Today I closed our exposure to a short position on a Square (SQ) call option (covered by the 100 shares we own). Square has performed exceptionally well in the past three weeks; which is roughly the duration of our short in SQ calls. On September 15th I sold a SQ covered call with a week and a half until expiration and purchased to close it just two days later to net $60.61 on an option initially sold for $134.3. With this recent success, I tried to replicate the result a week later – with different results.
On September 21st I sold another SQ covered call (strike price: $170, premium: 219.30, expiration: 09OCT20, market price: $151). Basically, if the market would not move by 12.5% in three weeks we would keep the premium. Eight days later, on September 29th, the market for SQ shares had jumped nine percent to close at $164.81 and I decided to roll the covered call out (expiration date) and up (execution or strike price).
To close the short position in the $170 strike, October 9th expiration covered call I paid $495.69 to net a loss of $276.39. To cover the costs to close the initial option, I sold another covered call option for $508.30 (strike: $200, expiration: 06NOV20). The market had to 21% to appreciate (Strike Price/Market Price) before the call would be executed but five weeks to do so. Well, as I type the market price of SQ is only five percent from our strike.
SQ has continued to soar now trading around $190. Our cost basis for the underlying shares is $59 per share so the execution of our 100 shares would generate a tax liability of $14,100. Today I repurchased our position in the covered call for $985.69 to realize a loss on the position of $477.39. When added to the loss on the previous SQ covered call, we’re in the hole $753.78 on these contracts while holding them for a combined 21 days.
Source: MarketWatch.com, accessed 13OCT2020 prior to 12:00 PM
To mitigate the losses on the contracts I sold a put contract on SQ (strike: $150, premium: $149.30, expiration: 6NOV20) and another covered call (strike: $220, premium: $584.69, expiration: 13NOV20). With a 46.6% spread of the strike prices (Call/Put) one or the other is quite likely to expire worthless in the month left until their expirations (four and five weeks). The market is almost 16% from our covered call’s strike price and 21% from our put’s strike price.
If both option contracts expire worthless we will still lose money on the trades, but our losses will be mitigated. We do not need to win every trade to make money. Our position in SQ has appreciated 220% or $12,000 since mid-March. The reason to write/sell a covered-call option was to make extra revenue while the share price stagnates – we hedged against a stagnant share price after significant share price appreciation. Though the pressure to win every trade compelling, I plan close these positions as I would close any other position. And the value of writing this blog is to reinforce that sentiment!