Friday, June 15, 2018

Implications of June 15, 2018 Call expirations

Readers of this blog know I use calls, mostly on dividend stocks, to boost my income.  I have summarized the calls expected to expire and those expected to be assigned.  Every call expiration date comes with some uncertainty yet these ten calls are pretty straight forward.

  • Call premiums can be booked as income or as reduction of cost basis but not both.
  • When current price is greater than the strike price, you have lost opportunity.
  • Sell calls on only part of your position to preserve upside potential
  • Carefully selected strike prices makes selling covered calls an income strategy that works for income investors.

Let's first look at those calls that are outside my comfort zone.  


I wrote about taking a flyer on RIOT a block chain stock.   This trade is totally outside of my comfort zone.  I am an income investor.  I like dividends plus call premium income.  If my stock gets called away (assigned,) I expect to receive a capital gain.

Yet, even a disciplined investor like me occasionally makes stupid mistakes.   I was so successful with Twitter (TWTR) and Nvidia (NVDA) that I thought I could pull a fast one and make money on RIOT.

This did not work out well.  I still hold RIOT.  I have not lost everything.  I have received two call premiums and that helps salve some of my pain.   I want to make a point here about using call premiums for income.  You cannot both use the premium for income that you spend to pay your expenses and consider it a reduction of your basis.  Either you keep the money from your call premium in your account or you invest it in another security, but you cannot book the income twice once for spending and the second for cost reduction.  

The table below show how my RIOT trade has worked out so far.  Since I spend my income, I do not lower the cost basis.




Note that in the next section, I have included another trade on a stock that does not pay a dividend.  That stock is Novocure, symbol NVCR.   This stock was picked by my husband who is my biotech analyst.  You will notice, this trade worked out so far.

Calls I expect to be assigned.


Three calls should be assigned; they are CVX, NTR, and the above mentioned NVCR.  CVX is a bit iffy as the current price is just a bit above the strike price.  When you add in the call premium of $1.64 per share paid to me by the call buyer, they are not in the money if they take the CVX shares.

In my experience, they usually take these stocks.  Energy demand continues to grow with the overall economy and I would expect CVX's price to increase.   If they take these shares, I will be happy to book the gain and I have more shares on which I did not sell calls.

Nutrient symbol NTR is the successor to Potash.  This call and the NVCR call are examples of lost opportunity by selling calls.    If I really wanted to sell these two stocks, I would make more money selling in the open market rather than writing (selling) calls with a defined strike price.  This is because their current price is higher than the strike.  




The lesson here is to sell calls on only part of your position.  You get the call premium, dividends during the holding periods, and capital gain when the stock is called away.  If you continue to hold additional shares, you can participate in upside potential as well.

Calls I expect to expire.


These are the stocks I love.  They pay good dividends and those dividends tend to go up.  I sell calls above my basis so if they are called away (exercised or assigned,) I get a capital gain as well.  If they expire, I just keep working the calls to boost my income.

The table below illustrates the results of my favorite strategy for covered calls.  I love it when calls expire.  I just keep working them over and over again.



It is difficult to sell new calls right around the upcoming expiration date.  Wait until next week and start working those calls again.   This is an excellent strategy for income investors.

M* MoneyMadam
Disclosure:  Long all names with calls