I figured I'd clean up this setup a little bit on the chart to show what's going on with this trade a little more clearly, since we're running into opex, and I'll have to do something with it here shortly. I also for mapping out what I'm going to do if price does certain things relative to my cost basis and original stock purchase price.

The trade originally started out as a "Plain Jane" covered call, where I bought shares at 7.54 and sold the Sept 16th 8 call for something like a 6.39 debit (so my cost basis in the shares at that point was 6.39/share). I proceeded to sell the Sept 16th 5 short put to further reduce cost basis in my shares, as well as to sell some premium in this unusually high implied volatility underlying (I filled the short put for an additional .67 ($67)/contract credit. When, after all, can you get >$50/contract credit for a somewhat far out-of-the-money short put in an <$10 underlying -- rarely. After selling the put, my cost basis in the shares would be 6.39 minus .67 or 5.72/share.

Currently, the 8 short call is valued at .72 ($72) (it was originally $115), and the short put is valued at .25 ($25) (originally, $67).

Rolling into expiry, I'm looking to take the short put off at near maximum profit (.05 or less). If price finishes above $8 at expiry, my shares will be called away at $8, and I'll be out of the trade. However, what should I do if price either finishes (a) between my stock purchase price and the short call or (b) price finishes below my stock purchase price, but above my original cost basis for the covered call (6.93/share)?

If price finishes "between", I'm likely to just treat the trade from that point forward as a straight "speculative long" stock play and set a stop loss for my shares at break even and then let the trade ride. The reason why I would probably not continue to sell calls against and set a stop loss on the stock is to avoid the scenario where I would get stopped out on the stock and have a naked speculative short call hanging out there which could get painful if price whips higher on news (which is due out sometime in the 4th quarter and most likely at a presentation NVAX             is going to give in mid-October).

If price finishes lower than what I paid for the stock originally, but above my cost basis for the original covered call, I'm likely to just close it entirely out, having made profit on the short put and on the covered call setup ... .
Comment: Covering: NVAX Sept 16th 5 short put for a .13 db. In for .67 ($67)/contract credit, out for .13. Net profit -- about $52/contract after fees and commissions. One less thing to think about running into Friday opex, although I could have just let it expire worthless with the underlying dawdling around $8 here.
Comment: Well, doesn't look like I'm going to get the "perfect finish" I wanted (price finishing below $8, but above where I bought it). I can either just leave the setup alone and let the shares be called away and be done with it (assuming price stays above $8 for the next two days) or roll out for duration and credit. I can currently roll to the Oct 21st 9 short call strike for an additional 1.23 in credit; to me, that's just too good to pass up on an $8 underlying, although there is some risk that when news comes about the RSV Phase III clinical trials, it won't be stellar, and the stock will implode .... .
Comment: Rolled the Sept 16th 8 short call to the Oct 21st 9 call at NY open for a 1.23 credit. In AH trading, the stock imploded on failure of its RSV vaccine clinical trials. The good thing: my cost basis in the stock is 5.17/share; the bad thing -- it's currently trading at 1.30 ... .
Comment: A little 20-20 hindsight: selling that short put to reduce cost basis was probably a "really bad idea." Were I not to have closed that out prior to expiry, I would in all likelihood be put $5 shares ... . Thank goodness for "little blessings."
Comment: Covered the Oct 21st 9 short call for .05 debit. In looking at what I can do to reduce cost basis further here, the answer is "not much" on the call side. The Oct 21st 1.5 short call is worth only .22 at the mid. Another option is to sell puts above current price for something better in terms of credit, hoping that the stock modestly recovers from here at some juncture. The Oct 21st 2 short put will bring in a .70 credit at the mid, but it will have to be rolled if price does not break $2 by expiry ... . Another option is to wait for price to "pop" and then sell calls against closer to my cost basis, but I'm not counting on a pop in short order. Consequently, I'm likely to sell puts above current price and then roll them out if price does not break the strike.
Comment: Sold the Oct 21st 1.5 call for a .22 ($22)/contract credit. Beats a poke in the eye with a sharp stick ... . As always, we'll see how it goes.
Comment: Sold the Nov 2 put for a .30 ($30)/contract credit to further reduce my cost basis in my stock. Naturally, this leaves me with a somewhat weird setup: long stock, plus an "inverted diagonal strangle". How this plays out will depend, naturally, on where price goes from here ... .
Comment: Short term, price movement is looking good at this point for the expiration of the 2 short calls at worthless or near worthless (I have a GTC order to pull it off for a .05 debit). It's got some time to play out, so I won't get my hopes up. Unfortunately, things aren't looking good for those 2 short puts. Those, I'll roll out to a later expiry in the event of a "no break" of $2 for additional credit. Rolling until the cows come home ... .
Comment: Failed to post a step in here somewhere. At some point, I sold Nov 18th 2 puts in order to finance a roll of the Oct 21st 1.5 short calls to the Nov 18th 2 strike. In any event: now Covering Nov 18th 2 calls for a .10 ($10)/contract debit and Rolling Nov 18th 2 puts to the April expiry for a .25 ($25)/contract credit. Current cost basis with all the goofing around is 3.90/share. I'll look to sell calls at or above the cost basis should we get a bounce of that sort at some point in the future. Obviously, a bit of a grind ahead ... .
Comment: Covering: ... both the shares and the short puts for a loss. It's December, so it's the time to decide what you should hold onto to work out, and what you should take the loss on if you'll get some kind of tax benefit from that. This is an underlying that has become unworkable as a covered call due to call strike availability, so biting the bullet here.
Holy sh*t! I learned my lesson about writing CC on small biotechs a few years back. But this is brutal! Kudos for writing about it. I had NVAX for a few months just to play FDA results with $4 base. Luckily for me I was blown out by a protective stop order about a month ago...brutal
Yes, that sky high IV does not come for free just to be
I always go "small" on these for this very reason (implosion risk). That being said, no one likes to open their portfolio to a "major tanker."
If you sell ITM puts, you are going to get more NVAX stock provided it does not rally. Oct 2.00 puts have no time value in them. It is all intrinsic value, except maybe 1-2 pennies.
Hmm, you're right there about the assignment risk, etc. I'm not certain I want more of this poo pile, particularly for 2.00/share. Sometimes it's best to "do nothing" ... . Oh, well, I have plenty of time. It's not as though it's going to get "dramatically worse" at this point ... . Lol.
+1 Reply
Baerrus (comments below) made a really good point about selling puts here above current price and that is that they have no time value in them. Selling a 2 put, for example, would be on the notion that price will pop from here and that the ITM put would move OTM, something that can't be counted on here (or, alternatively, that price would move somewhat significantly toward that 2 such that its intrinsic value decreases). Moreoever, if that 2 put is ITM at expiry, you would get assigned shares at $2 which, in the scheme of things is quite far above current price. So, I'm going to do the "regular thing" and sell a Oct 21st 1.5 call here if I can get >$20 out of it. It may seem ridiculous that I'm looking to reduce cost basis in my stock $20 at a time, but it beats "doing nothing."
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