Last week on "Options Action," Mike Khouw suggested the simplest of options trades, selling a covered call against Best Buy stock, which we thought could be dead money on earnings. Fast forward one week, and Best Buy is now trading for $43.30.
So what now?
Well, let's look back at the trade. When Best Buy was at $41.00, Mike recommended selling the June 43-strike call for $1.50, a strategy that is most profitable if Best Buy stock trades just below $43 by June expiration.
While some would dismiss the trade as a loser, he's why it worked.
That call that you sold for $1.50 is now worth $2.50, making for a $1.00 loss if you bought it back today. But the stock is up $2.60, so net-net, you're still up a $1.60. Not great, but better than a sharp stick in the eye.
So what to do now with that call? For starters, perhaps it could be time to revisit the original premise that the stock was so-called dead money.
"If one’s thesis is now more bullish than before, one could always cover the calls," said Khouw. "If your view is that the stock now fully bakes in the new data, it may well make more sense to sit tight and let the decay kick in, and revisit closing the call position closer to expiration."
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