Vertex Calls Sold – Should I Close?
I know the synthetic theory of Puts and covered calls and I sell both naked puts and calls on stock I own. I have never entered a covered call as a Put is the better trade; less expensive and usually marginally more profitable. Believing writing covered calls is conservative made it as my fifth biggest mistakes in option trading. But I always wonder when I sell a call, “what the hell am I doing!” Why don’t I just sell the sell the stock and sell a put. Tax is my normal reply in my internal dialog, but am I deluding myself? There’s also the fact that I already own the stock and prefer to make one trade rather than two.
I don’t think I’ve ever worked it out, so here goes on a real trade I placed recently. I’ll try to throw in some of my quaint Fusion Analysis as well.
Two weeks ago Vertex Pharmaceuticals Incorporated (VRTX) looked to topping out. You don’t really even need any TA to have an opinion on whether a stock is getting ahead of itself, but I do find TA to be a useful adjunct to my fundamental opinion.
VRTX was approaching its one year high, a level at which it appears slightly overvalued. The stock has dropped off these levels three times in the last year. With so many underpriced securities around, with many investors over the past three years having bought around these levels and with a good run up since April it looked like a good time to be selling my shares. But I still like the company and long term prospects, especially since Matthew Emmens took over as CEO back in February. People I respect in the pharma industry have called Emmens a golden boy with a midas touch (hopefully at 57 he’s flattered by being called a boy).
A quick look at the chart shows the price pushing up through it’s upper Bollinger Band, climbing well above it’s 50 DMA. As there is no big fundamental news expected in the near term, it seems unlikley that the price would continue to climb.
As I can no longer be bothered staying up late or interrupting my sleep to trade in the US I placed a sell limit at $1.80 on the July $35 Calls. It was tirggered that night, 26 June, with VRTX at $35.89.
I also didn’t want to sell the stock as that would give me an instant tax hit, right at the end of the tax year.
But, I can’t help think that I would never sell a Put on a stock I thought I was peaking, so why the hell do I sell a call? Is there something better I could be doing?
Should I Close Prior to Expiration?
The calls are now selling for $0.65 ($0.60-0.70). I have got 64% of the value in 5.5 trading days and there are nine trading days to go for the remaining 36%. I normally don’t close sold calls, I’d like to say I prefer to let them expire, but the truth is I’m too lazy to follow them closely and make prefer to make fewer decisions. Hence I make one decision to sell the call and leave it and that. I haven’t analysed past trades, but it is likley I would be better off if I was more active with my option positions.
I’m not even sure the best way to analyse the trade to decide whether to close.
- When I sold there was $0.91 in time value ($1.80-0.89), now there is $0.65. So from a time value perspective I have only received $0.26 and there remains $0.65. Hold.
- As mentioned above 2/3 of original sales price already gained in 1/3 of time. Sell.
- The theoretical option value is $0.356, so the calls are expensive. Hold.
- My original plan was to hold to expiry.
- If the shares were below $35, pocket the cash and decide whether to sell August Call. Hold.
- $35-36.70, buy back call on final day of trade and sell August call.
- $36.70- $38, sell August Put.
- Above $38, wait and see.
I want to hold VRTX through to approval of their leading Hep C compound Telaprevir, but wish to squeeze some more juice out of it in the meantime. I always say there is no such thing as upside risk, yet as I look at VRTX the biggest risk I see comes from a takeover bid.
I feel like I could be playing this better and am open to any recommendations.
I just went and re-read my option post linked above, writing covered calls is not conservative, and this jumped out at me. Never sell a call as an exit strategy. Absolutely never ever sell a call as an exit strategy. If a stock has risen to fair value or above and you do not want to own the company for the long term then sell the stock or enter a collar (sell a call and buy a put). I think that is my problem with trades like this. The stock is at my fair value and I think it is peaking, but I want to own it long term. Next time I’ll look at the collar, I had totally forgotten at using that as a strategy in this situation.
Related posts:
Leave your response!