DGI Adventure – 07-08-16 Sold Covered Call – Valero Energy Corporation (VLO) – $54.50 strike – Aug 12 Expiration

I made this trade yesterday morning, Thursday 07/07, but I wasn’t able to post this until today.

Way back on June 9th, I sold a put contract for VLO with a strike price of $53.00 and an expiration of June 24th. Shares closed that day at $54.39, so the trade had a short window but didn’t have a lot of downside protection, and I got stung by that. 

Also, selling a put with an expiration the day after the Brexit vote probably wasn’t the sharpest idea either. My MSFT put was similarly assigned that day.

While MSFT experienced a strong post-brexit bounce allowing a good opportunity to sell a call option, the VLO price action was a little more muted. There were opportunities, but I didn’t act until yesterday:

VLO One Month Chart June 2016 – Courtesy Yahoo Finance

Looking at that chart, yesterday doesn’t look like a very good day to sell a call. But take a look at a shorter duration chart period with more intraday resolution:

VLO Five Day Chart 06/30 – 07/07 – Courtesy Yahoo Finance

I happened to check the price just as I was starting work yesterday morning. Shares opened at $48.95, and at 7:30 (ish) they were up over 2%, topping out around $50.10/share. I decided to capitalize on the upward momentum while there was any, and sold the call contract. The trade executed at 07:37 PDT.

I received a premium of $0.49/share less a $0.79 commission for a total premium of $48.21. Using the $54.50 strike price as the denominator (which is what’s “at risk”) this represents a 0.89% absolute return. With the trade in force for 37 days, that equates to an 8.73% annualized return.

I would have liked a better annualized return, but the current price is quite a bit below my cost basis. It will take a substantial rally just to get back to even. I’m lucky to have a capital gain built in to this trade (if assigned).

Speaking of which, that capital gain of $1.50/share would be a 2.83% absolute return. Since I technically took ownership of the shares on Friday, 6/24, I would hold the shares for 49 days, so my capital gain would add another 21.08% of annualized return. So I really just traded premium yield for potential capital gains.

I’m not 100% sure when VLO is going to go ex-dividend. Back in 2013, the Q3 distribution went ex-div on 8/12. All the other recent years have been somewhere between 8/13 and 8/18. This trade should expire before the ex-div date, but I will want to keep an eye on it just in case.

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