2020.12.23-4 Closing Two Option Contracts and Trimming more TSLA Shares

Yesterday, Tuesday, December 22nd, I chose to close one of our two option contracts on RealReal Inc (REAL), an online luxury consignment store. On November 30th I purchased two long-dated option contracts (strike: $20; expiration: 20JAN2023) for $505.975, each. Though $1,000 is not that­ a significant portion of our portfolio, REAL is not one of my favorite investments. My standing limit order to sell the REAL contracts were priced at $10 per share but I changed the order to lower the limit price to $9 per share for one contract and we were immediately executed. I plan to increase the limit price to allow for more appreciation on the remaining contract.

The closed REAL contract was held for just 22 days and netted $383.04 or 75.7% of the $505.975 cost basis.

On Monday, December 21st, our short position in a put option contract for Unity Software (U; strike: $105; expiration: 16DEC2020) was closed for $50.69. We had just initiated the position the prior Thursday for $134.30 so the closure netted a quick $83.61 or 0.8%  on our collateral. U has been very volatile since its IPO earlier this year. I’d like to take a long position but would prefer a more favorable entry point. With just less than 15% cash and a very uncertain economy and stretched tech valuations I will write another put option contract for U when the opportunity presents itself.

This morning I also entered another limit order to further trim our Tesla (TSLA) position. My previous sale was for three shares at $690 per share. Today we sold two shares for $650 each. In the light trading week since TSLA joined the S&P 500 on Monday demand for the electric automaker has not pushed TSLA shares beyond last Friday’s close. Institutional investors may have added TSLA to their funds that track S&P 500; maybe they are waiting until after the holidays or for a more attractive entry point. I’d like to trim this holding further, but $650 was a good price to take our position from 1.7% to 1.5% of the portfolio. Our standing orders remain to sell more shares if the market takes TSLA higher. If we do not see much appreciation by the end of January, I’ll probably trim to TSLA to one percent of the portfolio.

2020.12.18 Expiring Options and A Volatile Close to Execute Our TSLA Limit Order

On Friday three of our cash-covered put option contracts expired out-of-the-money. Instead of closing these positions early to access the collateral required to maintain them I let the contracts expire to save a bit of cash and force myself to maintain a larger effective cash balance. The price of the underlying securities for these contracts were all well above their respective contract’s strike price so there was little chance of execution.

On November 24th I sold a put option contract on Flugent Genetics Inc. (FLGT; strike: $30; expiration: 18DEC2020) for $65, before commission, when the strike was 78% of the market price ($38.66). FLGT appreciated significantly over the 27 days we held the position. Shares of FLGT closed on Friday around $43 per share or 43% above the strike price. We kept the full $64.3 premium, 2.1% of the strike or 29% on an annual basis.

On December 3rd we sold another put option contract on Fastly (FSLY; strike: $72; expiration: 18DEC2020) when FSLY shares traded for $83.39; the strike was 86% of the market price. FSLY shares surged to close around $102 when our contract expired – 42% above our strike price. We kept the entire $104.30 premium which was 1.4% of the collateral needed for the trade over the 15 days the trade was active or 35.2% on an annual basis.

On December 9th we sold a put option contract on Unity Software (U; strike: $130; expiration: 18DEC2020) when shares traded for $155.42; strike/market: 84%. Over the nine days the position was active, U shares dipped to $145 but recovered to close on Friday at $157.77; our contact there for expired out-of-the-money, worthless. We kept the full $134.3 premium; a quick 1% on the $13,000 required to collateralize the trade or 41.9% on an annual basis.

The most interesting action of the day related to our Tesla (TSLA) position. I may recently discuss TSLA more than any other position of ours as its value has exploded over 2020. We began the position in 2016 for effectively $40 per share as 0.5% of our portfolio; now I have trimmed to keep the position no greater than 2% of the portfolio.

The radio hosts discussing TSLA this morning noted shares have appreciated 70% since the index managers at Standard and Poor’s confirmed they’d add TSLA to the S&P500 index today, December 21, 2020. Not many days have seen a more volatile market for TSLA shares than Friday. I did not realize our limit order to sell three shares of TSLA had been filled at $690 near the close until late last night. As you can see below, the share price of TSLA had fallen consistently on Friday (to roughly $636 around 3:40 PM) before appreciating drastically at the close to rest at $695.

