I made a shift a while ago from simply tracking the indexes through ETFs with options to trying to pick stocks with ETFs. I had some success with stock picking some years, but this year has not been one of those years. Part of that failure is due to picking these stocks at the wrong time and the other part is not dedicating enough time to my own account versus my clients’. I’m getting spanked on FB, GS, and AAPL. My ADI position is at a slight loss, but the covered call I sold today remedied that. The good news is that I’ve been using options, so my losses are substantially less than they would’ve been if I had simply bought the shares and held them without starting by selling a put option and then covering with a call option.
My ADI December $92.50 naked put will be assigned and I’ll buy 100 shares of ADI at $92.50. The $299.76 I received from the naked put will be used to reduce my cost per share. Instead of buying the put and selling a new one, I opted to sell a covered call on the shares that will be assigned this weekend. While ADI was trading at $89.16, I sold one ADI January $90 covered call for $3.88 and received $386.91 after paying $1.09 in commission. Before I placed my order, the bid/ask was $3.80/4.20 and I tried $4.00, but when I saw ADI starting to slip, I lowered my order to $3.90 and then a minute or two later, I lowered it to $3.80. So, getting $3.88 is better than my final order would’ve allowed. My new cost per share after deducting premiums is $85.63 and if my shares are called away in January, I’ll make a 377.67 profit. I sold the lower strike on the covered call to push for more premium with the risk of giving up some upside gains in the share value. I’m fine with that at this point, just to get out with a profit and move on.
My FB November $175 covered call will expire worthless and I’ll have a realized gain of $449.33 on the option, but I lost far more than the premium on paper with the decline in share price. FB is stuck in such a malaise that I don’t know when it’ll come out of it, but I believe it’s worth more than it’s trading for now. Still, I don’t want to hang around forever waiting for something different to happen. With that thought process running through my head, I opted to sell a covered call closer to the money, but not at the money. While FB was trading at $140.67, I sold one FB January $145 covered call for $5.70 and received $569.33 after paying $0.67 in commission. This trade gives me 7.13% upside potential from here and 3.93% of downside protection. My guess is that FB could move lower than my protection, but it will rally again at some point. I have thought about simply taking the loss before the end of the year and saving some on taxes, but I haven’t gotten to that point yet.
The other misfit I’ve considered taking a loss on is GS. I’m down over $6,000 on the shares and have a realized gain on some of the calls I’ve sold. The net result is a realized gain for the year so far and a big paper loss. My GS November $240 covered call will expire worthless and I’ll have a realized gain of $508.90 to report on taxes.
My choices fell between dumping the shares today, selling a new covered call (close to the money or far out of the money), and waiting. I chose to wait. The chart gave me my answer. GS has been trading in a wide channel this year and is hovering at the bottom of it right now after the scandal came out this week regarding the fraud accusations with Malaysia’s state investment fund (1MDB). I don’t expect the end result to be as bad for Goldman Sachs as many fear, and when the dust starts to settle, I expect GS to rally back towards its trend line of lower highs. The swing to the upper end of the trading channel would give me another $25 in share price or $2,500. I don’t know if I have the patience to wait, but will try. The option prices indicate a lot more volatility is expected, but that doesn’t mean upside price action. It only means hold onto your seat if you own the shares. If GS gets above $220 (roughly $20 higher than now), I’ll either dump my shares or sell a covered call close to the money. The fundamentals show a stock that is oversold (maybe deservingly so if GS gets fined heavily for the fraud) with GS trading below the industry average for price/earnings, price/sales, and price/book ratios. If GS can cut the difference in half between these ratios’ current levels and the industry averages, the stock will move much higher. Or GS could be somewhat of a value trap and I’ll lose more money.
My FEZ November $39 covered call will expire worthless and I’ll earn a realized gain of $57.47. FEZ is trading around $35.30 this afternoon and the chart shows room for a potential $0.90 price increase at a minimum and possibly $3.00 (over a couple of months) if fear subsides somewhat. I’m not sure when things will turn, so I might bite the bullet and sell a covered call before too long. I’ll also think about selling a new naked put to make my trade a combination with the covered call.