Today, options expiration day for February, we closed two covered-call option positions. Our Appian (APPN) covered-call had been threatening to expire in-the-money for the last few weeks and our Fastly (FSLY) covered-call expires next week but was severely depreciated by the drastic fall in FSLY shares after Wednesday’s earnings report.
Our APPN covered-call (strike: $220; expiration: 19FEB2021) was initiated on 17DEC2020 when APPN traded for $152 per share. Our stake in APPN has appreciated significantly – to the second largest allocation of our portfolio. My intention was to use an out-of-the-money covered-call to trim our position. As you can see from the below chart, APPN shares have been extremely volatile. To the point that we almost had a significant taxable event. After crunching the numbers, we would have been better off buying back the option for well over $2,000 to avoid short-term tax incidence.
Source: Questrade, accessed 19FEB2021, 1:20 PM ET
Our stake in APPN is equally divided into two tax lots dating 20March2020 ($43.81 per share) and 30April2020 ($45.94 per share). Were our shares distributed by the covered-call on a FIFO basis we’d create a short-term tax liability of $18,169. Assuming a long-term capital gain would be taxed at 15% we’d owe about $2,700 but a short-term capital gain taxed at an assumed marginal tax rate of 25% would result a $4,500 tax liability. The 25% rate is chosen as a low estimate to inform the repurchase decision. The option contract was trading for $1,100 yesterday which would have been a bargain compared to the short-term tax liability.
Luckily for me, APPN fell significantly today (down 3% at the open and as far as down 12%, but now around -3% as I type). Our option was closed at the open of trading on my standing limit order of $2 per share. The limit order was set in December not long after we opened the covered-call position. Over the course of 64 days we netted $348.60 on the covered call despite the impressive run APPN experienced since mid-January.
The FSLY covered-call (strike: $135; expiration 26FEB2021) was initiated on 19JAN2021 when FSLY traded for $95. With a margin of 42% between the market and strike price and about 5 weeks to expiration, we netted $210.61 on the trade when we closed it for $3.69 earlier today. Though we could have saved the purchase cost by waiting a week I thought it best to close while the ask stood at $0.03 to enable us to sell another covered-call FSLY shares rebound next week.
Source: Questrade, accessed 19FEB2021, 1:20 PM ET
FSLY is another candidate to trim via covered-call. Our cost basis for all 200 shares is less than $23 per share and to avoid short-term capital gain tax rates we’d need to wait until 23April2021 for the one-year anniversary of our FSLY position. After this week’s steep decline I’ll wait for FSLY shares to rebound before establishing another FSLY covered-call but now we’ll be ready to do so and it only cost us four dollars. I’d love to find another trade like this one that pays us $210.61 because FSLY did not appreciate 42% in 31 days.