Options UPDATE - Covered Calls July 17 2020 Expiry

I periodically employ a conservative 'out of the money covered call' option strategy when I think I can generate some option premium income and I have a strong probability of retaining the underlying security.

Well....you win some and you lose some.

In this brief update I disclose what transpired with the covered calls positions I disclosed in previous articles which expired July 17th.

These are the contracts for which I received option premiums.

  • Visa Inc. (V) with a $205 strike price - received $2.08/share. *
  • Canadian Pacific Railway Limited (CP) with a $365 strike price - received $3.75/share for 50% of the contracts and $3.70/share for the remaining 50%
  • The Toronto-Dominion Bank (TD) with a$60 strike price - received $0.79/share *
  • The Bank of Nova Scotia (BNS) with a $56 strike price - received $0.50/share *
  • The Royal Bank of Canada (RY) with a $90 strike price - received $1.08/share *
  • The Bank of Montreal (BMO) with a $72 strike price - received $0.80/share *
  • Becton, Dickinson and Company (BDX) with a $250 strike price - received $1.85/share. *
  • The Canadian Imperial Bank of Commerce (CM) with an $88 strike price - received $1.06/share *

While the value of the underlying securities reflected above has increased from the time I wrote these option contracts, I did experience just under a $5,000 net cash outflow on these option trades. As a result, I view the final results of these option trades as an abject failure.

The profitable trades....

The V options expired worthless meaning I retained 100% of the option premium I collected. Fortunately, V is the company for which I wrote the greatest number of option contracts!

CP's share price surged within a few days of the July 17th expiry so I decided to close my position at a cost of $0.89/share on July 16th. I ended up generating a profit of $2.86/share on 50% of the underlying shares and $2.81/share on the remaining 50%.

On July 9th I closed my TD and BNS covered calls at a profit. I paid $0.37/share for the TD options giving me a profit of $0.42/share and I paid $0.18/share for the BNS options giving me a profit of $0.32/share.

The "wish I could do over" trades.....

On July 17th I closed my RY and BMO covered calls at a loss. I paid $5.85/share for the RY options giving me a loss of $4.77/share and I paid $2.90/share for the BMO options giving me a loss of $2.10/share.

On July 17th I closed my BDX covered calls at a loss. I paid $17.60/share for the BDX options giving me a loss of $15.75/share.

On June 26th, the CM covered calls I wrote were exercised so I received ($88/share x 100 x the number of contracts I wrote). As I compose this article, CM is trading at $93.54. Although I still have 593 CM shares in the FFJ Portfolio and shares in an account for which I do not disclose details, it certainly was not my intent to part with the shares which were called away; my plan is to repurchase CM shares once they retrace to ~$88/share. I certainly have no crystal ball but I think the probability is reasonable that we will witness a broad market pullback within the next few months and am of the opinion CM's share price will get caught in the downdraft.

New option position....

I disclosed my opinion on BDX in this recent article and continue to be of the opinion BDX is richly valued. I, therefore, wrote covered calls on July 17th with a $290 strike price which expire August 21st for which I received $2.35/share.

Final Thoughts

As evidenced by the above noted trades, writing covered calls is not a guaranteed way to 'come out ahead' from a cashflow perspective. In fact, you can see from my trades that I experienced negative cashflow from the conservative option trades I executed.

Given what is happening in this world I never anticipated a surge in the share price of some of the underlying companies on which I wrote covered calls and readily admit I have no idea what comes next; I appear to be in good company in this regard.

Although many investors might be pleased to see a significant increase in the aggregate value of their overall portfolio from the March 2020 lows, I do not fall in this camp. I am continually on the lookout to acquire shares in high quality attractively valued companies so a company's share price which appears to be detached from the underlying fundamentals does not bring me joy.

If anything, I would have expected share prices, in general, to have taken a beating in recent months. When you stimulate an economy with TRILLION dollar relief packages, however, we see how crazy things can happen to share prices.

I do not envision the corona virus being brought under control any time soon and at some stage the various Federal governments, which are printing money as fast as they can, will find this 'printing money solution' is no longer a viable option. If/when this does happen, I think many investors who are reapping the rewards from 'speculating' will find themselves in a difficult spot.

I could possibly make much more money employing an aggressive investment approach but I would likely experience many sleepless nights. I, therefore, choose to stick with a conservative 'buy at an attractive or reasonable valuation and to hold for the very long-term' strategy. In addition, I will continue to selectively employ the use of options where I think there is a reasonable probability for a desirable outcome even though some of my recent covered call option trades resulted in a less than desirable outcome.

Until my next update....stay safe and stay focused.

I wish you much success on your journey to financial freedom!

Thanks for reading!

Note: I sincerely appreciate the time you took to read this article. Please send any feedback, corrections, or questions to [email protected].

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 V, CP, TD, BNS, RY, BMO, BDX, and CM.

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.