TWTR: Covered Call into earnings: why & what's next?
in this post, i quickly share why i love selling covered call into the earnings for stocks that i held for sometimes and i'm ready to cash out of.
I sold the Feb 12 Call option with strike $65 for TWTR yesterday for $2.20
Why ? how is this a good trade?
i believe selling CC into earnings is one of the lowest risk trades - it's a great weapon to add to your trade arsenal, cause we win in all scenarios .. here's the break down and the thinking behind this trade
(quick notes - i'm not an options expert and i exclusively trade the 4 basic strategies -- sell/buy calls/puts -- i don't get into spreads - but there are may resources that explain covered calls in a lot more details on the web if anyone is interested)
Scenario #1: TWTR closes below $65 on Friday Feb 12
if volatility (IV) is strong for the option ahead of earnings, which is usually the case for stocks like TWTR (and most other social media and tech companies), the option premium will reflect a higher extrensic value (vega) - once the earnings resuts are out, volatility drops, causing the premium to "go back to normal" price. for the sell side, that means easy profit (premium to keep).
in our case here, the premium for the Feb 12 $65 call was $2.2 (IV was ~180% when i opened the position) - if volatility comes down today to ~40%, the call option maybe worth $0.5 -- and with only 3 days to expiry, even that $0.5 would eventually drop to zero at expiry (provided TWTR remains below $65) - we end up keeping both the full $2.20 premium and the stock
Scenario #2: TWTR closes above $65 on Friday
we will get assigned and the stock is "called" away at the strike price $65 - keeping the call premium of $2.20
since we already had a good run with TWTR (see the breakeven / BE marked on the chart) and were ready to close the position at current price level ~$60, getting $67.20 is even a better deal.
Scenario #3: TWTR drops down after the earnings for any reason (was not expected)
The call price will drop and we will close it for profit and still continue to hold the stock - which is not a bad thing since we originally think TWTR is on a good path in future.
** note: TWTR is hovering around the $62 in after-hours/pre-market after strong earnings.
now for the price projection:
the projection for the current move for TWTR is $16 from the mid-Jan base of ~ $46 which takes us to around the $62 price level (+/- couple of $$) - then the price may ease up back to the mid $50's (the nearest supply/demand "balance level") before moving up again
(this is also why i thought the $65 strike with 3 days to expiry was the best choice)
the UTO (lower indicator) on the daily chart is reaching 100% -- showing that this is a possible top for the price and supporting a new wave of consolidation at that level - so seems to support our projection.
if our covered call gets assigned, we can then look for another opportunity (an upcoming dip) for re-entry to catch the next move. we remain bullish overall on TWTR.
this is my 4th covered call trade in this earning season and it's a great way to add to our PnL for stocks that we already hold, especially those positions we were looking at closing or rotating out of. this is a basic option strategy that is easy to learn and follow, with an opportunity to repeat every earnings - as rewarding as dividends if not more :) - so i hope it works for other fellow traders here and i hope i managed to explain it well .
let me know in your comments.
I sold the Feb 12 Call option with strike $65 for TWTR yesterday for $2.20
Why ? how is this a good trade?
i believe selling CC into earnings is one of the lowest risk trades - it's a great weapon to add to your trade arsenal, cause we win in all scenarios .. here's the break down and the thinking behind this trade
(quick notes - i'm not an options expert and i exclusively trade the 4 basic strategies -- sell/buy calls/puts -- i don't get into spreads - but there are may resources that explain covered calls in a lot more details on the web if anyone is interested)
Scenario #1: TWTR closes below $65 on Friday Feb 12
if volatility (IV) is strong for the option ahead of earnings, which is usually the case for stocks like TWTR (and most other social media and tech companies), the option premium will reflect a higher extrensic value (vega) - once the earnings resuts are out, volatility drops, causing the premium to "go back to normal" price. for the sell side, that means easy profit (premium to keep).
