Part of our covered call writing education involves looking back on both successful and unsuccessful trades and learning from them, says options expert Alan Ellman of TheBlueCollarInvestor.com, and here, he reviews a previous trade.
A few months ago I shared with a premium member a trade I had executed the previous month and saved it. Today's article will highlight a trade I made last September and October with a happy ending.
Proto Labs Inc. (PRLB) was a stock on our Premium Watch List with outstanding fundamentals and technicals. I sold multiple contracts on this security but will use 100 shares and one contract to simplify the math. Here's the overall trade:
- 9/23/13: Buy 100 x PRLB @ $78.10
- 9/23/13: Sold 1 x October $80 call @ $3.30 for an
initial one-month return of 4.2%
- 10/8/13: Buy-to-close the $80 call @ $0.45 (slightly
higher than our 10% guideline.that's why I call it a guideline!)
- 10/14/13: Sell-to-open the $80 call @ $1.40 for an
additional $95 credit/contract ($140 - $45)
- 10/18/13: Allow assignment as stock is trading >
$80 and there was an upcoming earnings report on 10/31/13
- 10/19/13: Shares are sold for $80 for an additional
$190 per contract (purchased @ $78.10)
- Total profit = $330 + $95 + $190 = $615/contract = 7.9%, 1-month return
Let's take a look at a one-year chart, which included this trade:
Click to Enlarge
Please note:
- Entered trade
- Hit a double as share price declined and then recovered
- Allowed assignment as share price was in-the-money at expiration
Let's now take a closer look at the one-month chart:
Click to Enlarge
Summary:
Here is a summary of the BCI principles, rules and guidelines used in this successful trade:
- Stock selection using fundamental and technical
analysis, as well as common sense principles
- Option selection based on market assessment, chart
technicals, and risk tolerance
- Exit strategy execution using the 20/10%
guidelines
- Expiration Friday decision based on earnings report
rule
By Alan Ellman of TheBlueCollarInvestor.com
