It really has been a few very busy days. Last week as I was writing a post I mentioned I received 2 phone calls giving me bad news that 2 of my very good friends had passed away. Well, it didn’t end there. The 2 turned into 4. With 4 deaths, and many wakes, funerals and memorials going at the same time I was not able to attend all, but I did stay very busy.
I know I don’t need to apologize, however, if someone was following some of my trades closely, I’m sorry there was a gap in reporting trades.
Yesterday was the funerals of 2 very good friend, but clearly, I could only attend one. This week reminded me of the weeks after Sept 11th where we had many FDNY funerals going at the same time for weeks. The one I attended yesterday started at 10:30am and the repass followed right after the cemetery ceremony. Yesterday was Friday, which is also an Expiration Day. I knew I had at least 1 position I was going to have to make an adjustment trade on at the close. It was with Advanced Micro Devices (AMD). The trade was a Naked Call and the stock ran up to $2 In-the-Money.
Before I get into AMD let me report moves I made with Square (SQ).
I had 2 option positions with SQ. One was a Covered Call with the Strike Price of $64.50. The other was a Naked Call with the Strike Price of $66. On Friday the stock opened at $63.20. I felt pretty confident the $64.50 would expire without assignment, and felt very confident the $66 Strike would not be reached and it would expire.
I left my house at 9:45 to attend the funeral. Before I left I placed and order to sell another 10 contract Call to expire next Friday. I love getting the next week started on Friday if I can. The order I placed was a $65 Call. The market was up, but also I feel SQ is going higher with a good earnings report. If the stock does continue up in the next week I wanted to make a little more on the stock so I went up to a $65 Strike Price. When I placed the order the stock was at $63.75, it shot up at the open. Before I left my house the premium for the $65 Call was at 68¢. I felt the stock was gonna move up during the day but I wouldn’t be near my computer. So I placed the order for the $65 Call and entered a premium of 80¢. I packed up my laptop to bring with me because I knew I was going to have to watch what happens with this trade and I had a move to make with AMD before the close.
After the cemetery, before I went into the repass, I had some time to open my computer and check on the market. My $65 Call was filled and SQ was up but still well below my $64.50 Strike price of the Call expiring at the close. I felt good with all my SQ position but worried with AMD because it was up again on my Naked Call.
Sell to Open 10 SQ 11/22/19 $65.00 C @ 80¢ (+$800)
At 3:30 the repass was winding down, but still going, so I went out to my car to check on AMD knowing I had to make a move. SQ was doing great! At 3:30 the stock was at $64.25 with a half hour to the close. Remember, I have a $64.50 Call about to expire. In the last half hour, with me at the computer in my car, SQ shot up to $64.72 and closed at $64.70. This is not a problem. However, I was assigned at $64.50 so I no longer own 1000 shares of SQ. The other SQ, Naked Call, expired so I keep the (2) $500 premiums of the $64.50 and the $66 Calls. Now I only have the $65 Call I sold earlier. Since I was assigned on my shares this Call is now Naked. I don’t believe this will be a problem because I’ll buy another 1000 shares of SQ first thing Monday morning to cover the Call.
I’m sorry this email is going to get longer because now I have to report on AMD, and this is not as nice.
As you probably know I had a $36.50 Naked Call on AMD. I might have done something crazy, selling a Naked Call on a hot stock, but I still think AMD is coming down. The problem started right after I sold the Call. The Bank of America gave AMD an upgrade and upped their price target to $44. This upgrade gave AMD a big boost! I was hoping by the time Friday rolled around the news would wear off and AMD would pull back the way I thought it would. Bad luck for me because it didn’t. I know I might sound nutty, and a little too dedicated to my teaching, but I’m glad it’s happening. I’m gonna use this situation to teach you how to make adjustment trades to turn a bad trade into a profitable one.
Let’s review
On Monday, Nov 11, with the stock at $35 I sold 10 AMD $36.50 Naked Calls to expire Friday, Nov 15th. I received a premium of $510. I felt confident this Call would expire because the stock was in overbought territory with the RSI well above 70. This trade being a Naked Call, I gave it a Risk Factor 3. A normal Naked Call gets a Risk Factor 5 but I placed a buy order with a buy price a little lower than my Strike Price.
I’m having a great year, so maybe this is why I made a big mistake. Being so confident the stock was gonna stop going up, when it approached my buy price I removed the order. Since I felt the stock was gonna come down I didn’t want my buy order to get filled, the stock move down, and now I have to wait for it to come back up. Well, it didn’t go like that! I took the buy order off, which would have covered my Call, and the stock continued up. When I went out to my car at 3:30 to make a much needed adjustment trade the stock was in the $38.50 area, still $2 above my Strike Price with the Call about to expire. If I don’t make an adjustment trade I have to deliver the 1000 shares of AMD at $36.50. What to do?
I have a few choices
I can buy the stock and deliver it. I would have to buy the stock at $38.50 and deliver it at $36.50 losing $2000. Considering the premium of $500 I would keep, my loss would be $1500. With the type of year I’m having this would not be a bad choice. Take the loss and move on!
I can do nothing. In this case my broker would borrow the shares and deliver them leaving me Short 1000 shares. If I did this and the stock came down I would make the lost money back on the Short position. However, if the stock continues up, my loses would become greater. With my prediction of the stock still coming down, this would not be a bad choice because with a Short position there is no Expiration Date. I could just hold until the stock comes back down. If it does!
I could do a Roll Out. This would entail buying my Short Call back and selling another Call further out in time, with a higher Strike Price. This is called a roll up & out. This is what I decided on, so let me explain a little more.
This is my original Call I sold:
11/11/19 – Sell to Open 10 AMD 11/11/19 $36.50 C @ 51¢ (+$510)
I bought back the Call for a premium of $2.05, a total of $2050. Below is the order form.
11/15/19 – Buy to Close 10 AMD 11/1/19 $39.50 C @ $2.05 (-$2050)
At this point the position is closed and I no longer have to deliver the stock. Also at this point I’m down $1540. Then I did the Roll Out trade. I sold another Call. This was also a 10 contract Call. This Call will expire 12/13/19 and has a Strike Price of $37.50. I received a premium of $2.20 for $2200.
11/15/19 – Sell to Open 10 AMD 12/13/19 $37.50 C @ $2.20 (+$2200)
Now with this nice premium I’m back in the positive being +$ 660. I continue to have the same prediction of the stock backing off. The RSI is the highest it’s been in over a year, well in overbought territory. If the stock goes a little higher the RSI will be at an all time high. I’m so confident the stock will back off I was tempted to short the stock. But Ive seen crazy things happen in the market so I decided to go with the Roll Out.
If this Roll Out doesn’t work I do another. I will come out a winner! lol
I’m sorry for the long email but I had to catch up on some moves because of my last few days of inactivity.
Watch for my Week Ending Report. I had another very good week. The only blemish is the AMD trade. My track record is great so I’m bound to have a loser. But you watch, this AMD trade will be a winner!
Enjoy the weekend!
Successful trading,
Steve
The Options Coach