I covered my deep-in-the-money QCOM APR 50's. Here's why:
(I 'll discuss this in the context of a single contract, no taxes, and ignored commissions of just a few cents per share.)
My original goal was to collect enough premium to essentially drive the basis down from 57 to less than 50 on half my Q position over the next two or three months.
My first CC, sold on Mar 20, was APR 65 for 3.13 which I bought back two weeks later for 0.43 for a gain of 2.70.
During a price rise two days later, I sold a slightly in the money APR 50 at 3.00 for a potential total gain now of 2.70 + 3.00 = 5.70. This week, however, APR 50's went to about 15.00 rather than to zero as I had hoped. So I considered these three choices:
---- Do Nothing, Let the Axe Fall ----
Just allow the exercise at 50. My overall position loses 50.00 + 5.70 - 57.00 = -1.30 per share which is a $130 loss per contract. In addition, I cannot buy another 100 shares of QCOM without adding outside money since the Q is now at 63.
---- Buy to Close the APR 50 ----
Buy back the APR 50 for 12.50 (it had dropped a little today). The overall CC total is now 5.70 - 12.50 = -7.30, a loss on the CC's. But I still hold the 100 shares of QCOM at about 63 with the overall investment now down 63 - 57 - 7.30 = -1.30 per share. Yes, same as above EXCEPT that now I can write another contract on the 100 shares I STILL OWN.
---- Roll-Forward and Up ----
Cover the short call as described above, then sell a MAY 60 contract for 8.30 on the block of QCOM I still hold. This is what I actually did.
Summary
- Short a MAY 60 contract with the stock at $63
- Still in possession of 100 QCOM
- Holding a gain of 7.00 depending on how the MAY 60 goes (see below)
The 60 strike is high enough that I may get a break in the next 4 weeks to buy back the call at a much smaller premium. The value of the position is the first two CC's, the new MAY 60 (which remains open), and lastly the stock itself minus the basis of 57:
-7.30 + 8.30 + 63.00 - 57.00 = 64.00 - 57.00 = 7.00 per share
If I had sold NO contracts this past month -- just held the 100 QCOM shares -- I would be up 63 - 57 = 6 per share. So even in the face of the biggest stock price run-up in ages, I'm slightly ahead, $100 per block, using the CC strategy.
--dfl |
