A Peek Into the Mind of an Options Trader

I do a lot of things routinely in my options trading. It occurred to me that many readers might now know, or understand, my reasoning for those trades.

In that light, here are some of my recent personal trades, with actual dates and prices, to show you my thought processes.

All the data shown comes directly from TradeStation. All were real money transactions. I blocked out my account numbers for obvious reasons.

All these trades took place between Dec. 6 and Tuesday.

When consumer price index inflationary numbers came in lower than expected on Tuesday (premarket), the Dow Jones industrial average futures surged by about 700 points. It was clear that most stocks would shoot higher on the opening.

Times like that offer great call-writing opportunities as the public gets excited and wants to buy "risk on" trades.

American Woodmark (AMWD)  has become my single largest dollar holding. As such, I hold a massive, long position. Tuesday morning thus gave me a chance to sell out-of-the-money covered calls at favorable prices.

I shorted 30 contracts of July 21, 2023, $75 strike price covered calls sold at prices ranging from $2.90 to as high as $3.40 per share. I also placed orders to sell $80 calls for that same expiration date but was too aggressive in my asking prices. Those did not fill.

Four separate accounts shared in the sales.

Taken as a group, I collected a total of $9,189 in option premium for those 30 covered calls, an average of $3.063 per share.

What did I commit to in selling those calls? If AMWD reaches and holds $75 on July 21, I'll be forced to sell 3,000 shares of AMWD at a net cost of $78.06 per share. AMWD closed on Dec. 13 at $56.09. If I am "called away" the value of those shares would have grown by $65,910 from that day's value.

If AMWD goes even higher by expiration day, I have plenty of other shares to participate with. If it doesn't exceed $75 by then, I'll have made almost $9,200 on the expired calls.

I can live with either result, but I'd absolutely be better off if the shares reached $75.

As they say on late night TV infomercials... "But wait, there's more."

There is another underappreciated side benefit of collecting $9,189 of other people's money in advance. In three of the four accounts I immediately used that sum to buy shares of Caleres (CAL)  and Signature Bank of New York  (SBNY)  at what I deem to be bargain prices.

The four-share lot of SBNY rounded up an odd-lot to a round lot, making it possible to sell an additional covered call later when the time is right to do so.

The following trades were executed in one of my IRA accounts.

On Dec. 6 in the premarket Signet Jewelers (SIG) reported much better than expected results for its fiscal third quarter. The shares jumped way up from about $58 to north of $70.

Here is the beauty of being an option seller. I had previously sold two Dec. 2, 16, 2022 expiration date, $66 covered calls thinking they might expire worthless. After hearing this news I didn't want to let my shares go.

I was able to buy back those December 2022 $66 calls for an average $5.35 per share while shorting July 21, 2023 $95 calls at a price of $5.50 per share. In option parlance that meant "rolling up and out" for a 15 cent credit per share.

I gave up eight months extra time while ratcheting up my strike price by $29 per share (from $66 to $95) and I was paid $30 to do so. How cool is that?

SIG closed at $70.34 on Tuesday, meaning I've already gained $4.34 per share, on paper, by rolling up the strike price.

That same day I also shorted two contracts of Berry Global (BERY)  June 16, 2023, $80 strike price covered calls at $0.85 per share.

The final trades, shorting 15 contracts of CAL Dec. 16, 2022 $25 calls was made to try to scalp a quick $185 if the stock closes below $25 this Friday. That is likely to happen with Caleres hovering about $22 the past few days.

Here's another IRA account where I shorted more BERY June $80 calls, plus very short-term calls on Caleres, Jack in the Box (JACK)  and G-III Apparel (GIII) , which are due to expire this week. If GIII shows signs of closing at $15 or higher, I'll probably look to roll them up and out. If not I'll have pocketed a quick $60 in a tax-sheltered account.

The single JACK $75 call only brought in $15, but is almost certain to expire worthless.

More interestingly, I paid 5 cents per share to close out three SIG Dec. 16, 2022 covered calls on Dec. 6, even though they would likely have expired this week also.

Why did I "waste" $15 to do that? I was able to short July 21, 2023, calls at the $95 strike price while traders were desperate to buy on that day's great news. The $5.20 premium brought in $1,545 more than I had to pay to close the short-term $90s.

I used most of that cash to round up my SBNY position, using other people's money. I channeled the remainder into more shares of Wolverine World Wide (WWW)  at a great price of $10.12 per share. As of the opening on Wednesday, WWW was already north of $11.

I was pleased to see that three insiders at WWW bought over $1.11 million of shares last Friday at an average cost of $10.47.

Any money made via purchases of shares with call option proceeds needs to be figured into the total value of the option sales. That is above and beyond the potential rise of the underlying stock to the strike price employed.

I hope these insights into my way of thinking regarding option trading has been helpful. 

At the time of publication, Price was long shares and short options on all stocks mentioned.