Sold March IWM Covered Call

Continuing with the plans I mentioned in a recent post, I sold an out of the money covered call on my 100 IWM shares this afternoon. While IWM was trading at $145.77, I sold one IWM $151 covered call for $2.15 and received $214.33 after paying $0.67 in commission. The contract had a bid/ask of $2.07/2.10 when I entered the order, so I thought I might have been acting a little too aggressive in my expectations for another bump higher on the day/week after an already spectacular rally.

IWM traded as low as $125.81 on December 26. It hit a high of $146.33 this afternoon, before I entered my trade. That was a $20.52 gain from intraday low to intraday high in less than a month. A 16.31% gain is enough for me to think it’s time to look for an exit price, if not at least cut my losses some with the call option premium.

If this contract is called away in March, I’ll make a 5.06% return, 31.88% annualized. If it isn’t assigned, I’ll make an annualized gain of 9.26%, not including any price movement in the underlying ETF. I thought about using a higher strike to maximize my potential return if assigned, but I decided I’ll be happy to see a 21% gain from its intraday low in December and then reconsider my next step from there.

If assigned, my exit price will be $153.14, including the premium. I drew a handful of trend lines that seem to make that a reasonable exit price. The lowest of the trend lines is the trend line of lower highs that began on October 9, 2018. The same line came into play on November 8 and December 4 and 5. We’re getting close to it now with the trend line descending to around $147.70 today. Based on this line alone, I could’ve sold at the money and been OK. However, I’m sticking with my plan for now and pushing for more room to run on my stocks and ETFs.

The Fibonacci 50% retracement is approximately $149.60, which also would’ve worked well for selling a lower strike than $151. The Fibonacci 61.8% retracement is around $155.21, which helped me push my strike higher. While I’d be leaving money on the table if IWM makes it to this line, the timing would have to be dead on to cause me to miss out. Resistance found around $155 will result in a good exit point for me if the timing works. At that point, I have to think small cap stocks will be due for a consolidation period, if not a slight dip.

I still have a good bit of cash on the sideline that I need to put to work. I’m also planning to sell covered calls on my ADI and XLF shares tomorrow if not Monday. My FEZ shares are uncovered still too, but the premiums aren’t too good. I might go ahead and sell a covered call to pull in a little cash anyway. The same goes for half of my AAPL shares. My one March call is slightly in the money, so I might let the other 100 shares run longer or take advantage of the higher share price to sell another call at a higher strike. I doubt I’ll make this trade tomorrow, but it’s on my radar.