in our case here, the premium for the Feb 12 $65 call was $2.2 (IV was ~180% when i opened the position) - if volatility comes down today to ~40%, the call option maybe worth $0.5 -- and with only 3 days to expiry, even that $0.5 would eventually drop to zero at expiry (provided TWTR remains below $65) - we end up keeping both the full $2.20 premium and the stock
Scenario #2: TWTR closes above $65 on Friday
we will get assigned and the stock is "called" away at the strike price $65 - keeping the call premium of $2.20
since we already had a good run with TWTR (see the breakeven / BE marked on the chart) and were ready to close the position at current price level ~$60, getting $67.20 is even a better deal.
Scenario #3: TWTR drops down after the earnings for any reason (was not expected)
The call price will drop and we will close it for profit and still continue to hold the stock - which is not a bad thing since we originally think TWTR is on a good path in future.
** note: TWTR is hovering around the $62 in after-hours/pre-market after strong earnings.
now for the price projection:
the projection for the current move for TWTR is $16 from the mid-Jan base of ~ $46 which takes us to around the $62 price level (+/- couple of $$) - then the price may ease up back to the mid $50's (the nearest supply/demand "balance level") before moving up again
(this is also why i thought the $65 strike with 3 days to expiry was the best choice)
the UTO (lower indicator) on the daily chart is reaching 100% -- showing that this is a possible top for the price and supporting a new wave of consolidation at that level - so seems to support our projection.
if our covered call gets assigned, we can then look for another opportunity (an upcoming dip) for re-entry to catch the next move. we remain bullish overall on TWTR.
this is my 4th covered call trade in this earning season and it's a great way to add to our PnL for stocks that we already hold, especially those positions we were looking at closing or rotating out of. this is a basic option strategy that is easy to learn and follow, with an opportunity to repeat every earnings - as rewarding as dividends if not more :) - so i hope it works for other fellow traders here and i hope i managed to explain it well .
let me know in your comments.
Trade active:
Update: market reaction to earnings was a lot stronger than i expected. although the option volatility "deflated", our call now is in the money (ITM) by almost $2 - this is a great opportunity to share some more about this option play.
- do I roll ?
i can roll the covered call "up and out" - means buy the $65 call back and sell the $70 or $72 strike with an expiry further out - for a small loss or even a credit. the issue with this scenario is 1) that we will "register a loss" in our PnL - and 2) the price may come down again and we don't get a better scenario than just getting assigned. so i'll just leave it to play out hoping for an assignment which is my max profit. the price action in the first 30mins show a spossibility of traders selling into the new high - so we may still end up below the $65 on Friday.
let's watch how this unfolds.
- do I roll ?
i can roll the covered call "up and out" - means buy the $65 call back and sell the $70 or $72 strike with an expiry further out - for a small loss or even a credit. the issue with this scenario is 1) that we will "register a loss" in our PnL - and 2) the price may come down again and we don't get a better scenario than just getting assigned. so i'll just leave it to play out hoping for an assignment which is my max profit. the price action in the first 30mins show a spossibility of traders selling into the new high - so we may still end up below the $65 on Friday.
let's watch how this unfolds.
Trade closed: target reached:
Trade closed after we got assigned
note: after settlement (T+2), I initiated a new married call position - this time stock was at $72.2 and sold the 5 Mar $75 Call .. again, the target here is to get assigned and for the position to be closed for $2.8 profit + $2.5 CC premium = $5.3 .. this is a good 7% return in around 2 weeks .. if i end up keeping the stock, my Break-Even would be $69.7 which is not bad.
note: after settlement (T+2), I initiated a new married call position - this time stock was at $72.2 and sold the 5 Mar $75 Call .. again, the target here is to get assigned and for the position to be closed for $2.8 profit + $2.5 CC premium = $5.3 .. this is a good 7% return in around 2 weeks .. if i end up keeping the stock, my Break-Even would be $69.7 which is not bad.
