Once we enter our covered call writing trades, we immediately go into position management mode. In August, 2018, Mike generously shared with me a series of trades he executed using Brooks Automation, Inc and asked for my evaluation of his management of these trades. This article will detail and evaluate each aspect of the series of trades executed by Mike.
Mike’s trades with BRKS
BRKS Trade Chart
Trades corresponding to numbers in chart
- 1: 6/18/2018: Buy BRKS at $36.13
- 1: 6/18/2018: Sell 7/20/2018 $35.00 call at $2.15
- 2: 6/25/2018: Buy-to-close (BTC) the $35.00 call at $0.50
- 3: 7/11/2018: Sell-to-open (STO) the August $35.00 call at $1.40 (rolling out)
- 4: 7/27/2018: Buy-to-close the August $35.00 call at $0.35
- 4: 7/27/2018: Sell-to-open the $35.00 call at $0.30
- 5: 8/17/2018: Buy-to-close the $35.00 call at $0.05
Initial calculations
BRKS Initial Calculations with The Ellman Calculator
An initial time value return of 2.9% with downside protection (of that time value return) of 3.1% is a reasonable covered call writing 1-month goal.
Evaluation of trade executions
Initial trade execution on 6/18/2018: This is a great defensive initial trade with a time value return of 2.9% and downside protection of 3.1%
BTC short call on 6/25/2018: This approximates our 20% guidelines for closing short calls early in a contract…well done
STO (rolling out) on 7/11/2018: The net credit is $0.90 or an additional 2.8%. I generally prefer to wait closer to expiration to roll options. This gives us more time to re-evaluate our bullish assessment of the underlying stock. Also, the time value cost-to-close will be lower as expiration approaches and because of the logarithmic nature of time value erosion (Theta), the latter month time value will not be impacted as much.
BTC and STO the August $35.00 call on 7/27/2018: This resulted in a net debit of $0.05. No need to execute either trade.
BTC the August $35.00 call at $0.05 while stock traded under $35.00 on August 17, 2018: This step was also unnecessary. When an option expires out-of-the-money, it expires worthless and exercise while not take place.
Should we have rolled into the August contract?
BRKS Technical Breakdown in Early July
In early July, there was a breakdown of the technical chart for moving averages (#1), MACD Histogram (#2) and the stochastic oscillator (#3). I would have considered
“getting out of Dodge” at that point.
The final outcome
I’m pleased to report that in late August, BRKS announced the sale of its semiconductor Cryogenics business which caused a nice pop in share price allowing Mike to close at a $1000.00 profit. Lunch is on Mike!
BRKS News-Related Price Acceleration
Discussion
There are several factors we need to consider when managing our covered call trades which have a critical impact on our final returns. Using our 20%/10% guidelines, evaluating price charts, factoring in time to expiration, earnings reports (not an issue in this case), setting calculation return goals and assessing those calculations and all considerations that need to be implemented in order to become an elite covered call writer.
Many thanks to Mike for sharing these trades with our BCI community.
Upcoming events
March 29th
Quinnipiac GAME Forum
International forum for college and graduate school finance majors
May 8th or 15th
Alan will be hosting a webinar for the Options Industry Council (OIC) on generating income from selling options. I will post the exact information next week.
May 14th
Las Vegas Money Show
Bally’s/ Paris Hotel
12:15 – 3:15
Master class encompassing covered call writing, put-selling and the stock repair strategy
This is a paid event hosted by The Money Show
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Alan,
I started employing the covered call writing strategy you teach in the 2nd quarter of last year. I have already realized some nice returns by employing this strategy. I finished 2018 ay 4.6% on my main IRA. I thought that was decent compared to the S&P being down 6-7%.
Thanks for all you do for all of us do-it-your-selfers!
Greg
Market tone
This week’s economic news of importance:
- NFIB small business index Jan. 101.2 (104.4 last)
- Jog openings Dec. 7.3 million (7.2 million last)
- Consumer price index Jan. 0.0% (0.1% expected)
- Federal budget Dec. -$14 billion (-$23 billion last)
- Weekly jobless claims 2/9 239,000 (225,000 expected)
- Retail sales Dec. -1.2% (0.0% expected)
- Producer price index Jan. -0.1% (0.1% expected)
- Business inventories Nov. -0.1% (0.6% last)
- Industrial production Jan. -0.6% (0.0% expected)
- Consumer sentiment index Feb. 95.5 (94.0 expected)
THE WEEK AHEAD
Mon Feb. 18th
- None scheduled President’s Day
Tue Feb. 19th
- Home builders’ index Feb.
Wed Feb 20th
- Housing starts Jan.
- Building permits Jan.
- FOMC minutes
Thu Feb 21st
- Weekly jobless claims 2/16
- Durable goods orders Dec.
- Philly Fed Feb.
- Market manufacturing PMI Feb.
- Markit services PMI Feb.
- Existing home sales Jan.
- Leading economic indicators Jan.
Fri Feb. 22nd
- None scheduled
For the week, the S&P 500 moved up 2,50% for a year-to-date return of 10.72%
Summary
IBD: Market in confirmed uptrend
GMI: 5/6- Bullish signal since market close of January 31, 2019
BCI: I am favoring out-of-the-money strikes 2-to-1 compared to in-the-money strikes.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a greatly improving market tone. In the past six months, the S&P 500 down 3% while the VIX (14.91) moved up by 11%.
Wishing you the best in investing,
Alan and the BCI team