Getting experienced in option trading means that I have to learn from my past actions. The raw material is documented in my option tracker sheet. A more comprehensive story is written down so I and others can learn from it.
The option trade
In my playmoney portfolio, I wanted to get exposure to gold. Not just gold, I wanted it via the gold miners. I started to buy my way in the GDX tracker. Mid January, I considered the gold miners were beaten down too much. I wanted to profit from this via a covered call.
I bought the stock and sold the call. It lowers my cost basis (tastytrade link) and increases my change of a profitable trade.
Photocredit: Bogenfreud, Creatice Commonn Licence
The math behind the trade goes as follows
Cost basis of the tracker (trading fee and tax included): 12,7238
Option Premium: 0,19
Option strike: 14
Profit when assigned (trading fee and tax included): 1,2784
Maximum Return: 10pct on 1 month.
I have a long term bullish view on the GDX tracker. If the stocks drops further or stays at the same price, I do not mind to own the position. This is a prerequisite to buy the stock
By selling a call, I need to be ok to sell at the strike price. I have learned from other trades that this might not be easy. As I have other GDX in my portfolio and I had some uninvested cash, I was ok with this. After all, It means potentially 10 pct return on 31 days…
So, I made the trade. About the same time, the stock started to rally up to the strike price.
I decided not to roll the position at that time, as I wanted to see what would happen further. I remembered my past experience on combing puts and calls to be positioned for any market. As a result, I sold a 12,5 GDX put for a credit of 0,33.
The graph demonstrates well what happened… The stock started to rally hard now, Really hard… At the time I write this article, it is up to 17. And yet, I have to sell at 14.
Am I happy about this? No, but I have gone through the experience before and this time I was prepared to sell. I did not expect to sell this soon and hoped to be able to sell the premium a few times. Looks like it won’t happen
Did my put added value? Yes, It did. 8 days later, I closed the position for profit. I made 61 pct of max profit. I could wait until expiration, but I could only make 39pct of the extra profit in the remaining 37 days. Not worth the effort. The capital can be used better elsewhere.
- It still feels bad to have to sell, but I can live with it. Having a documented approach and gameplan makes it easier to let it go. What also helps is that I have more GDX in my portfolio to profit from the current rally. On those GDX, I have no plans yet to put on covered calls.
- Rolling a call up is something you need to do rather early than soon. I looked at it when the stock was around the strike. It might have been possible. Now that it went well through the strike, it seems to become more difficult. I will investigate this further and might roll around expiration.
Let’s wait and see what happens next with the stock.
What is your experience with covered calls and stocks that rally?
This trade overview is published to keep track of my own progress. It is not intended as investment advice for the readers of this blog. Before making a trade, you need to do your own research and you need to understand the risk of the trade.