Back on Monday I bought 100 shares of FB @ 56.75. The plan was to swing trade it up to around 60 bucks. Well, mission accomplished! On Friday I sold my shares at 60.61 booking a $377 gain. Hey, that's a nice little 6.6 percent return in 5 days people! Not bad!
Now, that's the short story to this successful trade! However, it was a bit more complex than that. Let me explain how this thing went down.
So as the stock was approaching $60 right before the close on Wednesday, I decided to sell the weekly $60 covered call, collecting a $61 premium. This in essence was like setting up a limit sell order at $60.61.
How? you might ask... Well my 100 shares would get sold at $60, meaning I'd get $6000. This, in addition to the $61 premium collected would mean the TOTAL amount received would be $6061. Divide that by 100 shares and you got $60.61 per share. Make sense?
And since FB closed the week ABOVE $60 @ 60.46, I got out of my shares @ 60.61. On paper this looks like a GREAT idea right?! I mean, FB closed the week at 60.46, and I sold my shares for MORE than that!
But hang on folks... lets take a deeper look, because there's definitely downside to selling calls.
Alright, so I mentioned I sold the $60 call on Wednesday right?! Well, when I sold the call the stock was trading around 59.75. Once I sell this call I'm a obligated to sell my shares at $60. But, if I decided I wanted to sell my shares before they got called away, I'd have to first buy back the call AND THEN I'd be free to sell my shares. But the problem is this, as the stock goes up, the call becomes more valuable, making it MORE expensive to buy back. So you'd have to take a loss buying back the call to make extra money selling the shares. It ends up being a wash.
So I say ALL that to say this - on Thursday FB gapped up and ran all the way to 62.22. You see, I could have sold my shares around the $62 range and made about $130 MORE, an additional 2.2%! But instead I was stuck and couldn't sell my shares. Because as I've mentioned, the call that had been worth $61 when I sold it was now worth $191! So you see, I'd have to take a $130 loss, to make a $130. I don't know much, but that's just plain stupid.
So to sum it up, the downside to selling calls is that you CAP YOUR UPSIDE! In this particular case, I missed out on an extra $130!
OK, so if that's the deal then why even do this? Great question!
I think because I wasn't completely sold on the idea of selling my shares in the first place. I have no problem that they're gone, but I'd also be happy if I still had them. You see, had FB closed BELOW $60 on Friday, I'd still have my shares AND the $61 premium I collected on the call I sold. So I would have made money by simply owning the shares. Some people might call that "interest" or a "dividend".
Instead though FB closed ABOVE $60 and my shares got called, or sold. But this resulted in me booking a handsome profit in just 5 days. Overall I'm pleased!
Either way, here's the bottom line people, I'm still testing things out, trying different approaches and learning new stuff.
Hey, I'm having fun and getting PAID to do it.