Covered Calls · Investing

Covered Calls Experiment Update

As with anything investment-related, see my disclaimers. This post deserves an additional disclaimer. Investing involves risk. Trading stock options is extremely risky and you can lose 100% of your investment. My story is provided solely for entertainment purposes and in no way do I recommend doing what I did. Or anything else, for that matter.

It’s been four months since I posted about my experiment selling covered calls on some stock in DumpsterFireInc.  With the pandemic and the associated crazy market volatility, it’s felt like much longer than four months.  Its a good time to check in with how my experiment has been going.

The Good

The good news is that I’ve collected over $2k in premiums selling covered calls since January 1st.  Collecting these premiums has boosted my IRR for the year over 5%.  These premiums are considered short term capital gains and are taxed at my marginal rate of 22%, so it’s actually just under 4%.  

I sold options 9 different times but I haven’t had a single option that has been assigned.  My 5/29 options were close to the strike when they expired, but $.02 underwater is still underwater.  About half the time I exited a call option early by repurchasing the call and the other half I’ve let them expire worthless.  I still have two active calls that haven’t expired yet.

Also good news: DumpsterFireInc hasn’t fallen to zero. Yet.

Here are the options I’ve sold:

Date Option Qty Expiry Outcome Net Premium
1/2/2020 $19@$.99/share 10 6/19/2020 Repurchased 1/24 @ $.52/share $460
1/7/2020 $20@$1.12/share 5 6/19/2020 Repurchased 1/24 @ $.36/share $370
1/15/2020 $20@$.32/share 5 3/20/2020 Repurchased 1/24 @$1.5/share $70
2/13/2020 $20@$.22/share 5 3/20/2020 Expired $105
2/13/2020 $20@$.60/share 10 6/19/2020 Active (will likely expire worthless) $590
3/25/2020 $12@$.96/share 2 4/17/2020 Expired $190
4/30/2020 $12.50@$.29/share 4 5/15/2020 Expired $113
5/20/2020 $12.50@$.37/share 4 5/29/2020 Expired $145
5/29/2020 $13.50@$.16/share 10 6/05/2020 Active $120


The Ugly

Let’s skip the “Bad” and go straight to “Ugly”.

Like many stocks, DumpsterFireInc took a pandemic beating in March, falling from $16.78 on January 1st to a low point of $8.11 on March 16th.  It’s recovered a little since to nearly $12½/share.  Over all, my IRR for the year on my DumpsterFireInc stock is -47%, with my covered calls “sweetening” it to -43%.  Ouch!

Call me crazy.  I doubled down on my bet, buying more shares as the knife fell, accumulating an additional 400 shares at various points, which I then started using as collateral for more covered calls with expirations only 2 to 3 weeks out. 

I’ve pulled back on selling options on the shares I owned prior to the pandemic pullback, mostly because I still think the pandemic’s effect on DumpsterFireInc is little more than hysteria.  Am I in denial?  I’ve already been sitting on the shares for a few years, what’s a few more?  Yep, plenty of logical fallacies in my reasoning for holding on to the shares a day longer.  Any rational person would probably cut the position and move on.


One thing I haven’t touched on much is the fees for the option writing that I’m doing.  I’m still working on simplifying things, but over the past year I’ve used three different brokerages to trade options: Robinhood, Vanguard, and Fidelity.  

Robinhood was nice because they had zero fees for buying/selling stock or options.  Of course you “paid” in other ways, like restrictions on how soon you could trade with deposited money (unless you paid for Robinhood Gold) and their several meltdowns in the face of heaving trading during March shook my confidence in them as a safe avenue for trading.

I’d prefer to do all of my trading at Vanguard. However, while stock transactions at Vanguard are now free (thanks to pressure from Robinhood and others), they do charge $1 per option contract.  Fidelity is slightly less at $.60 per contract.  I have a mix of DumpsterFireInc at both Vanguard and Fidelity so my average fee per contract averages somewhere between $.60 and $1.00/contract.

Next Steps

I picked up my DumpsterFireInc positions in 2016 and in that time the stock has moved mostly sideways.  There’s always been a hope for a buyout, but four years of nothing is a long time.  I’m not quite ready to part with all of it as I still think there’s a future buyout or something else in the cards.  I’m probably being an idiot and not just selling it all and moving on.

So what to do next?

The first step I’m going to take is start selling more out-of the money covered calls.  DumpsterFireInc is trading around $12.50 this week I’ll put up more of my shares as collateral and sell some $13.50 calls that expire in two weeks, netting a premium of ~$.35/share.  If the stock rises and I get exercised, so what.  I already kinda-sorta want out and $13.50 isn’t terrible.  If the stock tumbles from where it is today, I’ve “bought” $.35 worth of insurance.  And if it goes sideways some more and stays under $13.50 (in my opinion the most likely scenario), I’ll walk away with the premium and the opportunity to do it again in two weeks.

In a way, my plan is to use covered calls to stumble my way out of my position.  We’ll see how it goes.

Final Thoughts

It’s been a year since I sold my first covered call in DumpsterFireInc.  It’s been both interesting and educational.  I’m still trying to grok the advanced option ideas that ERN puts forth here, and hopefully my experience will help in that regard.

Hasta luego!

2 thoughts on “Covered Calls Experiment Update

  1. Despite teaching options, I remain highly skeptical of trading options and vehemently discourage my students from doing so.

    In aggregate, it’s zero sum (every $1 of gain is generated by a $1 loss from someone else). I can’t get excited about that.

    That said, Big Ern is smarter than me so maybe I should reread his posts to try to understand his rationale.

    1. I’ll buy it that it’s zero sum for most people. And there’s a certain amount of lottery fever that drives many option buyers. At the same time, I also get the argument that it’s a form of insurance/hedging and has it’s place. But the insurance argument is generally not what drives the lottery fever.

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