Hey traders,
A few weeks ago, I had one of my behind-the-scenes folks write about his experience using naked puts and covered calls on a stock he wanted to own.
It’s been a bit of a roller coaster for him, so I thought it would be great for you to read about how he’s taken it all in stride and made some great decisions along the way.
Read below to see how it’s going for him.
— Jack
Hi everyone,
I’ve been a bit quiet for a while, but I figured I’d check in with you again to let you know how things are going with CDLX.
If you missed the first 2 parts of this series, you can give them a quick read here: Part 1, Part 2, but I’ve done my best down below to give you a recap of everything that’s happened up till now.
Long story short: CDLX has been quite the rollercoaster ride.
I didn’t expect that when I got into it, but hey — if there’s one thing I’ve learned is that the market will throw you curveballs… and you’ve got to learn how to adjust.
To make a long story, short, here’s a chart:
Selling The Puts
Here’s a quick rundown of what you see in the chart:
First of all, the green dotted line shows the level of the $15 puts I sold.
I put that in just so show you that along the way, I’ve had several chances to close out the trade at breakeven or possibly even a small gain since time value had burned off.
On March 21st, 2024, sold 10x $15 puts on CDLX expiring April 19.
That brought in $1.10 per share or $1,100 cash instantly into my account.
Two days later, CDLX spiked up 23% in a single day and those put I had sold at $1.10 each, were now worth less than $700.
I probably should have bought them back and closed out the trade, but I decided to hold on to see what would happen.
The Crash
Overnight, the day after the huge 23% spike, Cardlytics — the company behind CDLX — announced they were going to be putting more shares out into the market.
That sent the stock crashing — 33% down in a day to be exact.
Suddenly the puts I had sold were in-the-money, but I wasn’t assigned.
A couple of days after the crash, CDLX came back up slightly above $15.
At that point, I probably could have gotten out at breakeven — but again I decided to hold on and see what would happen.
Over the next couple of weeks, CDLX wavered between $15 and about $13.
What I found really interesting is that for most of those 2 or 3 weeks, I wasn’t assigned the stock!
It wasn’t until CDLX fell to about $12 right before the options expired that I got assigned at $15.
I wish it had happened sooner, because then I could have started selling covered calls earlier, but oh well.
Selling Covered Calls
Here’s an interesting thing I did:
Rather than immediately turn around and sell covered calls, I looked at the chart and noticed that CDLX had touched the $15 level several times before retracing.
You can see that in the first 2 orange circles on the chart.
The fact that it had touched that price twice in meant to me that the $15 level was an important price point for the stock.
Since I still believed in CDLX — and because I didn’t want to sell covered calls below my cost basis of $13.90 — I decided to wait for CDLX to again hit that $15 level.
I set an alert on my platform and waited. It took 2 weeks, but CDLX went slightly above $15 again — that’s the third orange circle — and I was able to sell 10x $18 covered calls expiring in June for 50¢.
That brought my cost basis down to $13.40.
I still wasn’t profitable on this trade, but my plan to keep chipping away at my cost was working out.
Another Curveball
Shortly after I sold those covered calls, I got another curveball!
CDLX reported earnings and it didn’t go well. The stock crashed down to about $8!
Ouch! Painful, but I decided to take advantage of it. At that point, the $18 calls I sold were pretty much worthless. Great for me as an options seller.
Rolling With the Punches
While I wish the stock I owned hadn’t just crashed down, I decided to use the crash to my advantage.
I put in an order to buy back the 10 contracts I sold at 5¢ each.
I thought that was a generous offer, but the market had other ideas.
I saw asking prices as high as 40¢! Absolutely crazy considering I sold those for 50¢ when the price was above $15 and now the stock was hovering above $8.
So I decided to wait out those crazy sellers. I put in my order at 5¢ and just went off to live my life.
After all, to my way of thinking, I had nothing to worry about:
If CDLX miraculously recovered and I got called away at $18, that would be an incredible 34% profit in less than 3 months!
And if CDLX didn’t recover, then I’d keep the full 50¢ and get to sell another covered call in a few weeks.
As luck would have it, the market finally came around to my way of thinking and my standing order buy them back for 5¢ finally got filled.
It actually happened in dribs and drabs: A couple filled one day, a few filled the next day and so on — but eventually I bought back all 10 contracts at 5¢.
Where I Stand Today
That brings me to today. If you’re keeping track, my cost basis right now is $13.45.
Here’s the math on that:
I was assigned at $15. Subtract $1.10 for selling the put, that equals $13.90.
Then subtract 50¢ for selling the $18 covered call, that equals $13.40.
At that point, I bought back the $18 calls for 5¢, bringing my cost basis to $13.45.
The stock just closed today at $9.01, which means that on paper I’m down $4.44 per share or $4,444 for the 1000 shares I own.
Am I panicking? Not in the least.
The Hidden Lesson
This is the hidden lesson in this crazy trade:
If you’ve been reading Jack’s posts over the past few days, you know that he’s been discussing some of the crazy mistakes he’s made over the years.
One of those mistakes he’s mentioned is trading more than you can afford to lose.
It’s one of the surest ways of making bad, emotionally-driven decisions.
Now, don’t get me wrong $15,000 is far from pocket change to me. It’s quite a significant amount of money.
I wouldn’t like it at all if this trade went to zero, but I would still be able to sleep at night.
That single fact is the biggest takeaway I have from this trade.
If I had been trading with the grocery money or with next months’ mortgage, I would have been forced to make crazy decisions.
Instead, I’ve been able to make my decisions logically — completely detached from any emotion.
Now don’t get my message wrong: I’m not saying I’ve made the best trading decisions.
I’m sure Jack would probably have a dozen tricks he could teach me to pull more money from these 1,000 shares I own than I’ve managed to pull on my own.
What I’m saying is that the decisions I made were made from a place of logic and reason — not wild emotions.
My Plan Going Forward
Now that I own this stock, I plan to keep selling covered calls and lowering my cost basis.
I’ll sell calls above my cost basis when it pops and I’ll either get called out at a profit or let them expire worthless.
In a worst case scenario, if CDLX keeps coming down to this level, I’ll buy back the calls I sold so I can “double dip” on the pops.
Stay tuned. As long as Jack lets me, I plan to keep you updated on how this trade works out for me.
The long term view I have still shows this stock could hit $30 by year’s end. How nice would that be to keep lowering my cost basis as the stock gradually rises and then sell at a massive profit?
That’s the plan. How it works out? Stay tuned…
Ride the waves,
D.A. (Dave)
P.S. This article is Part 3 in a series. You can access Part 1 here and Part 2 here.
