It's Options Expiration Day, and I'm Cashing In

Over the last year or so, the third Friday of every month rapidly has become my favorite day of the month. That is because it is options expiration day. This means numerous of the covered calls in my personal portfolio are ready to expire in the money. This Friday, winning bets on names such as TG Therapeutics , Exelixis Inc. and Sarepta Therapeutics that I initiated in the fourth quarter of last year will expire in the money. These will provide 20% to 30% profits and bolster the cash allocation in my personal portfolio by slightly more than 5%. This cash will provide some much-needed dry powder in case we see another dip in the overall market, which I think is likely. A covered call or buy-write involves buying equity and simultaneously selling a call option against the new holding. I prefer option strikes six to 10 months out and just above the current trading level of the stock involved. Did I leave some money on the table on some of these names by not just buying the straight equity? Absolutely. I also made more profits on some positions where the stock didn't move much compared to just buying straight stock. More importantly, I acquired significant downside protection with this simple option strategy. This made the trade-off more than appealing as I had believed by the close of last year that equities had gotten overextended. After all, the S&P 500 posted a nearly 30% rise in 2019 with no profit growth within the index overall. Then Covid-19 blindsided the globe, making downside protection even more prudent and desired. The spike in volatility also made option premiums larger than they had been since the financial crisis. The covered calls I initiated throughout March as I used up my 33% allocation in cash buying the huge meltdown had potential returns of 40%, 50% or more on the same type of bets I made in the fourth quarter of last year. Obviously, the larger option premiums also provided greater downside protection as well. Covered call strategies are something I believe should be in more investors' toolboxes, especially in volatile times such as these. They are easy to learn, and with the recent collapse in brokerage fees cheaper to execute than they have ever been. They are best used within tax-deferred vehicles such as Roth IRAs or rollover 401Ks. That way, you do not have to account for short-term capital gains every year, which can be a hassle at tax time if you don't have a good accountant. In the past year, I have turned scores of Biotech Forum members on to this simple tool for managing risk within their portfolios. The consensus seems to be once you execute one or two trades, it becomes like second nature. The downside protection provided by these strategies also gives a trader more confidence to buy the market when it declines, which is more than needed as the market has become downright scary over the past several months with big moves in both directions. I find this strategy best utilized on stocks I don't mind owning long-term, such as the names mentioned at the start of this piece. If the option doesn't expire in the money, one always can roll the position forward, picking up another option premium and maintaining downside protection. I didn't start heavily utilizing this simple strategy until I had spent three decades in the market and when I turned 50. So, I can guess in this case you can teach an old dog a new trick.

It's Options Expiration Day, and I'm Cashing In

Covered call options provide downside protection for holders of the underlying stock and can yield nice profits, too.

Columnist Conversation

This Weekend on Real Money

Did the CCMP Index Form a Head and Shoulders Pattern?

More Evidence of Inflation That Never Gets Reported in the CPI

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.