On Monday I posted about me doing a Triple Play Hedge. This is where I buy shares of a stock and sell a Call on those shares to have a Covered Call. In addition I sell 2 more Calls on the same stock. These 2 Calls are Naked Calls. These Calls are at higher Strike Prices and an the Expiration Dates are further out in time. These Naked Calls are hedging against the stock going down. The Naked Calls are short positions so if the stock goes down the value of my Calls will increase. If the stock goes up I have the first option, a Covered Call, covered. If the stock goes up big, I would have to buy more stock to cover the next Call in line, which is Naked. I know this can get complicated and might be beyond what you want to do or learn, but I said I’ll post all my trades so that’s what I’m doing. I think it’s a great strategy and I think it’s worth learning.
When I was in the Triple Plat Hedge for a few hours the stock, which is U.S. Steel (X), took a pretty big drop. When it took the drop my account owning 5000 shares was protected. When the stock went down my Naked Calls actually increased in value. While the stock was down I got out of my 2 Naked Call positions and put over $2000 in my mattress. This was a $2000 gain in a few hours. Once I got out of the 2 Naked Calls I was using as hedging I was left with a Covered Call on my 5000 shares on X.
Today U.S. Steel is back up and I just sold another Naked Call to add some hedging against the stock going back down. This time I did not do a Triple Play Hedge because I only sold 1 extra Call. I did this because my Covered Call expires this Friday and I already took in $2000, so I figured the 1 Naked Call would be enough of a hedge. Today I sold 50 contracts of U.S. Steel 4/15/16 $18 Naked Calls and received a $.30 premium for a total of $1500. I give this trade a Risk Factor of 3. It is a Naked Call but I feel U.S. Steel is near it’s top for the week and if my Covered Call expires on Friday the 5000 shares will then cover the shares of my Naked Call which will expire next Friday the 15th. Here’s the sell order:
Sell to Open 50 X 4/15/16 $18 C @ $.30 (+$1500)
Again I know this can get confusing. If you have any questions please email me.
Steve
The Options Coach