United Airlines Roll-Out

You can read about the UAL trade by going to this post HERE. It’s part of the post I titled “Busy Morning.”

I owned 1000 shares at $28. The stock dropped down to $23.25. When you get in a situation like this It’s hard to get another Call sold because you want a Strike Price where you won’t lose money if assigned. In this case I would have to sell the $28 Call. With the stock down to $23.25 the premium would only be a few cents. It’s not worth it!. I decided to take a chance and sell the $26 Call. And to get an “OK” premium with the $26 Strike Price I would have to go out 2 weeks, not my normal 1 week. For the $26, 2 week Call, I received a 50¢ premium for $500. Not bad! This Call was to expire 5/29.

Well, this position became a problem! As soon as I sold the Call the stock started going up. And didn’t stop until 5/27 where the stock hit $32.75. This is a Covered Call so I’m not gonna lose money, except the loss I signed up for. I bought the stock at $28 and would be getting assigned at $26. A $2000 loss on the stock.

I decided I didn’t want to take the loss I signed up for. With a little patience the stock started down. On Wednesday, with the stock moving down, I sold my 1000 shares at $29, locking in a $1000 profit on the stock. However, I still have to deal with the In-the-Money Naked Call I just created. On Friday, I decided to do a Roll-Out with my Naked Call. I bought my way out of my Call, the $26 Call about to expire, and sold another to expire in 2 weeks. This was a $28 Call. Not only did I get a better Strike Price but I also bought another 1000 shares at $27.90. Here are the trades I made.

5/29/20 – Buy 1000 Shares UAL @ $27.90

5/18/20 – Sell to Open 10 UAL 5/29/20 $26.00 C @ 50¢ (+$500)

5/29/20 – Buy to Close 10 UAL 5/29/20 $26.00 C @ $1.80 (-1800)

5/29/20 – Sell to Open 10 UAL 6/12/28 $28.00 C @ $1.95 (+$1950)

(At this point I’m +650)

The question is, what did these moves do for me. Well, for starters, I didn’t have to deliver my stock at $26 and take a $2000 loss. I actually sold my stock and made $1000. In order to make this happen I had to do a Roll-Out of my Short option. If you look at my trades above, I sold the $26 Call for $500. That’s my money, it’s in my account. Then I bought my way out of that Call for $1800. Now I’m down $1300. My next move, I sold the $28 Call to expire on 6/12 and brought in $1950. I am now up $650. I also bought the stock at $27.90 to cover the Call. I now have a 10 contract 6/12/20 $28 Covered Call. When this expires in 2 weeks I will be up $650 on the premiums, and if assigned I’ll make another $100 on the stock sale.

The bottom line is I turned a $2000 loss into a nice size gain with a few moves. I know for Grasshoppers this sounds very complicated! Don’t get discouraged. As a Grasshopper you will never get involved in this until you learn more. My point of explaining this is to let you know you will learn to make adjustment trades. Hopefully you don’t have to make them often, but you must learn how to navigate your way off the rocky roads.

Successful Trading,

Steve

The Options Coach