Source: MarketWatch.com

Source: MarketWatch.com

Last night I established five limit orders to each sell two shares of TSLA at prices increasing about ten percent between orders. After opening down about six percent today, I placed another sell order for two shares at $680. I’d rather sell now in case we are at the market top as passive funds that track the S&P 500 than hold out to sell at a price we may never see. If TSLA does rally to $1,040, the price of my most ambitious limit order, we’d lose $720 on the difference in our sale prices and I can live with that. In fact, if today’s order for $680 is filled, I may place another limit order around $700 tomorrow.

2020.12.15-16 Three Option Contracts Closed

Today we closed two option contracts after closing one yesterday. Two were quite profitable, but another roughly broke even. With two weeks before the end of the year we have closed $22,059.13 in option profits in 2020. Using, as a base, our total cash balance - averaged across the twelve months - that’s a 14.3% return.

On Tuesday, our covered call option contract of Appian (APPN) closed on our initial closing limit order after I had initiated the position just the past Friday. APPN has been very volatile lately, but I was surprised to have sold the call contract (strike: $200; expiration: 15JAN2020) for $529.29 when the market price for APPN was roughly $150. Maybe I could have squeezed an extra $100-200 off the trade, but I didn’t want to be greedy – and netting $228.60 in four days is not bad.

Today I closed another covered call for Starbucks (SBUX) this time and we closed for the price we received 33 days before to initiate the short position in the call option contract (strike: $105; expiration: 18DEC2020). We are due to have a new pandemic relief effort any day and the market is roughly at the strike price so I thought I’d close this option and roll up and out another SBUX covered call.

We also closed a cash-covered put option contract for Match.com (MTCH) today after holding it for two weeks. MTCH has been on fire all year. This contract (strike: $125; expiration: 31DEC2020) was closed for $15 with two and a half weeks to expiration while the market was almost 20% above the strike price. We netted $183.61 on the trade for a 1.5% return on the collateral or 38.3% on an annual basis.

Two Positions Closed, One Today, One Yesterday

Today I closed a position in an put option contract for Lemonade (LMND), the newly public, high-tech powered, property-casualty insurance company. I initiated the short position in the put contract (strike: $70; expiration: 31DEC2020) yesterday when LMND shares sold off. Today, our limit order to close the position was triggered. We netted $118.61 in just a day or 1.7% of the capital used for collateral.

Yesterday we closed another short position in a put contract for Chewy (CHWY) (strike: $55; expiration: 31DEC2020). I had planned to let this contract expire, but we closed the put contract for just $5.69 – netting $98.61 over the 17 days the position was open. The return was 1.8% on the $5,500 collateral or 38.5% annualized.

2020.12.07 Trimming TSLA; Closing a PINS Put Position

Today Tesla (TSLA) shares jumped more than five percent today and our standing limit order at $625 triggered our sale of two shares. In late August I had established a limit order to sell five shares at $625, but last week, as TSLA threatened that level three weeks prior to its inclusion into the S&P 500 index, I split that limit order to sell two shares at $625 and created a new order to sell three shares at $675. The difference in this order modification is $150 (if both orders are executed) but, as we still have two weeks prior to TSLA’s index inclusion, I can split the standing order again to sell at a higher price. As we stand, our $675 order is six percent above the market price, and our stake in the electricity innovator at 1.97% of our portfolio.

TSLA shares seem remarkably overpriced but there are significant market opportunities for TSLA products and innovation is TSLA’s identity. I like exposure to TSLA but, as share prices seem priced more and more speculatively, two percent of our portfolio a comfortable allocation. When I last trimmed the TSLA position (August 17th, 2020), TSLA was also around two percent of our portfolio but our portfolio has grown 13% (nearly $100,000) in the past four months. I had planned to restrain our exposure to $10,000 but perhaps a percentage-based approach is more suitable.

