Analyzing Covered Call Writing Trades to Enhance Our Trading Skills: A Real-Life Example with The Clorox Company (Nasdaq: CLX) – November 29, 2021
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 CLX. His conclusion was that he was currently in a $250.00 net credit position. I will break down these trades into 3 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:
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 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.
Author: Allen Ellman