In this Mastercard Incorporated (MA) article I provide an example where, through the use of options, it is possible to come out ahead even if your original call is wrong.
In my February 4, 2019 article I provided details on covered call transactions I had initiated; I generated $2.43/share on the MA options.
Mastercard Incorporated’s (MA) share price has appreciated to a far greater extent than I anticipated and shares are now trading in excess of the $230 strike price of my covered calls; shares were trading at ~$215 when I wrote my calls.
It is not my intent to part with my MA shares, and therefore, I have closed out my position at a cost of $8.55/share. This means I am down $6.12/share ($2.43/share - $8.55/share).
Rather than shell out $6.12/share I have sold October 2018 $250 contracts and have generated ~$10.4125/share versus the $6.12/share reflected above and I still own my MA shares.
If MA’s share price remains below $250 come the October 18, 2019 expiry, I will let these options expire worthless meaning I will retain 100% of the option premium I have just collected and will still own my shares.
If MA’s shares trade above $250 as we approach the October 2019 expiry, I will most likely close out these option contracts and will write new calls at a higher striker price for a future expiry.
As you can see from the above trades, my net cash position has not deteriorated and the value of my MA holding has appreciated. This is what I mean about coming out ahead even though the original call did not turn out as planned.
I wish you much success on your journey to financial freedom.
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Disclaimer: I have no knowledge of your individual circumstances and am not providing individualized advice or recommendations. I encourage you not to make any investment decision without conducting your own research and due diligence. You should also consult your financial advisor about your specific situation.
Disclosure: I am long MA.
I wrote this article myself and it expresses my own opinions. I am not receiving compensation for it and have no business relationship with any company whose stock is mentioned in this article.