This post has required much more time than I had intended because I do not want to stray from my original plan because as the prevailing risk-free rate of interest is held at remarkably low – likely less than the rate of inflation – the market will thrust asset prices higher. In fact I have just cooked refried beans and listened to a podcast about Abraham Lincoln between sentences – in addition to constructing a schedule to analyze TSLA’s weight in our portfolio as prices rise – in the effort to further consider how to handle allocation.

Shares of TSLA are now trading around $645 and I have increased my sell limit order to three shares at $690. If prices continue to accelerate as TSLA shares are added to funds that are required to hold constituent firms of the S&P500, I plan to sell two shares when share prices increase by $70. This strategy is designed for the short-term. TSLA shares may eventually grow into their current valuation but I do not plan to follow this plan to sell beyond the first quarter of 2021.

We also repurchased our short position in a Pinterest (PINS) put option contract today. We only initiated the position in this contract (strike: $56.5; expiration: 31DEC2020) on Friday but we’ve already earned more than 41% of the premium so I am not disappointed to find this PINS position closed by my initial standing limit order. Though we only netted $28.61, we only had $5,650 exposed to PINS. Over three days we earned 0.5% or 61.6% annualized on the trade.

2020.12.04 Closed NEE Put Option Contract

This morning I chose to close a short position in a put option contract of Next Era Energy (NEE). I really like NEE and want to add it to our portfolio but our put option contract (strike: $70; expiration 15JAN2020) was just four percent from the market price, $72.90, with six weeks to expiration. After holding the position for 37 days, we closed for a profit of $113.61 or 1.6%, 16% annualized, of the $7,000 used as collateral for the short position.  

I have issued a limit order to roll out and down the position but the order has not been filled as I type this update. Given NEE’s strong year-to-date performance, the low market interest rates driving yield seeking investors to NEE and other utilities, and overall market exuberance for the past eight months, I’d prefer to initiate a position in NEE at a lower cost basis. NEE also does not have many options available for trade. The market has NEE options expiring on 18DEC2020, 15JAN2021, and 19MAR2021; a February 2021 expiration, as opposed to March, would be much more attractive. Our portfolio will have exposure to NEE within the next four months but current entry points are not desirable.

2020.12.3 ZS Position Closed

Today we closed a short position in a put option contract (strike: $120; expiration: 15JAN2021) on Zscaler (ZS). The IT security firm reported earnings last night after the close and I failed to adjust my standing limit order after impressive results. Our limit order to repurchase the contract was established at $1.60/share shortly after we sold the position for $2.50 per share. Fortunately, after ZS jumped 25% near today’s open, our position was closed for $97.69. We were fortunate to be executed below our limit price; to the tune of an additional $60 or about 40% of our net on the trade. I am happy to have been so lucky on this trade. I’ll have to be more cognizant of earnings call dates going forward.

Assuming downside exposure to ZS for less than 24 hours netted $151.61 or 1.3% of the capital ($12,000) required to collateralize the position. The annualized return is astronomically high and not particularly meaningful.

2020.12.02 Catching Up on Transactions Around the Holiday

The market was very upbeat during the last few days of the Thanksgiving week. We set our all-time high portfolio value due to the rapid rise, before a quick descent, of Appian (APPN) – which briefly traded around $200 on Friday before tumbling this week to roughly $135. Don’t cry for shareholders like me. APPN began November around $60 – we’re doing just fine.

On November 25, three of our options were closed on standing limit orders. We more than doubled our money on a long-dated Planatir (PLTR) call option. I had hoped to amend the order to allow this position more room to run but found our order filled just before market close. We bought our January 2023 call option contract (Strike $22) for $585.95 and closed it for $1589.01. On the 13 day trade we netted 171.2%.

Our RedFin (RDFN) contracts close on 11/25 as well. We netted $87.25 for two put option contracts (strike: $35, expiration: 18DEC2020). Over the 12 days we held the short position we earned 1.2% (37.9% annualized). We had only sold our Unity Software (U) short put option contract (strike: $90; expiration: 15JAN2021) for two days before it closed on 25NOV2020 but we netted almost $100 or 1.1% (200% annualized).

