Yup, Those Two Charts Were Different

by JDH on October 17, 2015

Last week I discussed Franco-Nevada and Royal Gold: Two Gold Charts That Aren’t Quite the Same.  This week that difference came back to bite me.  As I reported last week:

On September 24 I did a covered write, selling the October 62 calls for $1.20 on FNV.TO – Franco-Nevada Corp.   Franco-Nevada was trading around $59 at the time, so it looked like a good deal.  For the next few days FNV dropped, so it looked like a prudent move, but since bottoming at $56 on September 30, FNV has shot up 14%, and now the options I sold are in the money.

FNV-Oct-16-2015

And, as the chart shows, Franco Nevada kept rolling, closing on options expiration day on October 16 at $67.16

So, in hindsight, instead of selling the calls, I should have bought them, since they would have increased in value from $1.20 to over $5 on expiration day.

As it turns out, I let them mature, so my shares are “called” and I am forced to sell them for $62.  Since I received $1.20 for the options, I have effectively sold something that today is worth $67.16 for $63.20.

Ooops.

Of course I’ve still made a profit, just not as much as I would have made if I had either done nothing (not selling the calls), or if I had actually bought the calls.

But I’m not crushed by this, because when I look at the chart (which you can click on to expand), I see that Franco-Nevada certainly looks over-extended.  The RSI is at 71.79, the level at which shares tend to pull back.  So, my plan is to put in a buy order for the shares I sold at $62, on the assumption that at some point over the next week or two the shares will drop back to that level, and I’ll be back in the game.

Is that plausible?  On August 5 Franco-Nevada traded below $52.  By August 23 it traded over $62, a $10 move in three weeks.  On August 27 it touched back down to $53.  So yes, volatility is plausible, so I will use it to my advantage.

Here’s the other trade I reported on last week:

I sold the October 68 calls on RGL.TO – Royal Gold Inc. on September 24 for $1.35

Royal Gold has not had the same run, and on options expiration day on October 16 it closed at $66.47, out of the money, so the options expire worthless and I get to keep my $1.35.  This worked out exactly as intended.  The shares were in the $65 range when I sold the options, so even though they did increase in value the options time premium eroded, so I win twice: my shares are up in value, and I keep the options premium.  Perfect.

What’s next?

More of the same, I suspect.  I will continue to sell options against the stocks I own.  I’ll cover them at a value slightly higher than they are now, in the hopes that they will increase in value to just under that amount prior to options expiration.  Lather.  Rinse.  Repeat.

I will also continue to cheer for the Blue Jays, even though they dropped game one in Kansas City.

Can’t win ’em all.

Thanks for reading.  See you next week.