Sometimes the option buyers we lovingly refer to as degenerates really outdo themselves.
As we’ve discussed many times, I have been selling covered calls on favorite stock Guidewire (GWRE) since its IPO last year. The trading strategy has resulted in nothing that couldn’t have otherwise been achieved with a simple buy-and-hold thus far, but with GWRE prices roughly doubling in the last twelve months, I’m inclined to favor caution now more than ever.
My last sets of shares were called away at $40, and I’ve been sitting on the GWRE sideline for the past few weeks. Shares topped out with a close at 43.56 exactly two weeks ago, and retraced to drop below 40 briefly today.
When that happened, I couldn’t help but check to see the option prices around the $40 mark – and to my surprise and delight, I saw that the June 21 $40 calls could be sold at $2…a return of 5% in just 28 days!
So, I bought back in – picking up a bushel of GWRE at $39.99, and simultaneously selling the calls and netting $2 in cash per share.
If GWRE stays flat or trends higher between now and June 21, the trade will net an amazing 5%. If GWRE is lower, our cost basis on the shares will be $37.99 – a 5% discount from today’s price. From which we’ll likely turn around and sell another set of calls to generate more instant income.
After a (very) brief hiatus, the GWRE income trade is BACK on…tough to argue with 5% in 28 days if status quo or better is maintained. (via StockCharts.com)