Black Friday also closed three positions for us though two were identical put option contracts for Emergent BioSolutions (EBS) (strike: $65; expiration: 18DEC2020) initially sold two days apart. We held the EBS contracts for 7 and 9 days and earned 1.7% (87.1% annualized) and 1.5% (61.5% annualized), respectively, on the $6,500 required to collateralize each contract. We also closed our Match.com (MTCH) put option contract on 27NOV2020, netting $148.61 or 1.3%, 47.2% annualized, on the $11,500 collateral. We held the short position in MTCH contract for just ten days and retired it well before the 15JAN2021 expiration.

On Monday, 30NOV2020, our covered call option contract on Cintas (CTAS) (strike: $400; expiration: 18DEC2020) was closed for $75.69 netting $98.61. We held the position for 17 days and I am glad to have closed the covered call because I do not want to trigger capital gains tax on my CTAS shares. Even after trimming our CTAS stake, the uniform supplier remains one of our top three holdings. And the shares have performed quite well this year.

With such market exuberance in November (the NASDAQ 100 is up around 13%, the S&P500 has advanced about 11%) I hesitate to expose much of our portfolio to downside risk. Before I sold a Zscaler put option contract (strike $120; expiration: 15JAN2021) this morning we held 17.4% of our portfolio in cash. As market sell off I tend to provide downside insurance in the form of short put option contracts because premiums seem to be more attractive and the entry point, if were shares to be distributed, would be much more attractive.

2020.11.23 Two Short Put Contract Positions Closed

Another Monday, another vaccine announcement. We reached another all-time high in our portfolio on the favorable news and one of our put option contracts (Neurocrine Biosciences, NBIX; expiration: 18DEC2020, strike $75) closed on a standing buy order when the market opened; another contract (Chewy, CHWY; expiration 18DEC2020, strike: $50) closed as trading ended due to a similar standing limit order.

Early in Monday NBIX was up more than 3.5% and closed up 5.5%. Our option contract closed for $50.69 when the strike price was 19% below the market price, $92.4. With four weeks yet till expiration, I am glad to have the capital available to earn higher returns or find more promising opportunities. We netted $48.61 on NBIX trade that was active for only five days. On our $7,500 at risk we earned 0.6% or 47.3% on an annualized basis.

The CHWY trade was held longer, 14 days, and earned $57.62 on $5,000 at risk or 1.2%, 30% annualized. CHWY closed at $69.27; 28% from our strike price with four weeks until expiration. I actually sold another CHWY put option contract before this contract closed this afternoon with a week further until expiration and 21% from today’s close, $55. I am glad close this contract at $0.25 per share after closing an identical contract on November 19th for $0.45 per share.

2020.11.19 Three Option Positions Close

Today we had three option contracts closed on standing limit orders. Crowdstrike Holdings (CRWD) was up over 5% at one point; the strong move closed our short put option position. Open for just six days, we netted $113.61 on our $11,000 in collateral or 1%, 62.8% annualized. One of our two Chewy (CHWY) put option contracts closed while the other remains open to capture more of the premium. The CHWY position began ten days ago and we earned 0.8% on our $5,000 in capital at risk or 27.5% annualized. Our final closed position today was two short positions in call option contracts on U.S. Bancorp (USB). We only netted $21.25 on the trade held over 6 days, but I’d do the trade again if the opportunity arises. When I initiated the USB covered call the market price of shares were 15% less than the strike price on the option and the option had only five weeks until expiration.

2020.11.17 Quick Repurchase of a BYND Put Option Contract

Beyond Meat (BYND) shares rebounded this week and soared today, but our short position in a BYND put option contract already closed yesterday when it was purchased-to-close by a standing limit order. Had I known BYND shares would appreciate more than five percent this morning I would have set a lower repurchase order for the contract (expiration: 24DEC2020; strike: $100).

Beyond has been in the news consistently since McDonald’s announced their McPlant offering and BYND trading become so volatile that trading was halted. After reporting lackluster sales growth on 14NOV2020, BYND stayed in the news this week by announcing their newly improved iteration of its burgers that are supposed to taste more similar to meat. Unilever, one of the world’s largest food manufacturers, announced its ambitious new target for sales from plant-based products, and BYND launched a plant-based pork product in China.

