Today, two of our holdings have appreciated quickly in early trading, which is great, but we had sold call options against both of these holdings. When I checked our call option positions, Fastly (FSLY) was just three percent away from the strike price on our option that expires next Friday. Square (SQ), traded even closer to the strike on the SQ option we sold that also expires next Friday. We had also sold a second FSLY call option with a higher strike (13.6% from the market price when I checked prices) and later expiration.
Both our positions in FSLY and SQ were initiated earlier this year and are held within my brokerage account that does not have any tax protections. We bought 100 shares of SQ when a put contract I sold distributed shares at a basis of $59 in early March. Our FSLY position was initiated in mid-April for $23 per share. Were FSLY or SQ to appreciate in the next two weeks, we’d have significant taxable gains (strike prices were $100 and $110 for FSLY and $170 for SQ; if executed our gains would be $16,400 for FSLY and $11,000 for SQ).
I quickly repurchased the three outstanding options and then sold different options to replace the positions I had cancelled. For SQ, I paid $495.69 to close the outstanding option and then sold another option with a $200 strike price, scheduled to expire a month later (November 6th) for $508.30. By rolling up and out, we’ll likely avoid a large taxable event, but the option will not be as profitable. The canceled SQ call provided $224.30 revenue and, because today’s transaction costs basically cancel each other, we have to wait an extra month to earn that $224.30. Were the newly sold call option distribute our shares, we would earn an extra $3,000 compared to the $170 per share under the prior call option.
The two FSLY call contracts repurchased today had originally generated a total of $673.60; had they distributed our shares we would have received $21,000. By rolling our positions up (strike prices) and out (expiration dates) we received an additional $203.22. We now are obligated to sell shares at fixed prices until November 6th and November 20th, compared to October 9th and October 30th. Were both contracts executed, todays action will generate an additional $3,500 for shares distributed from the owner of the call options.
I’d love for these options to expire out-of-the money to avoid large tax burdens, but I cannot complain about the performance of either FSLY or SQ since we purchased the underlying shares. If these shares continue to appreciate and threaten the execution of the options we sold, I will probably roll the positions up and out again.