Here Are More Tailor-Made Options Tips and Tricks

This column is a continuation and expansion on how I use options in my day-to-day investments, following up on my previous article. I rarely buy options, except for closing or rolling-out exiting options. Everything I'll be speaking about here relates to sales of options if the transactions are new. Joann Inc. has been quite volatile lately. The shares were $11.27 just one month ago before momentarily sinking to $8.51 on Dec. 1. Trailing 12-month earnings per share are now $2, putting the stock at less than 7-times the current year's profits. JOAN's 10 cent quarterly dividend translated to 3.86%, at $10.37, and was 4.44% when the shares were offered at $9. There was heavy insider buying earlier in the year, at an average price of $11.80. I missed the extremely fleeting chance to buy JOAN under $9 but did manage to snag a few thousand shares on Dec. 7 at $9.02. Step one in most money-making trades involves buying low. Just one day later JOAN had rebounded to the mid-$10s. The sharp uptick got option traders interested in buying its call options. I was happy to oblige them. I split my sales of May 20, 2022 covered calls between $15.00 and $17.50 strike prices as shown below. Prices of 25 and 50 cents a share might not seem exciting at first glance. Consider, though, how far out-of-the-money these calls were. If called at the lower strike I'd be forced to give up my shares for $15.50 ($15 strike plus the 50-cent call premium). The gain would be $6.48 per share, 71.8% above my day earlier purchase price. I'd likely have pocketed an additional 20 cents a share along the way from the two dividend payments between now and expiration day. Because JOAN has pretty high upside I kept some shares reserved for using $17.50 strike price calls at 25 cents. If I'm lucky enough to see JOAN that high by May 20 I'll sell those remaining shares for a net price of $17.75 plus dividends. That best-case scenario would deliver a cool 99% total return over the coming 6.25 months. When JOAN made it first plunge to under $9 I didn't buy shares. I did sell $10 & $12.50 puts at $1.80 and $3.40 respectively (per share) as detailed here. My worst-case, forced purchase price on those $10 naked puts was $8.20 ($10 strike price less the $1.80 put premium). On the more aggressive, deeper in-the-money $12.50 strike puts offered a worst-case break-even point of $9.10 ($12.50 strike less $3.40 put premium). With JOAN selling at $10.37 both sets of puts could be bought to close (BTC) if desired for modest profits right now. I plan on doing nothing, though, as I'm convinced Joann's will be substantially higher before expiration day next May. Owning shares, while also being short covered calls and naked puts is what I call a buy/write combination. In this example I stepped into the full combination at slightly different times to get the best pricing. You ideally want to sell calls when the stock is up, and rising. You want to sell puts when the shares are low and falling. That same moment is a good one for buying shares, too. Once you've established all three positions they work brilliantly to allow for great gains while also offering significant downside protection. Here is what the full buy/write would look like on a 1,000-share, 10 option sizing as of Dec. 9, 2021 using the stepped into prices. There are many permutations about what could unfold with this. For illustrative purposes these would be the worst-case, static price (unchanged from Dec. 9th) and best-case possibilities come May 20, 2022. Even if JOAN dips back to under $10, as long as it does not violate its all-time low there would be no loss. Any closing price between break-even and $9.99 would show at least a small gain. JOAN could dip by as much as $2.03 per share (-19.5%) from $10.37 without causing a loss on the full buy/write combination. If JOAN remains exactly where it sat on Dec. 9, 2021 this static price scenario will play out. Amazingly, the power of selling both covered calls and naked puts would have led to a very substantial paper profit. The raw gain would be 57.3%, annualizing at 130.95%. That's pretty good on a stock that went nowhere. What if JOAN rebounds to close at $15 or better? If so, the following best-case scenario will unfold. You'd end up with no remaining JOAN shares but a very tidy profit. The raw gain equals 129.1% cash-on-cash. The annualized return would be an astounding 295.2%. Keep in mind JOAN fetched as much as $17.50 less than one year ago. Obtaining the best-case possibility is not out of the question. What a deal this type trade is. You'll be profitable as long as JOAN does make, and stay at, a new all-time low. You could win big even if the shares go sideways. You'll win even more if they rise to $15 or above. Any final expiration date price above $10.27 but below $15 would be somewhere in the range between the static and best-case profit possibilities. It pays well to learn about and utilize option sales techniques as part of your portfolio toolbox.

Here Are More Tailor-Made Options Tips and Tricks

Let's look at ways I use options in my day-to-day investing, using Joann as an example.

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