Source: MarketWatch.com, accessed 18NOV2020

BYND shares are trading at very high multiples of revenue (the company is not yet earning profits) and investors did not appreciate the quarterly report released last week which disclosed lower revenue in the third quarter of 2020 compared to revenue for 2020’s second quarter. I used the market’s reaction to sell the most recently closed BYND put contract and yesterday we closed the position to net $63.61 after holding the position for a long weekend. That’s a 0.6% return on $10,000 of capital or 58% annualized.

My nutrition is now predominantly plant-based, so I’d really like BYND to succeed; especially if their burgers continue to become tastier and tastier. I wouldn’t mind owning shares at some point, which is why I am willing to write put option contracts on the shares. With the closure of this position, we now have our available cash as 13.9% of the portfolio; I’d like available cash to be 15% of assets.

Playing Catch Up on the Past Week's Trades

It has not been a productive week for me. I have spent too much time reading news and much, much too much time inside my self-curated echo chamber on Twitter as we digest the election results. Now I have a few trades to summarize.

On November 5th I closed three short positions in put option contracts for a few of my favorite companies to write puts upon. If memory serves, the market was especially happy (bullish) to learn Joe Biden was soon to be the President-Elect but the Senate was likely to remain controlled by the Republican party. Markets love division between the Congress and the Executive branch of government. Division leads to less new legislation and businesses are more likely to continue operating under current laws. I believe these three were all executed on existing limit orders which I had established to aggressively close the positions.

The Above Charts via Questrade IQ Edge, accessed November 12, 2020

First, we took another loss on an Appian (APPN) contract (expiration 20NOV2020; strike: $60). We’d held it for 29 days and lost $56.39 to close the position. Had I held till expiration, we would have closed the contract at a profit because as I type (eight days before expiration) APPN trades above $90 per share. At least we’re still long 200 shares.

Second, we took profits on a Fastly (FSLY) contract due to expire January 15, 2021. This position was only open for a week, but we managed to close the position with an $88.61 profit on a trade that required $5,500 in collateral. A week later, FSLY is trading well above the strike, but I am glad to have closed out this FSLY put early due to my recent misadventures trading the company’s options.

Third, Square (SQ) also jumped on November 5th and we made another quick $88.61 (not a typo, just ironic) after selling this put option contract (expiration: 27NOV2020; strike: $130) having held it for just three days (well, if it closed at the open of trading, two). SQ jumped from $172 at 4NOV2020’s close to $177 at 5NOV2020’s open, but continued up to $204 and back down to $178 as I type. It’s been a wild ride for the purveyor of small-business payments so I am glad to have taken profits.

Chart via Questrade IQ Edge, accessed November 12, 2020

This Monday I wrote three put option contracts and two have already closed for small profits. Beyond Meat (BYND) was hammered by investors when McDonald’s revealed its plans to release a McPlant meatless burger offering. Competition from the world’s largest quick serve company may be troublesome for BYND but McDonald’s failed to disclose they were partnering with BYND in the McPlant venture. I sold a put contract (expiration: 20NOV2020; strike: $105) after BYND shares crashed then set a limit order which was quickly executed as shares rebounded following the partnership disclosure. We made almost $40 on $10,500 collateral within a couple of hours.

Chart via Questrade IQ Edge, accessed November 12, 2020

Another trade opened Monday closed this morning as Fastly (FSLY) shares remained volatile. The contract (expiration: 20NOV2020; strike $65) closed on a limit order set on Monday after I opened the position. It would have been nice to hold this one, it expires in just two weeks, but the trade closes to net $48.61 after just three days of exposure.

Screenshot clipped from JPM Securities, accessed November 12, 2020

For those keeping score at home. These five trades did sum to a net positive, but just barely. I mean, I couldn’t even pay for the meal we bought at Burger’s Priest on Monday (I did leave a 15% tip on a takeout order).

As a more general summary of this year’s trades, not considering the opportunity cost of buying assigned shares at the market price, I am still up $19,150.57. That’s a 12.1% return on the month-end cash balance of our portfolios. It’s been a slow week but the effort is still worth pursuing. I have held 260 distinct positions; 34 of which lost money; 54 have not returned the 15% I strive to achieve. Investing with options keeps me engaged in the markets and has also provided very lucrative entry points for a few positions we continue to hold (100 shares of SQ being one of them).

