Covered Calls Pro Tip (part 4 in the CDLX series)

D.A. here again, I just wanted to check in with a quick update.

In case you missed it, on Monday, I shared an update with you on how my trade with CDLX is going.

But then I spoke to Jack yesterday and asked him to give me some pointers. I wanted to know what I could have done better.

The biggest thing he told me is that when I sold the $18 covered calls, I should have gone closer to the money.

In fact, he said that since CDLX had gone slightly above $15, I should have sold the $15 covered calls because I would have gotten a lot for them.

In hindsight, looking at this, it makes total sense.

At the time I sold the $18 calls, I was looking at it with greedy eyes: “collect a little now and when the stock goes up to $18 I’ll get a big payday.”

Jack’s advice was the opposite.

Considering the stock had already taken me for a rollercoaster ride, I should have been thinking: “collect as much as I can now to lower my cost basis”

Some Quick Math

In my last update I said my cost before selling the covered calls was $13.90.

When I sold the $18 calls expiring June 21, I collected 50¢, bringing my cost basis down to $13.40.

If I had instead sold the $15 calls with the same expiration, I’m looking back and I could have gotten about $1.00 for them.

That would have brought my cost basis down to $12.90.

I might have even sold $14 calls and gotten $1.40 for them, getting me all the way down to $12.50!

Lesson Learned

My original thought was to collect a little now and wait for a big payday later.

At the time, I thought it was the smart thing to do. And it would have worked if CDLX had been exhibiting the strength I been expecting when I first entered the trade.

But considering the stock had already faltered on me, it would have been wiser to sell closer to the money and collect a bigger premium up front.

I still wouldn’t be in the green — CDLX is currently at $8.84 — but it would have put me that much closer.

It was eye-opening to get Jack’s input and see another way I could have played this.

You can bet I’ll be thinking of this lesson with the next covered call I sell.

Ride the waves,

D.A. (Dave)

P.S. This article is Part 4 in a series. You can access the other parts starting here with Part 1.

Facebook
Twitter
LinkedIn