Anatomy Of A Covered Call Trade

Anatomy Of A Covered Call Trade Hello Smart Option Sellers! In today's earlier alert, we implemented our very first covered call trade. For those of you who still had the GPS September 20, 2019 $18 put-sell position in your account last Friday, then you received the shares in which to execute the covered calls against. I will have the official results of the covered call price in tomorrow's alert, after we let everyone receive their fill prices during the day today. How Does It Work? Since GPS stock finished below $18 per share on Friday, we now own the shares at a price of $18 per. This also means we have concluded the roll trades which consisted of a position that started in March 2019. I will go over those results in the next section. By selling the December 20, 2019 $17 call option, we will be obligated to sell the GPS shares at $17 per, as long as GPS stock finishes above $17 at the December expiration. You might be thinking - why would I possibly want to sell the shares at $17 when I just bought them at $18? Seems like a guaranteed loser? On the surface, yes, it might seem that way. But, by selling the $17 call option, we are going to collect roughly $1.50 per contract (not official yet), which can be applied to the loss that might be taken on the stock transaction. Yes, we will lose $1 per share by selling the stock at $17 after buying it at $18. But the $1.50 per contract we'll collect from selling the $17 call option will outweigh that loss by $.50, giving us a potential $.50 per share overall gain. Now, the final profit/loss on the covered call transaction won't be known until we unwind the trade in December. We actually want the stock to finish above $17 so our shares will be taken away from us. This will finally conclude the trade and we will be finished with our GPS position. If GPS stock finishes anywhere below $17 in December, we will re-assess at that time (or sooner) on the next step. We could continue to sell covered calls until we're finally taken out of the trade in some form. Final Profit/Loss Results On The Roll Position Let's discuss what the final numbers were on all the option trades. Back in March, we executed a June 2019 GPS $20 put-sell position which we sold for $.26 per contract. At the end of May, we bought that June put option back at a price of $1.00 per contract, netting a loss of $.74 per contract. On that same day in May, we sold the September $18 put option for $1.00 per contract. So as far as these three option trades go, we collected a net of positive $.26 per contract (minus commissions). Since we didn't buy back the September put option, we don't factor that into the purchase price of our GPS shares. Our cost-basis for the new GPS long stock position is $18 per share. If you want to factor in the $.26 net on the option trades, you could also look at the stock cost-basis as $17.74 per share ($18 - $.26 = $17.74). You can decide whichever way you want to see it. For track record purposes, we will take an overall net gain of $.26 on the option trades and a cost-basis for the shares of $18. Your profit/loss may be slightly different, depending on your original entry and exits points on the roll trades. Now, if anyone took the GPS hedge trade back in August, you can factor in that position too. We purchased that option for $.32 per contract which expired worthless, so that will add to the loss column. I know some of you took the trade and others didn't. With the new $17 covered call trade that will bring in roughly $1.50 per contract, it can be seen as a possible sale price of $18.50 per share if we have to relinquish them in December. That would give us a $.50 per share gain on that end of the trade, which would yield an overall net gain between all the GPS transactions. I know this is a lot to take in right now, but as it stands, it can all end up as a profitable experience. This is all dependent on where GPS stock trades over the next few months. If you have any questions, please send them in and we can discuss in the Friday Q&A. That's all for now. Continue to hold all other open positions as-is. Contact us here with fills, comments, questions or concerns. Regards,