Going forward, and over the past month or so, loss mitigation is key. Twenty-three trades have lost more than $100 and four have lost more than $1,000.

2011.11.03 More Capital Raised as We Await Election Results

I just finished the previous post. And this is more of the same. I just finished typing about the Beyond Meat (BYND) option position I closed at a massive loss to free a bit of capital and establish a lower entry point if shares are distributed. Today I closed the position I just yesterday established in BYND and four other option positions. I found another $31,000 worth of liquidity and our cash position is roughly 16% of our portfolio. As market move significantly higher as Americans go to the polls on election day.

Holding the BYND contract netted $54.30 on $11,000 of capital or 0.5% - which isn’t very relevant annualized, but it’s crazy high. I’m still down over $500 between the BYND contract closed today and the BYND contract closed yesterday. But focus on the big picture, Beau: you’ve closed almost $19k in options profits this year. Not bad for a part-time job.

This past Friday I had entered into a Chewy put contract but closed it today when the market vaulted the online pet supply retailer higher. We netted just $33.61, but today I focused on liquidity and it was a 0.7% return on $5,000 over four days.

I also closed another Fastly (FSLY) contract today. The position in this contract had been established just a week ago – probably when I rolled a different FSLY contract into this one. I could look it up, but I lost a lot on that contract and scrapped up a few dollars on this one ($50.61 to be exact, so I guess that would by pizza for the fam).

I closed a Match.com put contract which I had held for 20 days – the strike was well under market and I paid $70.69 to close the position, but it was due to expire in 24 days and I had already made $133.61 on the position and it freed another $9,000 of capital. That’s a 1.5% return in less than three weeks. Note to self: write more MTCH contracts and fewer FSLY contracts.

I also closed the covered call position in Square (SQ) today. Though this move does not create liquidity in our portfolio, we don’t need to worry about an upside-surprise and have our shares called away – which would be taxed as regular income. Instead we took the profit, 10 days before expiration. The trade netted $134.30 and we can cheer for SQ to be wildly over-priced once more.

2011.11.02 Raising Capital Ahead of an Uncertain Election

I probably should have made a few of these moves early. Clearly we would have sold at higher prices, for some of the transactions, but as I write, after Monday’s close, we raised an additional 4.7% of cash bringing our total to 13%.

First, I bought Cintas (CTAS) shares in my wife’s tax-free account near the bottom of the market earlier this spring. Shares had been up more than 100% earlier this fall, but I liquidated the position today to trim our overall exposure to CTAS. At the start of trading today CTAS was 5.7% of our portfolio and after trimming the portion of CTAS held in Amy’s account, CTAS is now down to roughly 5% of our portfolio.

To raise more capital, I closed four short positions in put option contracts – rolling two down and out. On Friday I entered into three contracts as the market fell sharply and I closed two out right to take quick gains in addition to raising cash. I had written put contract on McKormick (MKC) (expiry: 18DEC2020; strike: $155) on Friday and closed it on Monday when the market changed course for the better. After holding the position over the weekend, I made a tidy $93.61 profit and a 0.6% (73.5% annualized) on the $15,500 at risk.

Another Friday move was to roll out and down a Fastly (FSLY) put option contract – out from October to January and down from $60 strike to $50 strike. Since FSLY rebounded on Monday, I decided to close of the FSLY put positions I had just initiated on Friday. Over the three days we earned $38.61 on the $5,000 required for collateral. That doesn’t make up for the loss we took on the previous option but I need to focus on wholistic profitability, not winning individual trades.

I’ve established too much exposure to FSLY and have suffered from it. Had I never written an option contract on FSLY my portfolio would be better off – by a couple thousand dollars. More importantly, had I not been so determined to earn money lost on closing FSLY from subsequent FSLY trades I would have made a couple thousand dollars on FSLY trades.

Speaking about rolling out and down and not relying on recouping funds lost by subsequent trades in the same name, I rolled short positions in Beyond Meat (BYND) and Square (SQ) out and down on Monday as well. Some lessons are hard to learn and even harder to live.

