Here's another sample CCing LEAPS trade (which has gone well so far), but I'd like to see what others have done differently.
On May 26, I bought 5 Oracle 13 3/8 Jan 2000 LEAPS (effective 3:2 split) for 10 7/8 (note that the 3:2 split means that each option is actually good for 150 shares, not 100). ORCL the stock had just dipped to hit the lower BB, trading in the mid 22's, but RSI was still about 40. This put my NUT at 24 1/4.
A couple of days later, ORCL had rebounded to hit 25 (just before the Memorial Day weekend), and rumours were all around that ORCL was expected to have a slowdown over the remaining 6 months of the year as businesses put IT spending on hold for Year 2000. I obviously took these rumors to heart too much, because I decided to sell 7 ORCL JUL 25 covered calls at that point for 2 1/8, bringing my NUT down to 700 shares @ 22 1/8 + 50 shares which were riding free at 24 1/4.
I thought this was not bad, because 22 looked like a pretty good support point for ORCL based on the technical charts, and I still had until January 2000 for the LEAPS to do further CCs if the stock was below 25 in July. If I got called out in July, I'd have made a profit of 700*2 7/8 = $2000 on an initial investment of 5*1.5*100*10 7/8 $8190 (incl comm), or about 24% in just 2 months. Plus, even if I got called out, I'd still have the 50 shares riding free from an average price of 24 1/4.
Of course, I should have waited 5 more days, because ORCL continued to rise after Memorial Day up to about 28, at which point I could have sold the JUL 25s for 4 and change. However, hindsight is 20-20, as they say.
Instead I watched as ORCL descended back down until the JUL 25s were selling for about the same as I sold them for, mainly on anticipation of poor earnings yesterday. Being somewhat disappointed that I'd missed out on the rise up to 28, and feeling confident that Larry Ellison would deliver, I took the sideshow option and bought 10 JUL 30 calls yesterday at 11/16.
Well, as you probably all know, ORCL blew away the earnings estimates, and shot up to trade at 32 7/8 today. I sold all my sideshow calls midway through the day for a net profit of $2500. I'm still long the Jan 2000 LEAPs and short the Jul 25 calls... the LEAPS are now trading at 19 1/8, and the short calls at 8.
So in summary, assuming ORCL stays above 25 for the next month, I'll have made $4500 on a $9000 investment, or basically 50% in just under two months. Certainly nothing to sneeze at, but I wonder if others would have played it differently?
e.g. I know I should have waited longer to sell the CCs in the first place, but when I decided to go for the sideshow calls, should I have bought more? Should I have just bought back the short Jul 25 calls yesterday, since I was pretty confident that ORCL would beat estimates. What should I do come July expiration (assuming ORCL stays in the 30s or above). Should I just let myself get called out, or should I try rolling again to preserve the Jan 2000 time premium in the LEAPs?
Just some thoughts for other people who might be CCing LEAPs. |
