Two weeks ago I sold five naked calls on Shutterfly (SFLY) for $1. I got the idea from Barron’s and after charting the stock and thinking how bearish the overall market was, especially for consumers I sold the calls.
On Thursday I put an order in to buy these March calls back if it went down to 5 cents. By Friday, I decided to take my profits and run. I raised my limit to .10 and it hit a few minutes later. I’m not saying SFLY will make a run back above 22.50 before March expiration, but saw no reason to let 10 cents per option linger for that long.
I bought the five options back for $63.74 after selling them for net $486.25 on January 22nd. Since I’m still relatively new to selling calls and not just puts I don’t have a hard and fast way to track my risk level like I do with naked puts. I’m mulling it over and will listen to suggetions if many of you sell uncovered calls very often or can just see the obvious that I can’t. For puts I use the cost basis of what the underlying equity is, but for calls I’d be selling shares I don’t have and not taking a debit from my account. I could use the cost to buy the shares at the strike, but I’m not sure, so please enlighten me on your methods – even if they aren’t fully formulated yet.
At least you are selling them. I am too scared to sell calls… Here’s an idea. Instead of selling calls naked, sell a bear credit spread. So sell the SFLY at 22.50 and then buy the SFLY at 30.00. You pay 0.05 for the OTM call but it limits your risk to the difference in the strikes. Once you start doing that, you can self insure the risk. That is, instead of buying the 30.00 strike call, set aside additional capital. The OTM call will cost you $5 per contract + $0.75 cents per contract of commission + $10 per trade. You figure out whether self insuring that cost is worth it. Suppose you do 5 contracts, that’s $60. Let’s say you’d feel better to allow for SFLY to double. Then you’d need to reserve an additional 12.50 a share. If you do 1/2 margining, then this is $3000 of capital for $60. Which is a 2% insurance fee for a month (or however long your contracts are). This is similar to writing options slightly OTM, so I’d probably just take that risk.
If you self insure, you should probably have a hard stop at 100% loss, or something. Otherwise, the black swan will kill you.
This is all theory. In practice, my risk handling is poor, but improving.