This post will be very important to understand if you want to be an options trader.
On 10/20/17 I sold a 10 contract Call on previously owned 1000 shares of RH. With the stock at $82.60 I sold 10 contracts of the 10/27/17 $85 Call for a premium of $1.25 ($1250). With the market down yesterday the premium of my option was down to 60¢. Knowing how volatile RH is, and thinking it will be moving back up, I did a “Buy to Close” to get out of that position. When I sold the option I brought in $1250, and now I bought out to close the position for $600. I had a $650 profit and the deal was over! Money in my mattress! If I held this position until expiration (Tomorrow) I would have kept the premium of $1250, and if the stock went above $85 I would be assigned at $85. I bought these shares at $81. My total profit for the Covered Call, if assigned, would have been the $1250 premium, plus the $4000 on the stock for a total of $5125. Since I bought out of that option with a profit of $650 and still owning the stock, my total profit is still to be determined.
Today, as expected, RH is up. With the stock at $86.35 (up $3.30) I just sold another Call. Now I’m back in a Covered Call. This time, with the stock higher, I sold 10 contracts of the RH 10/27/17 $87 Call for a premium of 90¢ for $900. The important thing to understand is, #1 I brought in another $900, which added to my $650 already in my mattress gives me a total premium of $1550. $300 more than my original premium of $1250. And #2, my Strike Price is now $87 and not $85. As I write the stock is up to $86.60, with another day until expiration. If I get assigned, which I hope I do, I’ll make an additional $2000 on the stock. My Stock profit will be $6000 because I bought in at $81. If this works out the way I want my total profit will be my total premiums of $1550, plus the $6000 on the stock, for a total of $7550. This is why I want to be assigned going into the weekend.
Sell to Open 10 RH 10/27/17 $87 C @ 90¢ (+$900)
This is why I did the “Buy to Close” with the stock down and back in when the stock is up. This trade is a Covered Call on previously owned stock so it gets a Risk Factor 1.
This type of adjustments trade is very important to understand if you want to be an options trader. I mention adjustments trades throughout my site. And that it’s important to know how to adjust trades whether it’s to exit to bail out, or exit to better your position in the near future. If you have any questions on this move please send an email.
Keep an eye on RH!
Steve
The Options Coach