Covered Writes were Right This Week

by JDH on September 12, 2020

Sorry for the stupid pun, but the covered write call option strategy worked well this week.

After the recent correction, I believe gold stocks will trend higher, so I have a position in NUGT – Direxion Daily Gold Miners Bull 2x Shares because I like crazy leverage.  NUGT gives me that.  I expect to hold it for a month, or two, or three.

But why just sit there holding when I can also sell call options against the stock, and pocket the premium?  My current strategy is, on a day when the price goes up a lot, I sell an out of them money call option that expires at the end of the week.

So, on September 8, I sold the options with a strike price of $97 expiring on September 11.  NUGT was trading around $95 at the time, and I sold them for $2.30.  NUGT bounced as high as $102 on Thursday, so my play wasn’t looking great.  I was faced with selling my stock for $97 when it was worth $102.

But, as often happens, profit taking kicked in, gold shares receded, and by Friday NUGT closed at $94.52, so the options I sold expired worthless, and I get to keep the $2.30.

If I could see the future I would have not done the covered write, and I would have sold the shares for $102 on Thursday, but I’m not that smart.  I’ll take the $2.30.

I assume on Monday, or Tuesday, or Wednesday the price will bounce back up, and I’ll do it again: sell call options that are a few dollars out of the money, with 2 to 4 days remaining until expiration.  In most cases they will expire worthless, because that’s what happens to most out of the money options with 2 to 4 days remaining until expiry.

If I’m wrong, and the stock goes up, I can sell my stock, or by back the options I sold, but I still own the stock, so I still make money.

And yes, I know instead of using stock as “margin” I could do it with options (calendar spreads, or straddles, or whatever), but this is easy, and profitable, so why not?

Tune in next week and we’ll see if I get crushed with this strategy…..