One of the best ways to elevate our option-selling results is to analyze real-life trades. On August 3, 2021, Mark shared with me a series of trades he executed with Clorox (CLX), explains Alan Ellman of The Blue Collar Investor.
His conclusion was that he was currently in a $250.00 net credit position. I will break down these trades into three stages. I ask you to mentally comment on each stage prior to presenting my analysis.
Stage I
- 7/28/2021: Buy 100 x CLX at $181.52.
- 7/28/2021: Sell-to-open (STO) 1 x 8/6/2021 $180.00 covered call at $4.59.
- 8/3/2021: CLX to report earnings pre-market.
Stage II
- 8/3/2021: CLX declines to$162.70.
- 8/3/2021: Buy-to-close the $180.00 call at $0.07.
Stage III
- 8/3/2021: STO 1 x 8/13/2021 $140.00 call at $20.50.
- 8/3/2021: Mark’s analysis is that his cost-basis is near $160.00 and with CLX currently valued at $162.70, he is in a net positive position by $270.00.
Now that you’ve made your assessments, here are mine:
Stage I Analysis
The initial 9-day time-value return was 1.7% (68.9% annualized) with 0.8% downside protection of that time-value profit, as shown by the multiple tab of the BCI Calculators:
CLX: Initial Calculations
The robust return reflects a high implied volatility situation. Why? The obvious answer is the upcoming earnings report (ER), something we avoid like the plague in our BCI methodology. The ER creates the potential for high-risk of significant share depreciation.
Stage II Analysis
The ER disappointed and share price declined by $18.82. At that point, closing the $180.00 short call at $0.07 was appropriate.
Stage III Analysis
Rolling out-and-down, a technique rarely approved of (some exceptions) with our BCI methodology, generated an enticing premium ($20.50) but did not enhance the trade position. With CLX trading at $162.50, the $140.00 call was trading at parity (all intrinsic-value) so there was no time-value benefit. Furthermore, we have now locked in a substantial loss on the stock side of the trade due to the contract obligation to sell at $140.00.
Mark’s analysis that the new cost basis was near $160.00 neglected the fact that there was a contract obligation to sell at $140.00.
Current Status of the Trade on 8/3/2021
- Stock side: $181.52 – $140.00 = -$41.52.
- Option side: $4.59 – $0.07 + $20.50 = +$25.02.
- Net total position: $41.52 – $25.02 = -$16,50 per-share = -$1650.00 per contract.
Discussion
Analyzing real-life trades will make us all better investors and, ultimately, put cash into our pockets. Avoiding ERs, understanding time-value components of option premiums, and avoiding non-productive exit strategies are lessons learned from these CLX trades.
Learn more about Alan Ellman on the Blue Collar Investor Website.
