One of our covered call writing exit strategies is converting dead money to cash profits (CDMCP). When share price is declining and under-performing the overall market, we first close the short call and then sell the stock. The cash generated from the sale of the underlying is then used to enter a new position. Another approach we can employ is closing the short call and then implementing the stock repair strategy to lower our breakeven point and perhaps mitigating losses on the stock side. In some cases, we may turn losses into gains. This article will highlight a real-life example with Adobe, Inc. (NASDAQ: ADBE).
Initial covered call trade and closing the short call
- 7/23/2018: Buy 100 x ADBE at $259.77
- 7/23/2018: Sell 1 x 8/17/2018 $260.00 call at $5.95
- 7/30/2018: Buy-to-close the $260.00 call at $0.82 (stock declined in price to $242.32)
- 8/8/2018: ADBE price moved to $253.83 and a decision was made to employ the stock repair strategy
Calculations through 7/30/2018 using the multiple tab of the Ellman Calculator
When the trade was initially executed, the time value return of the option was 2.3% with an additional 0.1% of upside potential (yellow cells). After buying back the option, the option return was reduced to 2.0% (brown cell). On 8/8/2018, the shares loss was $5.94 or 2.28%. Commissions aside, there was a net total position loss of 0.28%. A decision was made to mitigate the loss by employing the stock repair strategy to lower the breakeven and allow time for additional share recovery.
BCI Stock Repair Calculator
- 8/8/2018: Buy 1 x ADBE 8/31/2018 $255.00 call at $4.95
- 8/8/2018: Sell 2 x ADBE 8/31/2018 $260.00 calls at $2.86
- Breakeven lowered from $259.77 to $257.00 (mid-section of spreadsheet)
- 8/31/2018: ADBE trading at $263.51 resulting in a stock repair profit of 2.31% or a total trade profit of 4.31% when adding in the option profit
ADBE price chart during the series of trades
When a covered call trade turns against us, we can mitigate by closing the entire position simultaneously or do it in stages. The latter approach involves closing the short call and then implementing the stock repair strategy.
*** For more information on the Stock Repair Calculator, click here.
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