The BYND position closed at a $571.34 loss, or 4.2% of the $13,500 capital required for the trade. By rolling the option down I freed $2,500 in capital. The SQ position also liberated $2,000, but I lost $276.39 on the trade or 1.8% of the capital at risk. Though the closed SQ contract was due to expire at the end of this week, I didn’t want to take the risk of a market sell off following the election – especially with the heightened uncertainty this election cycle – only for the shares to rebound in short order. The new SQ position requires only $13,000 in collateral and expires at the end of November.

2020.10.30 Rolled Another Fastly Put Closed Two Covered Calls

On Friday our short position in a Fastly (FSLY) put contract was very close to it’s strike price ($60) with almost two months until expiration (December 12, 2020) so I rolled it down (to $50) and out (to January 15, 2021).  This is another loser for us. We closed the position for $600.69 but received only $194.30 to take it on. Over the 15 days we held the position we lost 6.8% on the capital at risk.

By establishing a lower position in an option with a lower strike price, I justified the maneuver because we would save $1,000 if shares are distributed to us.

I also closed a FSLY call option that was due to expire in two weeks. Again, with the market price around $60 and a strike for this call at $90, the market only required me to pay $25.69 to close the short position. Having sold the contract 7 days ago for $299.30, we netted $273.61.

Another short position in a covered call option, this time for Starbucks (SBUX), had three weeks to expiration but was available for repurchase at $17.69. SBUX is a much more stable stock so we sold the contract for only $64.30 and netted just $46.61 but holding the position for 29 days paid a dividend that would roughly buy dinner at Chipotle for my family.

2020.10.29 Fastly Drops Another 5% Today

Fastly (FSLY) shares have continued its decline after disclosing it lost significant business from TicTok due to regulatory concerns and potential sanctions against TicTok’s parent ByteDance. Analysts on the FSLY questioned the ease at which FSLY customers can discontinue their patronage.

As FSLY shares are still more than three times what we paid for them, but about half of the value for which they traded only two weeks ago. Wild ride. I decided to roll down one of the put options we had sold (expiry 15January2021; strike $65). To buy back the outstanding option (expiry 15January2021, strike $65) I paid $825.69 for a net loss of $176.40 or 2.7% of the capital at risk ($6,500). The lower-strike put option contract generated $379.30 and if shares are distributed, we’ll save $1,000 on our cost basis.

Our options inventory is currently dominated by FSLY. We have three short positions in FSLY puts and a short position in a FSLY call. See the below chart. The covered call and one of the put contracts expire in two weeks from this Friday. The other two puts expire in December and January.

FSLY’s volatility has been difficult for our option performance. After the sharp decline of FSLY shares following the company’s second-quarter conference call, I made about $1,380 selling options which seems to have led to overconfidence. Since September 9th, I have written and subsequently closed four covered call option contracts and three cash-covered put contracts. And lost almost $5,000.

Chart clipped from MarketWatch.com on 10/29/2020.

Closing the covered calls hurt as FSLY shares moved from $82 on September 10th to $128 on October 13th (to the tune of $2,125). The remedy proved more harmful than the malady. First, I closed call options that by now would likely have expired worthless. Moreover, to offset the cost to close my call options, I wrote a put option that ultimately cost $2,400 after FSLY shares fell from $128 (two weeks ago) to $67.85 (as I type this note).

All I can say is hopefully my wife is busy at work today and does not read this post after I send it to her.

2020.10.27 Catch Up

Today I am writing to catch up on two past due investing journal entries and record today’s transactions. With the election next week the markets may provide opportunities. I’ve been trying to close option positions to liberate capital. Fastly (FSLY) has again moved substantially and as a result we’ve recorded our most expensive loss to date.

RedFin

On Friday, I bought a RedFin (RDFN) option to close our short position in a put contract (expiry: 20NOV2020, strike price: $40). We originally sold the contract on 18SEP2020 for $314.30 and closed it by paying $150.69. Over 35 days we earned 4.1% on the $4,000 at risk, 42.7% on an annualized basis, but I chose to close the position to free capital; we had about a month till expiration and had already earned half the premium.

