Morning Update – April 28, 2020

“LNG is being as hard as oil”

https://oilprice.com/Energy/Gas-Prices/The-LNG-Market-Is-Imploding.html

I saw this article headline yesterday; it has some good info. Not breaking news, but good info.

My Positioning:

UNG – 25% in with an average of $13

USL – 13% in with an average of $11.41

I do not plan to add or reduce today unless there is a drastic move in one direction or another.

I wanted to share an options trade for anyone interested. I’ve already be selling covered calls, and HFIR had shared one last week so I bought 100 shares of DBO and sold 1 call to see how it would do. I’m going to wish I had taken on more, but this is good for learning. I remember now that I had mentioned this trade late last week. I did take it in my cash account.

DBO Covered call position
Entered DBO trade 4/22/2020

So I bought 100 shares at $5.54 for a total cost of $554. I sold a $4 call for $1.9; after commission I get a credit to my account for selling this call of $189.35 (we’ll round down to $189).

I look at this trade in two ways. 1st – I’m protecting my 100 share position down to $3.64 ($5.54-$1.9=$3.64). Since I get a credit of $1.9, I can apply this to the share price and treat it as protection to my position.

The 2nd thing I look at is max gain. Because I sold a call, if the underlying share price goes higher, my call loses me money. Now I still get to collect the left over premium, or extrinsic value after the difference in my purchase price and the strike price. I’ll attempt to simplify this here.

  • Call Value when I sold it – $1.9
  • Share price at purchase – $5.54
  • Strike price – $4

The only profit I can make is the difference in my share purchase price of $5.54 and the strike price of $4, then subtract that difference from the premium. $1.9+$4-$5.54=$0.36

So all I can make is $36 before commission, but this is almost 10% against the value of the trade. I did pay $554 for the shares, but got a credit to my account of $189. So the net cost is $364.65. so after commission of $0.65 when I sold the calls and again when the contract expires or I buy it back for maybe $0.01, I will make around $34. So $34/$364.65=9.32% of a max gain. That’s not bad for holding a trade for 23 days.

Back to the part about selling $4 calls. I could have sold $5 calls and made more money as long as the price of my shares stayed above $5 at expiration and maybe have made more like 15% on the trade. I chose $4 in case the market tanks and I can still make 9.32%, even if my share price falls to $4. That is a good deal. There is still risk, because if the share price drops below $3.65, I start losing more money in the stock than I collected in premium.

Covered calls are a good option trade from me right now since I’m already buying ETFs anyway. These calls are helping protect my investment tremendously. I can’t advise anyone on covered calls, but I might be able to help find answer to questions you might have. Good Luck

Oldinvestor

Something I didn’t mention, the premium decays over time, because as the contract that I sold (5/15/20) gets closer to expiration. The contract is worth less because there is less of a chance for the price of the stock to go up. This decay is making me money faster than the decline of the price of the shares. I didn’t predict this or plan for it; it just happened this way so far. The price of DBO could still fall hard and cause me pain, but I’ll rest easy knowing I only traded $500 worth and that my position is protected down to $3.65.