New Options Position
Re-sold 5x $94 strike, $7.73 limit calls EXP 25/8/23 SPLK 0.00%↑ calls for date ending 25th August to take advantage of higher options prices.
total credit: $3,865
total risk: $2,135 if shares are called
total loss: $593
position, long 500 shares of SPLK, short 5x covered calls
Closed the week prior’s position for $0.11 per share since shares have now dipped from $106 to $99.
My average price is $106 per share. If markets continue to move down to earnings date on 25th Aug, the calls expire worthless.
I have earned $1,542 from selling week to week covered call options against my 500 shares of SPLK. If shares are called from me, the price would have to be above the ($94 strike + $7.73 limit per share) for the trader who bought the calls to be profitable.That would mean prices have to be go above $101.73 for me to "be at risk" of being called.
If it does happen, I lose $593 in total/aggregrate since having been assigned the shares from the 2nd week of July. If shares go down as it seems to be going between now and august 23rd when SPLK announces quarterly earnings, and if calls expire worthless, I will net all the credit. My average for SPLK shares will be $95 (assuming I want to discount all the call options I've sold and time lost).
The important understanding here is two fold:
1) Since im holding 500 shares of SPLK, that becomes the greatest needle-mover for my account. If shares drop by half, my portfolio suffers and any move I make should be in anticipation of that.
2) That means anything I can do to pad up my cash reserves while suffering minimal losses is going to be preferred over selling for example, the $106 SPLK strike ending 25th Aug for $2.25 limit. Because if I do that, I might earn $1,125 in credit, but it only takes a $2.25 move from the market to wipe that out across 500 shares. And the market is alrdy down on SPLK from $106 where I owned it to the $99+ where its trading.
3) Positionally, if I'm wrong, I want to lose very little ($593 in total seems fairly littly, my account value is up 19% YTD discounting even the loss). If I'm right, I want to be rewarded alot and have reduced the risk I'm facing by as much as I could have.
4) I am still prepared to hold shares of SPLK for the long term. I just don't want to be a sitting duck while I'm waiting and exposed to market moves. I want to earn some cash for holding the shares and not just be the guy who has to buy more when I get more cash each month. Note: $7.73 over the original $106 average price paid per share is a 7% tax-free dividend in a little over 2 weeks. If I'm right about markets heading lower over the next 2-3 months ahead of inflation data and a soft year, I reduce my risk alot, pad up my ability to buy more shares, and get to re-sell call options while holding the same amount of shares still.
The name of the game hasn't changed. Set yourself up to not lose with options is better vs being a pure buy-and-hold type of investor. Good luck. Caveat Emptor.