Why I Bought Back My MicroStrategy (MSTR) Covered Calls - A Quick Strategy Update
If you've been following my trading journey, you know that I regularly engage in covered calls, and sometimes things don’t go exactly as planned, especially when the stock price moves unexpectedly. Today, I want to share why I made the decision to buy back my MicroStrategy (MSTR) covered calls, despite some unexpected market movements. Let’s break it down.
The Current Position
As of this morning, MicroStrategy has been showing an interesting performance. Here's a quick look at my position:
- Stock Price: $777 (up 7.7% on the day)
- Base Position Calls: I rolled down an out-of-the-money call, and now it's showing a $6.90 premium increase.
- Covered Calls: I have 7 covered calls against this position, with a $2,000 unrealized loss.
Despite being in the red on my covered calls, my base position calls are doing well, showing a solid gain of $4,810. So, here’s the question many new options traders ask: what happens when the stock price moves higher? Am I losing money on my covered calls?
What Happens When the Stock Goes Up?
Let’s use MicroStrategy as an example. When the stock price rises, the calls I’ve sold against my position might lose value, but that’s part of the trade-off when you're in a covered call strategy. The big question is, should I buy back my covered calls in situations like this?
While the price increase might seem to be a loss on the surface, it’s important to consider both sides of the position. The base position (which I own) is actually in profit due to the stock price moving up, even though the calls are working against me.
How Does This Work?
The key is to understand that in many cases, the stock price rise can still lead to profits despite the loss on covered calls. For example, on my Tesla position, I had in-the-money calls that caused some concern when the stock went above my strike price. But the profit on the base position itself outweighed the loss on the calls, and that’s the power of this strategy. The overall profit from the stock itself has allowed me to weather those ups and downs in the options market.
So even when the stock rises and goes above the strike price, you’re not necessarily losing money—if you’re managing the position correctly, the gains in your stock can offset the losses from the covered calls.
The Strategy When Stocks Are Falling
Now let’s shift to a situation where the stock price is falling. For the past few weeks, MicroStrategy has been down 50%, but the position is still holding steady in terms of profitability, primarily due to the way I’ve been rolling down the calls and fortifying my position through collecting premiums. This has been a learning process, and although the stock has fallen significantly, I’ve continued to make money.
That’s the beauty of the covered call strategy—it allows you to keep earning even when stocks are down, as long as you manage the position and adjust accordingly.
Buying Back My MSTR Covered Calls
Here’s where the real decision came into play: Why did I decide to buy back my MSTR covered calls today? I’ve been tracking the stock for some time, and as we reached the end of the trading day, I saw that the price had dropped significantly.
I initially sold my calls for $2,010 per contract, but by the end of the day, the value had dropped to only $620 per contract. This is a significant drop in value, and I realized I could capture about 70% of my potential profit if I bought them back now. So, I decided to close the position for the day and get out.
It wasn’t an easy decision, but the key takeaway here is that timing is everything. The stock had fallen dramatically, and I believed that the gap would eventually fill. By buying back my calls at a lower price, I was able to lock in a solid profit and avoid any further risk over the holidays.
The Takeaway
This is part of the art, not the science, of trading options. The stock market doesn’t always move in a straight line, and sometimes you need to take a step back and make quick decisions based on market conditions.
Here are some key lessons:
- Managing covered calls requires flexibility: As the stock moves up and down, it’s important to monitor the position and be ready to make adjustments.
- Don’t be afraid to buy back calls: If the position has moved significantly in your favor, buying back covered calls can be a profitable way to capture your gains.
- Understanding both sides of the position is key: The covered call strategy works best when you understand how your stock positions and options interact.
This is a unique approach to trading options that you won’t hear many other people talking about. But it works, and over time, with consistent learning and adjustments, you can create a steady income stream from the stock market.
Life Improving Tips
- Embrace flexibility in your investments: Just as I adjust my options strategy with the market, you should learn to be flexible in your financial approach. If something isn’t working, tweak it rather than abandoning the whole strategy.
- Don’t fear losses, learn from them: Every loss is a lesson in disguise. Don’t let it discourage you. With each trade, try to understand what went wrong, and how you can do better next time.
- Create a long-term vision: Whether it's trading, investing, or building your career, having a long-term vision will guide you through tough times. Focus on growth and the bigger picture, not just the immediate wins.
- Manage your emotions: Markets will go up and down. It’s essential to not let emotions control your decisions. Stick to your strategy and avoid rash decisions.
- Start small and scale up: If you're new to covered calls or options trading, begin with a small, manageable position. Once you're comfortable, scale up as your experience grows.
FAQ
Q1: Why should I consider buying back my covered calls? A1: Buying back covered calls can be a strategic move if the stock price has moved significantly in your favor. It allows you to lock in profits and adjust for potential gains if the market conditions change.
Q2: How do I know when to roll down or buy back a covered call? A2: Monitor the stock’s price movements and your options’ premium. If the price has risen above your strike price or if the premium value has decreased significantly, it might be time to roll down or buy back the call to mitigate potential losses.
Q3: What are the risks of covered calls? A3: The main risk is that the stock can be called away if it rises above the strike price, limiting your upside potential. However, by managing your position and rolling calls, you can continue to generate premium income even in fluctuating markets.
Q4: How do covered calls work with a volatile stock like MSTR? A4: In volatile stocks, covered calls can provide income even in a down market. However, if the stock moves too quickly in either direction, it’s crucial to adjust your strategy accordingly to avoid substantial losses.
Q5: What’s the best strategy for beginners with covered calls? A5: Beginners should start with a stock they believe in for the long-term, and choose an out-of-the-money strike price for the calls. Keep your positions small initially and focus on learning how the strategy works before scaling up.
Call to Action
If you're interested in learning more about covered calls and options strategies, I invite you to join my Income Accelerator course. While the current round is sold out, I will be offering more sessions soon. Sign up for my newsletter to stay updated on upcoming opportunities to enhance your trading knowledge.
Conclusion
Covered calls are a powerful tool in an investor's toolkit, and understanding when to adjust, roll, or buy them back can make a huge difference in your profitability. Whether you’re a seasoned trader or just starting, the key is to remain adaptable, learn from your experiences, and stay focused on the long-term game.
