On Tuesday prior to Electronic Arts (EA) fiscal Q4 earnings, I previewed the event and offered a couple ways to play for existing longs in an effort to add yield and one for those looking to express a bullish view. I want to quickly update each as they all involved a leg that was short May 11th weekly options and offers some insight on how to manage the position close to strike on expiration.
First, a simple overwrite vs long stock:
VS 100 SHARES OF EA AT $123.50 SELL 1 MAY 11TH WEEKLY 130 CALL AT $1.30
With the stock at $133 as I write with three and half hours to expiration the May 11th 130 call be covered for about 3. In this case, the overwrite was a loser given the stock’s $10 rise since results and if you were inclined to keep the long stock position on the short call needs to be bought to close by today’s close. If it were covered at $3, the loss of about 1.70 of potential profits (received 1.30 for the call sale) if you had not sold the call vs the stock.
Second, A strangle sale vs long stock:
VS 100 SHARES OF EA AT $123.50 SELL 1 MAY 11TH WEEKLY 130 – 116 STRANGLE AT $2.40
-Sell 1 May 11th weekly 130 call at 1.30
-Sell 1 May 11th weekly 116 put at 1.10
With the stock at $133 the discussion is same as above for the short 130 call, if you want to keep the long position intact then you need to cover the short call by today’s close. As for the put sale that will expire worthless. But this is a good discussion of the difference between the straight call sale above vs a strangle sale. In the case of the strangle, the premium received for the put mitigates some of the lost profit from the call sale. But I guess most importantly it is important to remember that selling a strangle vs long stock is far riskier than just a covered call, as the put sale could result in additional losses to the long stock in the event the stock were to go below the short put strike on expiration.
It’s important to remember that when selling options against long stock for potential yield enhancement there is always a trade-off, giving up some potential upside in these two situations. If the stock had massively underperformed the implied movement for earnings it would have felt like easy money, but because it outperformed and money was left on the table despite having nice short-term gains in the stock, it is easy to feel like a fool. Fear and Greed!
Third, bullish call calendar:
Trade Idea: EA ($123.50) Buy May 11th weekly / Sept 130 call calendar for $6
-Sell to open 1 May 11th weekly 130 call at 1.30
-Buy to open 1 Sept 130 call for 7.30
With the stock at $133 the short May 11th weekly 130 call is offered at $3, but the Sept 130 call that you are long in this trade is worth 11, resulting in a $2 profit. You could take the profit and close out the whole trade, or you could cover the short call for 3 and then sell the Sept 150 call at 3 and you would now own the Sept 130 / 150 call spread for $6, with max potential of $14 with the spread already $3 in the money. Alternatively, you could take the $2 profit and roll the bullish view up and out and maybe buy the Sept 140 /160 call spread for $5, which less the $2 profit would cost $3.