First day back from a long weekend and I’m off and running. I just completed a “Triple Play Hedge.” This strategy might not be for Grasshoppers because it could get a little complicated. Please hit the link and read my page on the strategy. A Triple Play Hedge is a strategy I came up with where I buy a stock and I sell three Calls on the same stock involving the same amount of shares. Since you bought the stock, your first Call is a Covered Call. The next two Calls are Naked Calls. The Covered Call is sold pretty much At-the-Money to expire the next expiration day. In this case it’s this coming Friday, September 9th and the Strike Price is $14.50. I bought the stock at $14.40. The second Call is sold with a Strike Price a little higher than the first and the Expiration Date is an additional week out. This second Call has the Strike Price of $15.50 and Expiration Date of 9/16/16. For the third Call I add a little more onto the Strike Price and Expiration Date. This third Call is at $16 and 9/23/16. Like I said, this could get complicated. If it does, don’t worry, read the “Triple Play Hedge” page and try and understand. If you’re not ready for this concentrate on my other trades. I’m just posting everything I trade being genuine and transparent. Here are the orders and below I’ll explain a little of what I was thinking when I came up with this strategy. I give this “Triple Play Hedge” a Risk Factor of 3. The first Call is a Covered Call which is a low risk trade and the next two are Naked but they are out a little so I would be able to see trouble coming and make adjustments if need be.
Buy 5000 shares GPRO @ $14.40
Sell to Open 50 GPRO 9/9/16 $14.50 C @ $.30 (+$1500)
Sell to Open 50 GPRO 9/16/16 $15.50 C @ $.20 (+$1000)
Sell to Open 50 GPRO 9/23/16 $16 C @ $.27 (+$1350)
My thoughts when developing this strategy was, #1 to find a stock that would be a good candidate for a Covered Call. With my Covered Calls I like to get assigned so I want a stock that will go up a little. With a normal Covered Call I like to get assigned, keep my premium and make a little on the stock. The reason I sell the other two Naked Call is to have some hedging and get paid for it. Meaning, if I get the direction of the stock wrong and it goes down, I’ll lose value on my stock but my three Calls will increase in value because they are Short positions. I don’t like to pay for hedging because it’s expensive. In the case paying for hedging while owning stock you would buy a Put. Your Put would increase in value if the stock went down in value. But I think it’s too expensive to buy a Put which will cut into your profit on your stock if your stock goes up in value. This is only my philosophy! Many investors say you have to buy Puts and protect your investment. I don’t preach what to do, I only teach what I do. You have to figure out what strategy fits into your risk tolerance. When I sell Naked Calls I feel I’m getting enough hedging on a stock I like. You must like the stock to go up! And with this hedging I’m getting paid a premium to have it. Your premium is your insurance! You must understand, with my hedging I’m only insured by the amount of premium I bring in. When buying a Put, it cost you money but you get full insurance. If the stock keeps going down with a Put you keep making money. With my hedging, if I bring is $2000 in premium, that’s the limit to my insurance.
If after the first Expiration Date the shares gets assigned, I’ll watch the stock closely. If I still feel the stock is going to go up I’ll buy more stock to cover the next Call. And I might even Sell another Call the next week out to keep the “Triple Play Hedge” in force.
Let’s watch to see how this Triple Play Hedge plays out for me.
As always, any questions send me an email.
Steve
The Options Coach
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