This post is for the readers who are following my Micron Technology (MU) trades which fall under my strategy “Triple Play Hedge.” Please read and understand the strategy’s page by hitting the link.
Now that Micron has announced earnings and the dust is clearing, let’s see how my Triple Play Hedge is working. In summation, a Triple Play Hedge is done when I like the stock I’m dealing with. Meaning I feel the stock, in the short term, will be moving sideways or up slightly. I do a Covered Call, which is buy the stock and sell a Call Option. I look to make a little on the stock but the main reason for the trade is to make a profit with the premium. Whenever you buy stock there is always a chance the stock will go down. The normal way to protect against a falling stock is to buy a Put. This is hedging your position. I do not like to do this! I feel this hedging is too expensive and it cuts into my profit to the point that I don’t feel the trade is worth the trouble. With my Triple Play Hedge strategy I get hedging and I get paid for the insurance I receive. In addition to my Covered Call I do on a specific stock, I also sell two more Naked Calls a week or two out on the Expiration Date and a each Naked Call will have a little higher Strike price. Now I have a stock and three calls sold on that stock. One Call is covered and the other two are Naked. If the stock goes down I have insurance because as the stock goes down the Short position options will become more valuable to me. You must understand you are only insured up to the amount of premiums you brought in. Example: If with the three Call sold you brought in $2500 in premiums, you are insured for $2500. If the stock value drops more than $2500 your account will start to lose value.
As you know, this week I did a Triple Play Hedge on Micron. I bought the stock for $17.78 and sold my Covered Call with the Strike Price of $18.50. This is a 4 day Call. Then I sold two more Naked Calls, one with the Strike of $19 and the other with the Strike of $19.50. Both expiring next Friday the 14th. The thing that made this Triple Play a little different is their earnings report was due out before the Expiration Date of the 1st Call. This goes against my rules but I love the stock and after research I felt the earning would be good. Plus the stock has been doing great this year, up almost 25%.
The earnings came out after the close yesterday. And they were great! The only problem with the report was the company lowered their guidance for the next year. Meaning they felt their growth would be slowing. After the close the stock took a $1 dip but opened today at $17.55. Remember I’m in at $17.78. Not bad! An hour after the opening the stock was running up and as I write the stock is at $18.25. Take a lookout my Triple Play Hedge and I’ll explain what I want to happen.
10/3/16 – Buy 5000 shares MU @ $17.78
10/3/16 – Sell to Open 50 MU 10/7/16 $18.50 C @ $.35 (+$1750) (Covered)
10/3/16 – Sell to Open 50 MU 10/14/16 $19 C @ $.30 (+$1500) (Naked)
10/4/16 – Sell to Open 50 MU 10/14/16 $19.50 C @ $.22 (+$1100) (Naked)
I would like to see the stock continue to run and I get assigned. If this happens I will keep the premium of $1750 and I’d make $.72 on the stock for $3600. A total of $5350 on the 1st leg of the Triple Play. If this happens I’ll be Naked on the 2nd and 3rd leg. I’ll have to watch closely to see if I have to cover these Calls by buying the stock again. If I don’t get assigned on the 1st leg, I’ll be covered for the 2nd leg and watch closely.
I feel this Triple Play will work out great but you must remember anything can happen!
Let’s watch and see how this strategy plays out. Any questions send me an email.
Steve
The Options Coach