RH, formerly Restoration Hardware Holdings, Inc., is a luxury retailer in the home furnishings marketplace. The Company offers merchandise assortments across a range of categories, including furniture, lighting, textiles, bathware, decor, outdoor and garden, tableware, and child and teen furnishings.
RH announced earnings on February 24th and moved up big. Today it was up another dollar. I feel it’s going to level off and stay in the area where it is now ($32.50) for a little while. After selling a Naked Call, this is what I’m hoping. A few minutes ago with the stock at $32.50 I sold 30 contracts of the 3/3/17 $33.50 Naked Calls for a 35¢ premium. On the 30 contracts the total premium is $1050. With the stock at $32.50 and this being a 1 week Call, it fits into my “1 week/1 %” strategy. Here’s the order:
Sell to Open 30 RH 3/3/17 $33.50 C @ 35¢ (+$1050)
Along with this Naked Call I entered a Stop-Limit Buy order to buy 3000 shares at $33.40. With this order I entered it GTC. Most orders are entered as “Day” orders. This means the order will expire at the end of the trading day. A GTC order, which means “Good Till Cancel,” will stay in place until the order if filled or cancelled. This adds a little protection to my Naked Call. The Stop-Limit Buy order is entered with a Stop Buy and a limit Buy to the buy order entered. My Stop Buy is set at $33.40. If the stock get up to $33.40 the 3000 shares will be automatically bought into my account. This will make my Naked Call a Covered Call and I’ll be protect from my Naked Call going In-the-Money. A Naked Call, In-the-Money, is not a good thing.
The Limit part of the Stop-Limit Buy order puts a buy limit price into the order. In this case I entered $33.60. If the stock goes up big over night, my Stop-Limit would not activate the buy order because the market is not opened. So, with the Stop-Limit Buy order you are not completely protected. Let’s say the stock goes up to $33.50 when the market is closed. When the market opens I would be executed at $33.50. In another example, let’s say while the market is closed the stock goes up to $33.70. I would not be executed once the market opens because I put a Limit of $33.60. It would only buy if the stock is above the Stop-Limit and below the Limit prices entered; between $33.40 & $33.60. In this case I do not want to own the stock, so if it goes above the $33.60 price I don’t want the order to be executed. I’ll keep the Naked Call and take my chances the stock will come back down. If not, I’ll do a “Roll-Out.” If you have any questions on a Stop-Limit order send me an email.
Normally I’m near the computer and make moves if I need to. But I might be away from my computer a few times this week so I figured I’d apply this protective order on my Naked Call. Also, normally a Naked Call would get a Risk Factor 5, however, with the Stop-Limit order applied I give this trade a Risk Factor 3.
Steve
The Options Coach