Exited a Yelp Covered Call

Today While I was watching my active positions I saw a nice opportunity to exit a 10 contract Covered Call on YELP. I had two 10 contract Covered Calls going and I exited one. One is still active. The one I exited went as follows. I Sold the 10 contract Call on 9/9/16 and I bought the 1000 shares of the stock to cover the Call on 9/12/16. The reason I decided to exit the position is, the stock I bought for $37.80 and I was able to sell the 1000 shares for $40.50 which was a nice profit. The Call I received a premium of $3.04 and I was able to buy it back for $3.50. Since the profit on the stock was much bigger than the loss on the Call I went for it! Let’s take a look at the “Sell to Open” order and the “Buy to Close” order and see what the loss is:

Sell to Open 10 YELP 11/18/16 $40 C @ $3.04 (+$3040) 

Buy to Close 10 YELP 11/18/16 $40 C @ $3.50 (-$3500)

Loss -$460

As you see on the sale I received a premium of $3040 and to get out of the Call it cost me $3500. Now let’s take a look at the stock buy order and sell order and see how that adds up:

Buy 1000 shares YELP @ $37.80 (-$37,800)

Sell 1000 shares YELP @ $40.50 (+$40,500)

Profit +$2700

You must remember, this Covered Call had another 53 days (11/18/16) before expiration. I thought it was a nice opportunity to exit the entire Covered Call position taking a little loss on the Call and making a real nice profit on the stock. The total profit on the Covered Call is +$2240. I invested the $37.800 on 9/9/16. In 18 days I locked in a profit of $2240. That’s a 6% Rate of Return in less then 3 weeks. My strategy might not be good for everyone but this is the type of deal I love.

Covered Call Profit +$2240

 

Let’s examine what the possibilities would be if I held the position. The best case would be on 11/18/16 the stock closed at $40.01 and I was assigned. Some would like the close on expiration to be $39.99 and not get assigned. We know I like assignment! With my best case scenario I get assigned and make $2200 on the stock and keep the entire premium of $3040 for a total gain of $5240. That would be great! That’s why I got into the deal in the first place. That would be a 13.8% gain for a 2 and a half month holding. Fantastic! If the stock closed well above the Strike Price on expiration, let’s say $45. The gain would be the same, only in this scenario you would have an Opportunity Loss.

If you’re a regular reader of Main Street beats Wall Street you know I don’t like owning stock. I’ve had many Covered Calls over the years where the stock went way down and I was stuck holding the stock for a long time without being able to sell Calls because I couldn’t get the premium I wanted because the stock was too low. Let’s say on 11/18/16 YELP was at $30. I would keep the premium $3040 and I would also keep the stock well below where I bought. At this point I would be up $3040 with the premium but my account would be down $7800 on the stock. You might think this is far fetched but it happened to me many, many times. This is why I take profit when I can. I have a different strategy then I had in years past. If I pocket money, I’m not a loser! Many of you might not have done what I did and waited for the bigger profit and it might have worked out great. Me, I learned many lessons over the years and I like to take profit. My education was not cheap!

I still have another Covered Call with the same Strike Price and the same Expiration Date but with different entry points on the stock and the Call. That one I didn’t like the result if I exited today. I will watch and see how this one works out.

 

Any questions, please email me. Would you have held or sold? I like to know what you’re thinking.

 

Steve

The Options Coach