Last week we made this trade on $ACB :
On 12/4 at closing bell, $ACB’s price was $10.88 therefore our $11 Put options contract were auto assigned and we purchased 500 shares of $ACB at $11 a share, $5500 total invested.
Average Cost
It is very important to always keep track of your average cost per share when doing, “The Wheel”. Robinhood does a great job of tracking that for you but it will not track any premiums you have collected. Because we collected $600 last week we can substract that from the cost average shown.
Initial Investment – Credit Received / Amount of Shares = Average Cost
($5500-$600/500=$9.80 Cost Average)
We now know that as long as we sell our shares of $ACB above $9.80 a share we will make profit.
Step 2
So what do we do now that we own the shares? Well we just do what’s called a covered call, we will write a call using our shares as collateral this time. In the first step of “The Wheel”, we used cash as collateral and wrote a put.
What we have to find out is the strike price that is best to sell our covered call at. Using our formula earlier we know that as long as we sell above $9.80 we will make profit. Because we also want to capture last weeks profit the $11 Call looks like the perfect choice! This strike price will allow us not to lose any of the profit from Step 1. For more credit we choose the expiration date of 12/24 instead of our usual weekly expiration.
To collect more premium as well, we have decided to extend the contract to 12/24.
On December 7th, 2020, we sold 5 covered calls on NYSE:ACB stock with an expiry set in the next 17 days. For this trade, we get a premium of $515(5 x $103) (before commissions).
This trade comes as the #5 in the month of December, according to our trading plan for this month, the premium generated from this trade makes us about 25% of our $2000 monthly goal, while in total we have already reached 75% so far.
ACB is one of our favorite stocks to trade credit spreads / covered puts on, since April 2020, this stock has made us the most options income so far.
Here is our trade setup:
- STO 5 ACB DEC 24’20- 11Call -1.03 USD
For this trade, we got a premium of 515USD (after commissions) or a 10.5% potential income return in 17 days.
What happens next?
On expiry date December 24, 2020 ACB is trading at or above $11 per share – our options contracts will be valid and our 500 shares will be sold and we keep the $515 premium. If ACB trades below $11 on the expiry date, we keep premium, and also get to keep our shares.
Because ACB is trading such on an uptrend we are essentially just using this trade with hopes that ACB does close above our $11 strike. This is the second step to our strategy , “The Wheel”. If ACB does fall below $11, we will just sell covered calls against our shares the following week, making us even more money and lower our cost average!
