This morning Cloudflare (NET) traded down with the rest of the market and, after a significant drop in NET share prices, our covered call option contract (strike: $90; expiration: 19FEB2021) was closed for just $18.69. Sure, we could have waited until the option expired tomorrow but within a few minutes I sold another call contract (strike: $90; expiration: 26FEB2021) for $124.30.
The contract I closed was intended to generate quick revenue. On 10FEB2021 I bought 100 shares of NET just to write a covered call contracts on the shares. Each NET share cost $89.38 and I sold the call that expired in 8 trading days for $511.29. Had our shares been distributed through the call option, the profit would be almost $5.73 per share or 6.5% in 8 days.
Our effective cost basis for the NET shares is now reduced by the value of the first call option, or $84.27 per share. To cumulate the two option trades and the position in the underlying NET shares, if our shares are distributed by our position in the second contract, we’d earn about $700 in 16 days on $8,938 – or nearly 8%. If our shares are not distributed on 26FEB, our effective share price will be about $83 when we entered the position closer to $90.
I really like NET but I am concerned about the recent appreciation in share value. Fastly, a NET competitor, is trading down about 12% after reporting earnings after yesterday’s close. Both are very promising companies but both are up more than 200% in the past twelve months.