One of the golden rules of the BCI methodology is never to sell an option (call or put) when there is an earnings report due out prior to contract expiration, explains Alan Ellman of The Blue Collar Investor.
Most of the time, we avoid holding these securities in our option-selling portfolios due to the risk inherent in these reports. However, there are exceptions when we have so much confidence in the underlying security that we decide to hold it through the report and sell the option after the report passes. We may consider this approach when a company has a history of favorable reports or when we want this stock to be part of our longer-term buy-and-hold portfolios. On 7/22/2021, Alan, a premium member, shared with me such a series of trades he executed with Crocs, Inc. (CROX) with remarkable results. I will show these in 100 share increments, although he held larger positions.
Alan’s Trades With CROX
- 6/28/2021: Buy 100 x CROX at $115.73.
- 6/28/2021: STO 1 x $120.00 7/16/2021 call at $2.73.
- 7/08/2021: BTC 1 x $120.00 7/16/2021 call at $0.25.
- 7/08/2021: STO 1 x $115.00 7/16/2021 call at $2.05 (roll-down).
- 7/16/2021: CROX closes at $112.26, and the $115.00 call expires worthless. No option was written until the ER passes.
- 7/22/2021 (pre-market): CROX reports a favorable earnings report.
- 7/22/2021: CROX gaps-up in value to $131.00 when market opens.
- 7/22/2021: STO 1 x 8/20/2021 $135.00 call at $5.00.
CROX Initial Calculations With the Multiple Tab of the BCI Calculators
CROX: Initial Calculations
The initial trade structuring shows a maximum 18-day return of 6.1% (2.4% + 3.7%).
Rolling-Down Calculations
The status of the trades as of 7/8/2021, after rolling-down was a 10-day return of $106.00 or 0.92%, 33.6% annualized. This incorporates the net option credit as well as the unrealized share loss at that point in time.
CROX Post-Earnings Initial Calculations With the Multiple Tab of the BCI Calculators
CROX: Post-Earnings Initial Trade Structuring
After benefitting (unrealized, at this point) from the post-earnings gap-up in price, an additional 3.8% premium was generated with another potential 3.1% of share appreciation. Let’s calculate the current status of these trades as of 7/22/2021.
Overall Trade Status
- Stock side: $131.00 – $115.73 = +15.27 per-share.
- Option side: $2.73 – $0.25 +2.05 + $5.00 = +$9.73 per-share.
- Total net position: $24.80 per-share = 21.4% 53-day trade = 147.4% annualized.
Discussion
In our BCI methodology, it is critical to avoid selling options when there is an upcoming earnings report prior to contract obligation. There are times when we have extreme confidence in the underlying or simply want to hold it in our portfolios for the longer-term, in which case we allow the report to pass and then write the call. Of course, there is always the risk of a disappointing earnings report. In this case, a substantial (unrealized) return was enjoyed as of the date of the third option sale.
Learn more about Alan Ellman on the Blue Collar Investor Website.
