On 11/18 I sold 50 contracts of the U.S. Steel 11/24/16 $29.50 Calls and on 11/21 I sold 50 contracts of the U.S. Steel 11/24/16 $29 Calls. The stock has been on a crazy run lately since Trump won the election. When there is a huge run like this there is usually a little profit taking. In fact there was a downgrade on the stock this week and all technical charts indicate a pullback. When I sold the Calls I entered a “Buy Stop Order” to purchase 10,000 shares to make them Covered Calls just in case the stock continued up. With the stock at $28.50 I put the “Buy Stop Order” in at $28.95 which is $.05 lower that my lowest Strike Price. If the stock got up to $28.95 my account would automatically buy 10,000 shares to cover my Naked Calls. Well, there is a lesson to be learned! Everyone must understand a “Buy Stop Order” is only in place when the market is open. From the close on 11/21 to the open on 11/22 U.S. Steel went up well over $1 over night and continued up the minute the market opened. This is always a possible problem when involved in Naked Calls. In this case the stock ended the day up over $4 from the previous day’s close. This was not good for my Naked Call. I didn’t look into it much but I think this rise in the stock was caused by two things. I think there was many buying the stock riding the wave plus I think there was many who shorted the stock and had to cover their short position. When you cover your short position you have to buy the stock. When the shorts are covered, the buying of the stock forces the stock up. This is called a “Short Squeeze.”
Today I decided to do an inevitable Roll-Out. I normally wait until Expiration Day but with Thanksgiving day off and a half day on Friday I decided to get it done when I had a good opportunity. At the open the stock was lower but looked like it might gain strength so I bought back my Call when the stock was low. The stock did start up and I was able to sell my new Call at a much higher price. This is not recommended because the stock normally won’t move in the direction you want to get a desirable price, but this time I got lucky.
I sold 50 contracts of the $29.50 Call for $.45 and 50 contracts of the $29 for $.40. Because of the huge jump in the stock yesterday I had to pay a lot more to get out. The $29.50 Call I paid $1.95 and the $29 Call I paid $2.50.
After I was out of these Calls the stock jumped over $1.25 and I sold my new Calls. I lucked out with the stock jump! I rolled these (2) 50 contracts into (1) 100 contract Call. I sold the 12/23/16 $32 Calls for $2.50. I hope to get a nice Christmas present and have this expire worthless. Or the stock goes below $32 and I cover the Call. Here’s the new 100 contract Call:
Sell to Open 100 12/23/16 $32 C @ $2.50 (+$25,000)
This looks great but you must remember it cost me a lot to get out of my first Calls. The $29.50 Call I received $.45 and paid $1.95 to get out. On 50 contracts the total was -$7500. And the $29 Call I received $.40 and paid $2.50 to get out. On 50 contracts the total was -$10.500. A total of -$18,000. If I end up keeping the $25,000 premium from the Roll-Out it will be a nice Christmas.
If you have any questions on this Roll-Out please send me an email.
Have a great Thanksgiving!
Steve
The Options Coach