On Tuesday the 7th I bought 1000 shares of Yelp and at the same time I was also trying to sell a Call to complete a “Buy-Write.” I ended up buying the stock but was never executed on the sale of the Call. This was to be a Call expiring today! Well, today I went in a little different direction with the Call. I decided to go out a little in time and sold a 2 month Call. I sold 10 contracts of the Yelp 11/18/16 $40 Call and brought in a premium of $3.04 for a total of $3040. This is a Covered Call on previously owned stock so I give this trade a Risk Factor of 1. Here’s the sell order:
Sell 10 YELP 11/18/16 $40 C @ $3.04 (+$3040)
Let’s take a look at why I went with this 2 month option which is different from my normal 1 or 2 week option. There are a few reasons why I went in this direction. I bought the stock at $39.35. With the stock taking a little dip and now in the $38 area, I could not get the premium I wanted on a short term option. In order to not lose money on an assignment, I would have to sell the $39.50 Call. The premiums on a 1 or 2 week option were between $.25 and $.35. This is dealing with 1000 shares (10 contracts), I didn’t think it was worth holding this position a few weeks for a few hundred dollars. I looked at the November Option Chain and there was no $39.50 Calls available so I looked at the $40 Calls. The premium was listed at $3 – $3.10. I did a little math and I liked the deal. Meaning I liked the Rate of Return. On the 1000 shares I invested $39,350. The premium is $3040. If I don’t get assigned on my shares it will be a 7.7% return on my 2 month investment. If the stock is above the Strike Price of $40 on Expiration Day, I’ll get assigned and make $650 on the stock sale. I bought the stock for $39.35 and I’ll sell for $40. That’s a $.65 profit on 1000 shares for a total gain of $650. If this scenario happens, my gain will be $3690, which will be a 9.3% return on my investment. This is not bad for a 2 month trade. Where can you get a return like that?
If you look at my Active Trades you’ll see I have a lot going on. With the market on shaky ground until the Fed announces whether there’ll be a rate increase or not, I’m a little concerned with the stock I own. At the moment I own 10,000 shares of U.S. Steel, 5000 shares of Gopro and 1000 shares of Yelp. I have many Short Calls sold against these shares which will keep my account from going down if the stocks go down, as they are today. This is another reason why I sold the Short Call on Yelp today. As the stock goes down and loses value my Calls will increase in value to maintain my account. This is my way of hedging (insurance) and getting paid at the same time.
There’s so many things you can do with options! I love this business!
Steve
The Options Coach