It’s time to think about skipping strike prices across the surface of the options market.
Trading is a lot like skipping rocks across the surface of a lake, except it’s potentially profitable and not nearly as relaxing. But with so many stock prices at or near record highs, stock investors can find some appeal — and a lot of potential money — by selling weekly call options with strike prices that are at or just above the corresponding stock price.
The strategy is a way to get potentially regal premiums in the options market to agree to sell stock positions. The risk is that the stock price will rise above the strike price of the call, but more on that later.
(ticker: MRNA), one of the top performing names in the stock market. Shares of the vaccine maker are up about 255% this year, reflecting the company’s leadership in the fight against the Covid-19 pandemic.
In a normal world, many investors would take profits and sell some or all of the positions. But many investors want to hold on to what they have because they think – and lately they have made no mistake – that stock prices are only going up. In addition, the Covid virus shows no signs of disappearing.
For example, with Moderna’s stock at $389.84, aggressive investors could sell September’s $395 calls expiring on Sept. 10, which recently traded around $12.15. If the stock stays below the $395 strike, investors can keep the premium. If the stock exceeds the strike, investors can skip the call to the next weekly expiration, pick the same call or even a different one.
Over the past 52 weeks, Moderna’s stock has ranged from $54.21 to $497.49. Shares are up 503% in the past year.
If Moderna’s stock races higher and moves above the strike price, investors should adjust the call if they don’t want to sell the stock. The ideal time to adjust the position is usually no later than the morning of expiration Friday. In these cases, the call can be rolled out for another week or even a few weeks to reposition the strike price, ideally just above the stock price. When rolling positions, investors are again trying to get paid by the options market for moving the call.
This type of trading is aggressive and is not for everyone. Investors should not be sentimental about the stocks they trade. They should aim to use equity as a vehicle through which they can potentially pull money out of the options market in quick bursts. In addition, there is nothing tax efficient about this approach unless the trading takes place in a retirement account. The option premiums are almost certainly taxed as personal income.
As always, it’s important to understand the “event risk” that comes with options expiration. Events can cause a stock to move more or less than expected. On September 9, Moderna will organize an R&D day. On October 29, the company will report its third quarter results.
The skip strategy is radically different from the last Moderna trade we suggested. In July, we urged investors to consider an August bull spread in Moderna, waiting for the stock to fuel new concerns about the Covid variant.
At the time, Moderna’s stock stood at $321.11, and investors could buy the August $325 call that expired August 6 and sell the August $350 call with the same expiration date for $9. The bull spread rose in value to $16 as the stock closed at $413.72 on that expiration Friday.
The return on the spread made sense, but the potential return of the skipping strategy can make those spread strategies look like bank CDs. B
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialty asset management firm. Neither he nor the company has a position in the options or underlyings mentioned in this section.