TRADE IDEA: AMD COVERED CALL/NAKED SHORT PUT
My "guess" is that AMD will not hold onto this level (I briefly considered going "monied" with the short call with the covered call setup, selling the 7 strike instead of the 8). However. implied volatility is fairly high here (64.6%), and my mechanical approach to most of these setups is basically to "ditch the guessing" and pull the trigger; price will go where it goes ... .
Covered Call Metrics:
Buy 100 Shares at 7.51
Sell Oct 21st 8 Call
Whole Package: 6.93 db (off hours; 6.93 will be my cost basis in the stock)
Max Profit: $107 (if called away at 8)
ROC%: 15.4%
Notes: As an alternative, I looked at selling a put in the Oct 21st expiry below current price. The Oct 21st 7 short put, for example, currently offers up .54 ($54) in premium at the mid. The notion there would either be to (a) keep the premium if AMD finishes above $7 at expiry; (b) look to be put the stock at $7 if it doesn't; or (c) roll the short put down and out for additional credit if price breaks $7. Anything below the $7 strike in the Oct 21st expiry won't offer you much premium at the moment (e.g., the 6 strike offers .25 at the mid, which approaches "not worth it"). At NY open, I'll probably just "flip a coin" as to whether I go with the naked put or the covered call.
Covered Call Metrics:
Buy 100 Shares at 7.51
Sell Oct 21st 8 Call
Whole Package: 6.93 db (off hours; 6.93 will be my cost basis in the stock)
Max Profit: $107 (if called away at 8)
ROC%: 15.4%
Notes: As an alternative, I looked at selling a put in the Oct 21st expiry below current price. The Oct 21st 7 short put, for example, currently offers up .54 ($54) in premium at the mid. The notion there would either be to (a) keep the premium if AMD finishes above $7 at expiry; (b) look to be put the stock at $7 if it doesn't; or (c) roll the short put down and out for additional credit if price breaks $7. Anything below the $7 strike in the Oct 21st expiry won't offer you much premium at the moment (e.g., the 6 strike offers .25 at the mid, which approaches "not worth it"). At NY open, I'll probably just "flip a coin" as to whether I go with the naked put or the covered call.
Comment:
Went covered call, which I got filled for 7.00. So max profit (assuming a call away at $8) is $100 (14.3% ROC).
Comment:
Proceeded to drop a bit post-fill. I assume that if I went "monied" with the short call, price would've immediately popped ... .
Comment:
Yikes. Apparently investors didn't like the stock offering idea very much. My cost basis is at $7.00/share. I will wait until the 8 call approaches worthless (.05), close it out, and then proceed to sell 7 calls against to reduce my cost basis further.
Comment:
With the short call sticking around .07-.08 for days (near, but not quite worthless), I rolled it down and out to the Nov 18th 7 short call for an additional .37 ($37)/contract credit, locking in the profit experienced by the short call's reduction in value and further reducing my cost basis in my shares.
Trade closed manually:
Covering here for a small profit ($15 per 100 shares/contract) on this pop. Freeing up buying power.
Comment:
Here's the whole chain: 9/6: Bought shares at 7.61 and sold the Oct 21st 8 call as a package for a $700 debit. 9/30: Rolled the Oct 21st 8 calls down to the Nov 18th 7 calls for a $37 credit. 10/26: Closing for a $681 credit. Total credits received ($681+$37) - total debits paid ($700) - minus fees = $15 in profit. Here, price actually declined from where I bought shares, and I still didn't lose money. While I could have hung on until Nov 18th expiry (the setup was in-the-money), I wanted to free up buying power for my more traditional go-to setups in broad market/sector ETF's.