Last week I had 3 Calls sold on U.S. Steel (X), 50 contracts each. 1 was a Covered Call and 2 were Naked. The Covered Call was a $19 Call expired on Friday. 1 of the Naked Call is also a $19 Call expiring this coming Friday and the other a Naked Call expires June 17th. The 5000 shares I own I purchased for $18.95. On Friday I was hoping to be assigned but the stock closed at $18.84 with a Strike Price of $19. The Covered Call expired and I keep the $2500 premium I received. The problem is I also had to keep the 5000 shares and by now all “Main Street beats Wall Street” readers know I don’t want to hold this stock because I’ve been waiting for a pull back. Well, my fear came true! This morning X opened at $17.98, down $.86. That would not have been that bad but as I write the stock is down $2.45. Just what I’ve been waiting for! Believe it or not, my account did not suffer much. My 2 remaining Short Calls did their job. The 2 remaining Call, which were naked but now that last Friday’s Call expired, 1 is covered and the other is Naked, increased in value as the stock went down. This is the power of Short Calls when you own stock. You must understand how the premium reacts when the stock goes down. When the stock goes down the premium also goes down. When you sell a Short Call and this happens, your values (with the Call) goes up. I’m not trying to say I’m happy U.S. Steel went down but since it did, the value of my stock went down but the value of my Calls went up. So I pretty much stayed even (down a few dollars). If I only owned the stock (with no Calls) my account would have been down over $10,000. These extra Calls acted as insurance.
Now what do I do? Well, when the stock was at $16.79 I bought another 5000 shares. Now I own 10,000 shares at an average of $17.87. I’m hoping to get a good premium for an $18 Call and hopefully get assigned and get out of owning this stock. This is called “averaging down.” I lowered my average price of the stock to get out at a cheaper price and still make money. Here’s the buy order for the 5000 shares:
Buy 5000 shares X @ $16.79
If you look at my “Active Trades/Current Positions” you will see I adjusted my shares and price per share for X.
I didn’t have a Stop Loss on the stock. Please read today’s “Message of the Day,” it’s about Stop Losses. A Stop Loss would not have helped with U.S. Steel going down before the opening.
Also read my new page on Rolling. I completed the page over the weekend and it’s under “Educational” in the side bar.
Steve
The Options Coach