I have never myself, nor do I have a desire to, skin a cat, but I do understand there are multiple ways to do this, and being flexible in thoughts and plans is an important trait in life. This week I realized that there is a way to pickpocket the stock market on certain days. With yesterday being the third red day in a row and the stocks I bought specifically to sell covered calls on all riding down I decided it was time to through the sunk cost fallacy into the ocean and ride down with the positions.
The danger in pickpocketing is getting punched in the face, and the secret to investing is making losses small and wins big. So there we were watching all my covered call positions dip deeper and deeper into the red. The original plan was the sell weekly covered calls 4-5% out of the money and wait for theta to eat everything while hoping the stock rises 3-3.5% on the week. That’s the best case scenario and we all know that never happens.
With chaos creating opportunity I rolled my position down on Tuesday and down again yesterday. I was still 10% out of the money when the market closed and then Micron’s earnings came in. Let’s pause here for me to tell you I don’t own a single share of Micron and if you want to see the market at its most illogical now is the time to do it, but because Micron had an earnings beat the stock I owned to harvest covered call premiums suddenly covered that 10% and now I have a decision to make.
This is where the cat skinning comes in. Option 1 is to do nothing. Accept the risk I agreed to and if the position gets called away take my money and put it somewhere else. Option 2 is to look at basically selling theta to buy delta. This is the closest to the original plan. It keeps me in the position and harvests more premium while the stock recovers and grows. There really isn’t an option 3 on this unless we want to act like option 1 is really more than one option.
On a day with a business meeting, two interviews with potential hires scheduled, and having to finalize the estate audit, and do grocery shopping I am not in a position to watch the market for the perfect roll time, but part of the art of being flexible is recognizing that good enough is good enough and that neither option 1 or 2 or bad. They are simply different paths to the same conclusion.
David Huzzard Writes 