Trade Highlight #11

Today we discuss a covered call that went in the money two weeks before expiration. We’ll discuss how I managed to recover some of the lost profits and how I went about it.

Last week I showcased multiple trades that had been opened and closed in the same interval of two days. You can read this post via this link.

Introduction

Here are the options I will discuss this week:

-T 20 SEP 2019 $35 $0,45

You can find the details about this trade on number #104 on my Options Page.

Background information

I’ve followed AT&T for years by now, it’s been a struggling company but I always found some value in there. I managed to buy some shares at the low 30’s before and sold them when the stock rebounded.

More recently I had bought in the 29’s and after collecting the dividend for two quarters I decided I wanted to use the money for ETF’s. AT&T had run up towards the 34’s and I decided to sell a call (obligation to deliver 100 shares at a certain price) one month ahead, at the price of $35.

Little did I know that the stable run up would continue, this however was not the biggest problem. The real kick to the teeth was that the activist shareholder Elliot made some public comments and send the stock way higher.

My break even point was 35 per stock + 0,45 premium = $35,45. The stock rose all the way to $38,75, which meant I would still profit all the way from $29 to $35,45, but I would lose out on $35,45 to $38,75.

The $38,75 disappeared quickly and at $37,25 I decided to gamble slightly. I sold my shares, which meant that my call option suddenly was naked, I didn’t have any shares to deliver at $35.

I sold the shares in hope that the remaining two weeks, the price of AT&T would come down so I could close my option position with less of a loss and therefore make an extra profit on the sold stocks versus the closed option.

I was in luck, the stock fell down to around $36,60 and I managed to close the option position for less of a loss.

Instead of simply closing the stock + option position for $35,45 I managed to increase it to sell it for $36,17.

If I sold the stocks at $37,25 and AT&T would’ve kept rising higher I would’ve had to roll out the option as I would’ve made a bigger loss. The obligation to deliver shares at $35 would’ve been more expensive after all. I got lucky that the shares managed to dip real quick and I got out of my option position for less of a loss. It could’ve been an annoying gamble if I had to roll out the option and had to sit on it for a few months.

Long story short

I bought 100 shares of AT&T at $29 and wanted to sell them at $35 with a covered call. The shares went up to around $38,75 due to activist actions. I sold the stocks separately at $37,25 and decided to wait for the stock price to come down to close the option position for a smaller loss.

By gambling on this set of events I managed to up the final price from $35,45 to $36,17.

If I hadn’t sold the option, the sell price would’ve been $37,25, but that is easy to see in hindsight. Right now I didn’t get the best or the worst, right in the middle.

To find more information about options CLICK HERE.

For any questions regarding options, leave them down below in the comment section or simply hit me up on any of my social media channels!

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2 Comments

  1. Interesting play, but I don’t think I would do the same. It’s a little bit too speculative for me. The trade could easily have gone the other way as well. But luckily it worked out for you 🙂

    • DutchIndependence

      Hi SD, thanks for commenting! I completely understand that you would not have tried it! My exact reasoning was that I guessed that after the jump on the activist news the stock would go slightly back down the next week, as nothing really changed. If it had kept rising I or would’ve had slightly less profit overall, or I would’ve rolled out the option.

      DI

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