Before this post I only had a 50 contract Covered Call involving U.S. Steel (X), expiring this Friday, March 3rd. I just sold another 50 contract Call. This can be a good lesson on one of my strategies for Grasshoppers. I sold this Call, which is Naked, for 2 reasons. The first reason is sticking with my “2017Challenge.” In my challenge I have a goal to make $3000 per week for the entire year. I believe, I’m well positioned to accomplish this goal for the present week, so I’m starting on next week. I just sold a 3/10/17 $42.50 Call for the premium of 70¢. On the 50 contracts that’s $3500. If things work out well with this position, I will more than satisfy my goal for next week. This premium of 70¢, on a $39.60 stock (at the time of my sale) gives me a 1.76% Rate of Return on an investment of 11 days. That’s if I hold this position until expiration.
Let’s take a look at the second reason I sold this Call. This Naked Call I sold for insurance. If you read my page on my strategy “Triple Play Hedge,” you will see how I get insurance and get paid for it. I really don’t like to buy hedging with an offsetting position. If I were to buy insurance on my Covered Call, I would buy a Put, which would increase in value if my U.S. Steel stock went down. I feel the cost of the Put is too expensive! You must understand, this is only my philosophy. Many great, successful traders buy hedging. I do not recommend my way of getting insurance or getting it by buying an offsetting position. I’m only teaching what I do. You must do what you’re comfortable with.
When I sell a second Call, which is a Naked Call, I get insurance and I get paid for that insurance. I get the premium. If my stock goes down, my Short Call position premiums will decrease in value. This means it would be less expensive to buy back my Call. I am gaining value. If the stock goes down, my option value goes up in value for me. In this case the premium is $3500. The only problem with my strategy of getting paid to get insurance, I’m only covered up to the amount of the premium I bring in. If U.S. Steel tanks down big, and my 70¢ premium goes down to 0, I have no more insurance but the $3500 is in my account. If you buy a Put, as the stock goes down the Put continues to increase in value. These 2 ways to get hedging are very important to understand. It’s also very important to understand how Short & Long positions work. If you don’t understand send me an email.
The Call I sold yesterday is a $40.50 Call expiring this Friday the 3rd. If the stock doesn’t get to this Strike Price the Call will expire and I’ll keep the shares. These shares will cover the $42.50 Call I sold today. Today’s Naked Call will become a Covered Call. At the moment this Call is Naked, however, it’s 2 and a half dollars Out-of-the-Money. With this in mind, I feel it’s a little less risky. I give this trade a Risk Factor 3. Here’s the order:
Sell to Open 50 X 3/10/17 $42.50 C @ 70¢ (+$3500)
Let’s watch closely to see how these positions work out for me. Make sure you read my strategy “Triple Play Hedge.” Please understand how I get paid for my insurance. In this case above I have a Covered Call and a Naked Call. In my “Triple Play Hedge” I would have a Covered Call and 2 Naked Calls. This would give me 3 Calls sold 1 stock.
Steve
The Options Coach