Practical Investment Commentary - No Hype

As I have documented many times on this silly little blog, I have a position in MSTR—Miscrostrategy Inc.  It’s a Bitcoin investment on steroids, which is great when Bitcoin goes up, but not great when it goes down.  I consider MSTR to be a medium term hold, meaning I have no plans to sell it anytime soon.

But, being the greedy guy that I am, I wanted more, so I’ve done many covered-writes against the stock.  This is an excellent strategy during sideways periods because I pocket the premium.  When Microstrategy is going up, it’s a disaster.

This week was not a disaster, but it was close.

All was going according to plan.  MSTR was moving sideways, and it appeared that my calls would expire worthless, and I would pocket the premium.

Then, on Thursday, MicroStrategy announced a 10 for 1 stock split.  That caused the stock price to jump from $1,300 to $1,400, on the assumption that more retail investors could buy the stock, and buy more options on the stock.

Great.

I sold my calls at the $1,400 strike price.

By 2:45 pm on Friday, 75 minutes before options expiration, MSTR hit $1,435, so I was faced with a loss of $35 on the calls.  Fortunately, I covered at $32, so I was only looking at a loss of $3, but still, if I had closed out the position two days earlier, my profit would have been closer to $30, so I wasn’t looking good.

As look would have it, the stock faded into the close, and by 3:30 pm, MSTR was back to $1,404, and I was feeling much better.

But what should I do?  By the options back for $4, or wait until the close to see if the collapse continued and the options would expire worthless?

Tough call.

But here’s the amazing thing: With 30 minutes to go until expiration and with the options $4 in the money, they were trading at $9!  Who would pay a premium of $5 for 30 minutes?

At 3:37 pm, MSTR dipped to $1,399, but the options were trading at $5.70!  That’s over a 6-dollar time premium for an option that expires in 23 minutes.  Crazy.

At 3:47 pm, I had had enough, so I closed out the position by “buying to close” at $4.70 while MSTR was trading at $1,398.

The result: since covering on July 3, the share price increased from $1,309 to $1,398, and I sold the options for $31.58 and bought them back for $4.70 for a profit on the options of $26.88.

I’m fine with that.

However, if I had done nothing, the options would have expired worthless, because MSTR closed for the week at $1,397.

Isn’t it funny how the Big Boyz know where the options are and rig the system to get the close price so that many holders are out of the money?

Probably just a coincidence.

Oh well, we can live to fight another day.

Thanks for reading.  More next week.