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Hey Fools

COO worked out poorly for me. I got in at 237.29 after which COO tanked. I sold $230 calls for 8.61 (which given my purchase price maybe I should not have - thoughts?) Then, and only then COO started its ascend. Ah well. A total of $1.32 in profit (bar possible costs for the execution of the call) – 0.5% in profits! Not exactly what I call North Star beating performance here.

So why this whole ordeal? Do we no longer believe in our thesis, which sounded good when it was written? Why let the shared be called away? Can anybody explain the rationale behind this whole trade? Frankly, why was there a recommendation to cover COO when our thesis was that it should perform really well? (and why did I follow it - only I can answer). I thought that we only do covered calls if and when we are ready to let shares go, which for me in this case wasn't really the case, or did I miss an update to the investment thesis?

My main question is: when does it make sense to write covered calls that if executed effectively lock in a loss (or, in this case, basically a wash)? And this is no hypothetical question for me, as I have yet to executed covers calls on JnJ which would result in a major loss if executed (which is why I haven't, so far, written any).

Any feedback welcome!
- Zy
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Zy,

So, have you closed out the position? When you got in, did you do the "buy-write" as a single transaction, or two separate transactions?

My understanding of the COO position is that PRO was looking for income, not growth, from COO. I think the thesis was that they felt that the company was/is strong, but not one that is likely to rocket. Now, things may not have worked out 100% as expected, but I have to say that, so far, it is doing just fine for me. My first short call expired worthless (but I was off-reservation in that I had a March expiration instead of May for my $240 short call). So in early April I realized that Pro still had its short call but I didn't have a short call, so I wrote one on April 6th, a $230 May 2018 call. I rolled that one out in May and again in June. Then in July I rolled it up and out from July $230 to Nov. $240. As of right now, I'm showing an XIRR of just over 14%. That's an annualized average return on investment for each dollar invested that takes into account each date and cash flow amount (positive or negative). So I think that's pretty good. Each time I've managed to receive a credit, and my break-even price per share has dropped from $230.55 to $216.04 over the course of the nearly 7 months I've been in the position.

I should mention that it did not appear to be doing all that well at various times, especially early on. But over time, and as I've rolled out, or up and out, for credit each time, it has gotten better. And the fact that the stock is trading above my strike price doesn't really bother me because that says that I'm "hedged out", and the stock would need to drop by about $13 per share to hurt my profitability on the position. I will also admit that I haven't followed Pro exactly as recommended, mainly because I had trouble achieving the prices they suggested that I should be able to get. It's been kind of hard to achieve the guidance, so when that happens I tend to go off on my own and follow the spirit of what they're recommending while not keeping exactly in lock step.

Dan
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Thanks Dan for sharing! You did well. And no, my broker messed up the buy/write trade, I had forgotten about it and that mistake will have added to the poor outcome.

-zy
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… and no, I haven’t yet closed out the position, that’s basically why I posted here.

-zy
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-zy,

I see you could have rolled TODAY to Nov18 for a $4.80 credit - VIX is up considerably.

Good luck.

Nonacutum
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Zy,

My advice is to hang in there. Keep on rolling your short call, and if possible, roll for credit each time. If you can keep on reducing your basis in the position with each roll, then I think you'll eventually see some decent gains on it. I doubt it's ever going to be one of your most lucrative positions, but it should provide some steady income. I would also advise you to track each position via a spreadsheet so you can see all of the cash flows associated with that position, including dividends and any options trades that pertain to it. If you set it up correctly using Excel, for example, you can use the XIRR function that is built into Excel to calculate the internal rate of return for the position, taking into account all cash flows in and out. It took me a while to figure out how to make that work, but it was worth doing, I think. That helps me to evaluate how each position is doing. Of course, I don't look at this every day, and sometimes not even every week.

I think Pro likes to do these types of positions that bring in cash flow on a regular basis as a way of balancing out the portfolio. We don't want every position to be high-growth like SQ, FB, or BR. Some positions may be high growth, but it's good to have some that merely provide a source of steady income. But in many cases high growth also comes with high volatility, and sometimes more risk (those two aren't synonymous). So we want some that are much more steady, which helps to explain why JNJ is in the portfolio.

The HD diagonal also comes to mind, although that one employs a bit of leverage since we have a long call instead of shares in the case of HD. COO didn't make much sense as a diagonal because it doesn't have LEAPS, or they might have considered that. Right now the longest-dated options expire in Feb. 2019. We also had VRSN until just a couple months ago or so, which also did great. I actually implemented that one as a diagonal along with a short put spread, and that worked out really well for me.

Dan
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Zy,

You can't play the IFism game unless you want to drive yourself crazy. Everything is random. No one knows anything and the clarity of hindsight is truly amazing. It took me 10 years to internalize this lesson. I hope you can do it sooner.

COO worked out poorly for me. I got in at 237.29 after which COO tanked. I sold $230 calls for 8.61 (which given my purchase price maybe I should not have - thoughts?) Then, and only then COO started its ascend. Ah well. A total of $1.32 in profit (bar possible costs for the execution of the call) – 0.5% in profits! Not exactly what I call North Star beating performance here.

Beats the loss after it tanked, no? Actively managing the UL turned a loser into a small winner. COO could still be sitting at its lows, in which case you'd have made your position 8.61 less painful. Since you have no idea what the UL will do, you might as well sell calls.

My main question is: when does it make sense to write covered calls that if executed effectively lock in a loss (or, in this case, basically a wash)?

If you're in a losing position, it always makes sense to write CCs to reduce your basis. You have no idea what the stock will do, you might as well play defense and take some of the sting out. The best time to sell CCs is when the stock is nearing all time highs and you get an uptick in volatility. But usually that uptick in vol comes with a downtick in the UL.

We have a great team at PRO, but not even they can predict what any stock might do. Again, the market is random and so are all things in life for that matter. Luckily for us, most of the time we live inside the standard deviation.

Cheers,
Travis
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Great points, Travis.
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Thanks for chiming in, very valid points indeed!
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Not everyone has the same results on COO.

With rolling more aggressively than Pro, I currently have Nov $250 calls on COO, which if called then will give me a gain of $30.57 per 100 shares, a 21% gain in 10 months, something that I can't really complain about. I may even be able to roll those nearer expiration for more gains, but if not, I am happy with where I am at. Sometimes going off the Pro reservation improves gains, but one takes the risk in doing so.

Michael
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