Analyzing and Correcting Our Covered Call Writing Mistakes – April 8, 2024
When we execute our covered call writing trades, we base our decisions on sound fundamental, technical and common-sense principles. To master our option strategies and elevate our returns to the highest possible levels, we must analyze our trades to evaluate if we could have improved our results. In this article, a real-life example with Occidental Petroleum Corp. (NYSE: OXY) will be investigated. This series of trades was shared with me by one of our BCI premium members.
OXY trades
- 11/13/2023: Buy 100 x OXY at $62.81
- 11/13/2023: Sell-to-open (STO) 1x 12/8/2023 $64.00 call at $0.71
- 12/1/2023: OXY dropped in price to $59.22
- 12/1/2023: Buy-to-close (BTC) the 12/8/2023 $64.00 call at $0.03
- 12/2/2023 – 12/8/2023 (expiration Friday): No further action was taken on these OXY trades
Price chart of OXY during the series of trades
Lessons learned
- On 11/13/2023, OXY (gold line) was trending down while the S&P 500 (blue line) was accelerating
- A few days prior to opening the OXY trades, the price activity of OXY moved below the price action of the S&P, adequate warning
- There appeared to be several opportunities to roll-down between the purple arrows and between 12/1/2023 and 12/8/2023 … opportunities lost
OXY calculations using the BCI Trade Management Calculator (TMC)
- Section 1: Initial trade entries
- Section 2: Initial trade calculations results: 26-day return of 1.13% with an additional 1.89% of upside potential
- Section 3: Trade adjustment: BTC at $0.03
- Section 4: Final post-adjusted results: + 1.08% on the option side (realized); -5.72% on the stock side (unrealized)
Lessons learned
- The covered call option partially mitigated the unrealized share loss
- Taking advantage of additional exit strategy opportunities would have reduced the loss even further
- Closing the original short call was at a low cost, but unnecessary since no further action was taken
Discussion
These OXY trades are meaningful examples of how studying our trades can make us all better investors. In this case, I would ask myself if I should have entered this trade at all. If yes (should be “no”), then why not roll-down 1 or 2 more times? We would still have a losing trade, but not to this extent.
Author: Alan Ellman