One of the great benefits to co-hosting 2 Bulls in a China Shop with Dan has been the opportunity to learn from so many great guests. We’ve had some very knowledgeable people on the show lately who inspired me to try out some new strategies. One theme that often repeats is that options contracts don’t typically work out for the buyer. If I want to make money trading options, the best path seems to be selling contracts. I decided to go with covered calls as my first experiment, since it was the least risky strategy. To make the trade, a call option is sold and the premium is applied to the purchase of 100 shares.
The Target: OCGN
I used a volatility screener to find some candidates to execute this strategy and discovered Ocugen, Inc (OCGN). They are a Bio company that focuses more on eye diseases, but they have been co-developing a potential Covid vaccine too. The stock was extremely volatile, so the premiums on the options contracts were higher than I expected. The volatility stretched back to Feb 8, when Ocugen announced a direct offering to institutional investors at a ~27% premium. The price had fallen off since then, but that didn’t matter too much to me. The high premium on the direct offering indicated some good news was forthcoming and I did not see anything released to that point. Also, the stock seemed to be finding support around $8 per share, which gave me a reasonable entry point to aim for.
Making the Trade
On March 1st, I made my move. I purchased shares of OCGN for $9.63 while selling March 19 $12.50 call contracts at $2.13. The total cost of the transaction worked out to $7.50 per share. As long as the share price is over $7.50 by March 19, I’ll make money. If the contract does not get exercised, then I plan on selling more… I’ll just keep repeating the cycle until they do get “called” away. On March 3rd, their co-development partner (Bharat Biotech) shared the Phase 3 interim results of their Covid vaccine and the stock price shot up again! That spiked the volatility again and allowed me to trade another covered call. This time I sold April 16 $12.50 calls and got the same $7.50 total cost per share.
|OCGN Mar 19 Call||Sell||($2.13)||($0.88)|
|OCGN Apr 16 Call||Sell||($2.18)||($2.05)|
All in all, I’m really liking this strategy. My risk is managed since I already own the shares needed if the calls I sold are exercised. The benefit to me is the ability to purchase shares in the company at a nice discount! If the options contracts I sold end up expiring worthless, then I get to sell another contract, further lowering my cost basis for these shares. The main downside is if the share price drops below my breakeven point, I won’t be able to sell my shares unless I’m willing to risk losing my protection against the calls. I’m not too worried about that, as I aimed for an overall cost basis that was below the approximate support level of $8 per share. Bookmark this post for updates on the trade log!
More Like This:
- Organigram levels up!
- OCGN: Experimenting with Covered Calls
- 3 Bounce Back Stock Candidates Post Earnings Dip
- Semiconductors on the Rise?
- TXG Continues Hitting New Highs
- Peloton Hitting New Highs
- Is AMD Ready to Run?
- Checkpoint Therapeutics: The Taste of Success
- What’s going on with Purple Innovation?