My Boeing entry on Monday is regrettable as this past week my purchase price of $130/share was only profitable at Tuesday's open for a couple of minutes and then for the remainder of the week it keep going lower. To limit my losses I applied cover calls on Wednesday, all though looking back I should have put them on close of Tuesday. The cover calls I chose was specifically to be above break even of $130 in order to make certain if the stock was to somehow during the week jump to $130 that I would not be trading it for a lost.
By Wednesday when I sold calls the premium on the options for the current week had decayed to the point that the return did not worth the risk hence I move over to the following week of options expiring 05/22/20. I ended up closing the cover call by repurchasing the calls during Friday morning as I saw BA was rising from a day's bottom. Unfortunately by end of the day the stock closed lower.
Mitigating Losses with Cover Calls
The premium of an option is known as theta. The theta decay is dramatic in the last 30 day's of its issuance. Investors who hold core stocks has the ability to take advantage of the decay by selling calls that they hold shares towards. There is also the choice of simply selling a call without owning the shares and that is known as a naked call. I do not recommend a naked call because if the stock price exceeds the call strike at expiration the seller is now obligated to short 100 shares per contract at that strike price, which is an automatic red and takes on additional capital to hold.
What I did on my Boeing trade was basically taking advantage of theta decay by collecting a portion of the premium to lower my overall cost invested in Boeing. By selling the call while the stock price drop and then repurchasing the call I was able to collect some of the theta decay. Here is my trade to the cent:
Sold 127 Calls exp 5/22/20 for $3.60 on Wed. which equals $360/contract.
Bought 127 Calls exp 5/22/20 for $2.29 on Fri. which equals $229/contract.
End result was I pocket $131 minus commission, which was $1.30 per round trip on each contract. What this basically did was lower my cost of buying Boeing to $129 from $130. This is because each 100 shares I had I earned approximately $1 a share by executing the trade while holding onto the shares.
Not bad considering I can continue to do this if Boeing stays range bound. We will have to see how next week goes as this week has been brutal. My thought is to hold BA as long as I can while lower the cost I spend to purchase the shares as I want to hold the stock long term. However given the volatility and risk in markets I will have to realign with my approach if BA drops below $70. At that price range it would be basically back to two decades ago. Not ideal but it would also mean much more danger in the US overall economy since Boeing is one of the largest US exporters in the country and effects the country's GDP. Not to mention it is one of 30 Dow companies traded.
I am not a financial advisor and all this post information is for entertainment purposes only.
Posted Using LeoFinance