Square

Yesterday I bought our short contract on a Square (SQ) call option (expiry: 13NOV2020, strike: $220) and sold another call option contract with a lower $200 strike price at the same expiration. In an earlier post I wrote about rolling out and up this position (to $220) when SQ at appreciated rapidly; SQ has now reversed and the $200 strike call sold for about $215 with three weeks to expiration.

Closing the SQ call, $220 strike, netted $510.60 over 13 days – this is after, of course, after losing $477.39 on the previous SQ covered call. The new, lower strike, covered call does not add any additional time to our position but gives an opportunity to earn another $140 on the underlying shares.

Fastly

Oh, Fastly (FSLY). FSLY had another 30% move, downward, this time followed by a subsequent 10% fall. This afternoon FSLY was trading within 5% of a strike for a put option contract we sold (expiry: 15JAN2021, strike: $70) so I closed it and sold another contract with the same expiration and a lower strike price, $65. We lost $310.71 on the original contract.

Another short FSLY put contract, written to offset the cost to roll up and out a covered call, has backfired when shares of FSLY fell from $120 to $74 in a few days. The strike was $100 and it expired four weeks after I sold it, 30OCT2020, but that was two weeks too long! After paying to close the position this afternoon, we lost $2,366.39 on the contract. That’s about 10% of our option premium profit, this year. This one hurt.

I wrote another FSLY put contract to offset the cost (expiry: 13NOV2020, strike: $55). If shares are allocated, I’ll save $45 per share compared to the $100 strike contract, which is twice the loss on the $100 strike contract.

ALGN Technically not a Spiffy-Pop

Today the market may be trading down to sideways but one of our names, Align Technologies (ALGN) has gapped up after releasing earnings yesterday. We like ALGN because their Invisalign systems are a far superior solution compared to traditional braces. As a kid who wore braces during middle school, I have first-hand knowledge.

Just before noon, 22OCT2020, ALGN is up $105.66, or roughly 31.5%. We originally added ALGN to our portfolio in January 2017 for $93.89 per share so, if you ignore the loss-realizing trade I made this past spring, today our ALGN shares experienced a Spiffy-Pop. Crack the champagne. Well, I actually bought pizza and beer for lunch with the kids as they learn from home.

To make our stake in ALGN more fulfilling, I successfully sold and repurchased the shares at a lower price this spring to harvested a capital loss. Though our original cost basis was $94, the shares changed accounts and received a step up in basis (to $296.34) in May 2018. In late February I sold the ALGN shares for $242.24 but repurchased them for $164.79 in early April. Don’t you love it when a plan comes together!?!

2020.10.16 Closed Four Short Put Option Contracts

Today I repurchased four positions in put option contracts to lock in gains and bolster our capital liquidity. Yesterday, I initiated two more short put contracts in Fastly (FSLY) – to which our portfolio exposure is now over five percent, third-most of all companies. To begin the day, but after one put option had closed on a limit order, we only held 7.9% of the portfolio in cash. With the election fewer than twenty days away and $68,500 assigned to secure put options sold short, I decided to take profit on three more put contracts.

First, our position in Chewy (CHWY) closed on our previous limit order for $43.69. We only held the position for one day because CHWY has been pretty volatile, see chart. We netted $40.61 on $5,250 which may only be 0.8%, but annualized – over one day - was 282.3%.

Second, I closed our BlackLine put option, we held it for 14 days and netted $129.30 with $7,500 exposed to the trade. The return of 1.7% over two weeks equates to a 44.9% return on an annualized basis.

Third, I closed one of our two short positions in Appian (APPN) for $50, netting $74.30. Over the 14 days we held the position, with $5,000 at stake, the trade returned 1.5%, 38.7% on an annualized basis.

Fourth, I bumped our limit order up to $78 to repurchase to close the Activision Blizzard put. Again, we held this position for 14 days and netted $74.30 or 1.1%. On an annualized basis, this return was 27.7%.

Altogether, these four closing transactions freed $24,500, or 3.4% of the portfolio, for further investment. Each of the four option contracts were due to expire after the election – the CHWY contract expires on November 13th while the three other contracts expire on November 20th. Hopefully, the market will reward our exposure to FSLY as it has the four transactions closed today.

2020.10.13 SQ Covered-Call Option Rolled Up and Out

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!