roll down to the $80 strike or not roll out and up in the first place (possibly just roll out to the $85 strike in the first place).
Positions Skipped
CBRE
Wanted to enter a CBRE position (Nov options for covered calls) on 1 Nov but the ROO is too low now as it is close to expiration Friday (start of week 3 of a 5 weeks cycle).
TASK
Decided not to enter a position for DEC covered calls on 15 Nov since the bid-ask spread for CALL options is about 60 to 70 cents. The PUT option has a smaller spread, but an open interest of only 47. I believe I will get filled at a good price for paper trading, but the same will likely not happen with real trading.
Positions Closed
All the Nov positions for my wheel strategy portfolio had been closed.
Two of them (CROX and INMD) expired worthless, giving me a profit of $420 and $270 respectively. The third one ended up being ITM and I did not want to buy the stock as the bid-ask spread for this stock’s options are quite big. Hence, I do not want to sell covered calls on this.
I bought back the option at the same price that I sold it for ($2.10). If you refer back to my Oct paper trading post, you can see that I got filled at a very good price (30 cents above the bid price) for WAL, which was not realistic. For real trading, I believe I would have incurred a small loss on this trade.
Journal
2 Nov
Decided that I should not be looking for any new positions until 8 Nov.
As all my positions are ITM as of 2 Nov, I will be looking at exit strategies starting from 15 Nov, where I need to decide whether to allow assignment, or to roll out (or roll out and up). Decided not to do a mid-contract unwind since I only have two positions at the moment. Hence I do not need to free up the money for other positions.
16 Nov
When deciding which exit strategy to use for my NOV Covered Call positions, I tend towards thinking of the cost required to execute the strategy. For instance, if I need 3000 to buy back a 120 strike Nov CALL and can only sell the 150 strike Dec CALL for 2000, the cost is 1000 (i.e. $10 per share). However, by selling the higher strike option, my stock’s ‘value’ increased from 120 to 150.
Given that my stock was initially worth 120 (due to the CALL obligation), as long as eventually I manage to sell the stock at a price greater than $120 + $10, paying $10 for the exit strategy is worth it.
Hence, the question is, what is the probability that the stock will drop below $130 in the next month? Perhaps the monthly standard deviation of the stock will help me decide on an exit strategy better, especially when comparing the exit strategy of two different stocks.
24 Nov
A number of stocks in my covered calls portfolio have turned bearish. Currently, I have six positions in this portfolio, numbers in brackets are their purchase prices followed by their current prices.
- AMD (147.12 -> 149.92)
- BLDR (67.68 -> 73.35)
- CROX (150.42 -> 170.74)
- ENPH (251.91 -> 250.50)
- INMD (83.86 -> 83.26)
- PRFT (140.65 -> 136.72)
The current prices of ENPH, INMD and PRFT are below their purchase prices, but due to the hedge from the covered calls, only PRFT is net negative at the moment.
All three stocks are still on IBD 50, and pass all the 6 items on the IBD checklist. I couldn’t find any negative news, so I believe it is just consolidation and pullback after a big rally. Will be looking for a chance to buy back the options (if they satisfy the 20/10 rule) and either hit a double or roll down.
Leave a Reply