I am not generally “active” investing (trading on any frequent basis beyond recurring buys.) Historically, I have had some fun and seen some moderate income from buying and selling low volumes of options contracts. Typically the only space I am willing to throw any meaningful way is occasional covered calls (see Fidelity overview). This most recent week, I saw a few I felt were attractive opportunities. This is my kind of gambling, guaranteed return in return for forgoing some upside.
I sold contracts against my owned stock to, in the future, sell shares at a fixed price in exchange for a premiums. Across my ownership in Chevron (CVX), Delta Airlines (DAL), General Motors (GM), and Verizon (VZ). I netted $717.90 in premiums through 22 contracts (each contract is 100 shares). With some banger post-earnings results, two of these tipped past the strike price (I would have been forced to sell if these closed above that price). Ultimately no shares were called (as prices dropped and I rolled one contract over one week) and I banked a nice little payday. I find this as a mix of fun and moderately rewarding. **NOTE, NOT INVESTMENT ADVICE**
First off, what is a covered call?
A covered call is a type of options contract that gives the purchaser the right to buy owned shares of a specific company at a fixed price (“strike” price) on a future date (“expiration date”). One contract represents 100 shares. This is made in exchange for a payment (fee) to the seller. The seller does this to capture the fee premium, forgoing any increase in price beyond the strike price. The buyer does this because they believe the probability of the share price rising above the strike price will offset the fee.
End Math: $67.05 (CVX) + $61.75 (DAL) + $600.80 (GM) -$11.70 ($VZ) = Total profit of $717.90 for the week.
What was my strategy?
I sold a total of 22 contracts as part of a number of trades, each for a variety of reasons. Each at prices I would be comfortable selling shares at (locking in profits).
- Chevron (CVX) – earnings report this week, notable price increase in recent months
- Price at sale: $167.25
- End Price: $176.90
- Contract sale: 3 contracts (300 shares) strike price $177.50 for $0.23/share ($67.05 in premiums net fees)
- Outcome: Options expired “out of the money” (worthless). Win for me (+$67.05).
- Delta Airlines (DAL) – moderate volatility, notable price increase in recent months
- Price at sale: $67.70
- End Price: $65.89
- Contract sale: 5 contracts (500 shares) strike price $72 for $0.13/share ($61.75 in premiums net fees)
- Outcome: Options expired “out of the money” (worthless). Win for me (+$61.75)
- General Motors (GM) – earnings report this week, notable price increase in recent months
- Price at sale: $79.86 (600 shares/Monday pre-earnings) and $86.08 (200 shares / Tuesday post-earnings)
- End Price: $84.00
- Contract sale: 6 contracts (600 shares) strike price $86 for $0.57/share ($338.10 in premiums) plus 2 contract (200 shares) for $1.32/share ($262.70 in premiums)
- Outcome: Options expired “out of the money” (worthless). Win for me (+$600.80)
- Verizon (VZ) – post-earnings report surge in price I believed was overblown, and would not continue
- Price at sale: $42.43
- End Price: $44.52 (!!!)
- Contract sale: 6 contracts (600 shares) strike price $43.50 for $0.04/share, or $20.10 in premiums net fees
- Outcome: Options WOULD HAVE resulted in these shares being called. Loss for me (-$11.70). To avoid having shares called (and associated taxes), I repurchased the contract and extended the date a week by selling new contracts. Repurchasing the 6 contracts cost me $0.89/share ($537.90 total cost). Re-selling a week later netted me $0.85/share ($506.10 total). With this I also bumped the strike price up by $0.50/share (to $44.00 from $43.50.) If the price remains above $44, I can again extend. If the price drops below $44, I can let these expire.
Takeaways
I do not pretend this is or should be a strategy for everyone.
Covered calls can be a good way to give up future upside opportunity in shares for fixed fee. That can work out wonderfully (as my General Motors covered call sale above highlights, up $600.80 across 8 contracts!) That can also result in large missed opportunity (as Verizon options sale highlights, the $0.04/share premium ended up being worth $1.02 [44.52-43.50 strike price], returning a one-day 2550% gain to the purchaser(s).) Each of the strike prices sold, I would have been comfortable selling shares and locking in gains. I am pleased, and this worked out reasonably well, despite one…meaningful miss.
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