It was an interesting Monday this week for my wheel trades. AMZN and AAPL have just been on fire lately, and I’ve had covered calls on them for a while now. Lots of rolls, buying back the short calls for a loss so I could keep the stock appreciation. This went on for a few expirations now, which is less than ideal, but not the end of the world (and you’ll see why in a minute).
Both of those stocks are at highs. AAPL is slightly through the strike price of my short call; AMZN blasted through my strike pretty strongly. The overall market has shown some weakness this Monday. And AMZN is in overbought territory. My typical sell signal using RSI is when it crosses back down below the 70-level, which it has not yet as I type this up. For better or for worse, I’m going to sit on my hands on these trades and not roll. I’ll take assignment if need be, and then recycle into cash-secured puts.
While those (especially the AMZN) are what many people look at as the downside of covered calls (leaving money on the table), the other side of the wheel also played out nicely today (a nice scalping opportunity). I accepted assignment on the RCL 252.5 calls this past Friday. RCL was down $10, to around $247.50, by Monday afternoon when I looked at my trades, so I caught a nice break on that one.
To try and cycle back into the stock, I sold the Dec 13 247.5 puts at 3.40, which would be an effective buy price of $244.10 if I get assigned. Consider that that is after selling the stock at $252.50 plus the premium collected on the call that resulted in assignment on expiration Friday.
This ends up being a good lesson in big-picture thinking when it comes to the wheel. When investors leave money on the table, it can lead them to feel like covered calls don’t work. But this other thing happens too that makes you feel great about the wheel strategy.
That said, neither of these things are the typical result. More often than not, covered calls and cash-secured puts lead to the Goldilocks scenario, where the stock is in the middle of the bell curve and the option seller keeps the premium or rolls for profit.
Dan Passarelli
Founder and President
Market Taker Mentoring
