Analyzing a Multi-Faceted Series of Covered Call Trades: A Real-Life Example with Kohl’s Corp. (NYSE: KSS) – April 11, 2022
When we write a covered call option, we first buy a stock or exchange-traded fund (ETF) and then sell the call option which is protected by first owning the underlying security. This is what makes our position covered or partially protected. In November 2021, Avi wrote to me regarding a series of trades he executed with KSS and was inquiring as to the current status of the (10) positions, if closed at the time of the email.
Avi’s KSS trades
- 10/18/2021: Buy 100 x KSS at $47.77
- 10/18/2021: Buy 1 x Jan. 21, 2022 $32.50 call at $15.10
- 10/18/2021: Buy 3 x Jan. 21, 2022 $35.00 calls at $14.80
- 10/18/2021: Sell-to-open 5 x Nov. 19, 2021 $54.00 calls at $1.49
- 11/4/2021: KSS trading at $56.89
The stock price has moved up $9.12 since initiation of this series of trades, leaving the 5 short calls in-the-money. The question posed was regarding the trade status if all positions were closed.
Broker screenshot of trades
Trade debits
- $4777.00 (cost of KSS shares)
- $1510.00 (1 x $32.50 call)
- $4440.00 (3 x $35.00 calls)
- $2375.00 (cost-to-close 5 x $54.00 short calls)
- Total debit: $13,102.00
Trade credits
- $5689.00 (sale of shares at current market value)
- $2460.00 (sale of $32.50 call)
- $6660.00 (sale of 3 x $35.00 calls)
- Total credits: $14,809.00
Final calculations if all 10 positions are closed
Net credit: $14,809.00 – $13,102.00 = $1707.00
$1707.00/$13,102.00 = 13.03% = 264% annualized (based on an 18-day series of trades)
Discussion
Holding the equivalent of 500 long shares of KSS and then benefitting from share appreciation of $9.12 per-share in 18 days as well as option-selling premium, resulted in an impressive return. The deep in-the-money long calls had Deltas approaching 1, therefore, for every $1.00 movement in the underlying share price, the option value increased by a similar amount.