Beating the S&P500 by 18% in February and Doing it with Less Risk
Every buy and sell order for the month revealed plus what I'm buying next.
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
It has been a weird second month of the year for the markets and especially brutal for many traders. If you've had a rough month of February you’re not alone.
No matter what you look at, the action has truly been on a rollercoaster. Many traders are suffering losses or just breaking even over the past couple of weeks.
These are the months that the Covered Call Strategy really pays off both for your mental health and your bankroll. I’ll walk through the mental benefits, and I mean it when I say less risk.
While everyone else is getting whipsawed by the markets, the Covered Call Strategy (CCS) smooths out returns and adds some downside protection.
More on that later. I want to talk about these great returns and how I got them!
This week’s newsletter breaks down like this:
What stocks I bought and why I bought them
What I sold and why
What I’m buying next, including price targets
What call options I’m looking to sell to generate more cash
I hope this information helps you become a better trader. Let me know what else you would like to learn about, and I will try to address your questions in future posts.
What I bought and why I bought it
Let’s get right to the good stuff. The stocks that were sold to produce these realized gains in February were DraftKings (DKNG) and Sofi Technologies (SOFI). So why did I buy these positions initially?
DraftKings (DKNG)
I bought DKNG in January at $11.53 in anticipation of the NFL playoffs. Historically, DKNG has enjoyed a run up during the NFL playoffs followed by steep selloffs. I expected more of the same this year.
I also was watching the range the shares were trading in and after noting the $10.50 level was holding, it looked like another opportunity to buy the dip and so I did.
Another appealing characteristic was the increased volatility at the time, which increases the price of an option. When you’re selling covered calls this increased volatility adds to the amount of cash you can collect.
I turned around and sold the $13 strike call option expiring 2/10 and collected a 3.4% gain immediately.
Pay attention to this last detail, which is especially important in an uncertain market. Selling calls adds downside protection. The 3.4% gain is also a buffer against losses, requiring the shares to drop from $10.53 to $10.13 before realizing any losses.
When you’ve sold a covered call and the markets move lower, you have offset those losses by the premium (cash) collected and are ahead of the game.
Sofi Technologies (SOFI)
I bought SOFI in January as well, getting in at $4.83 per share and sold the $5.50 strike call option expiring 2/10 collecting an immediate 3.7%.
The shares had been trading in a range between $4.45 and $4.82 and on 1/4 there was a break above the range on stronger than average volume. This is why I bought shares.
I saw this break on strong volume as a sign of more buying to come. And that is exactly what we saw happen.
I was also comfortable with the support at $4.45 after watching the shares bounce off of the level since November.
Another bullish signal was the twice failed attempts to push lower. There are long lower wicks on the candles that dipped below support, indicating buyers swooping in to maintain price levels.
A large part of the stock selection process for the CCS portfolio is focused on the options available for the stock we are interested in. For SOFI the options prices were compelling.
As noted, a 3.7% premium was collected for the $5.50 strike price. This means that the shares would have to climb 13.8% before reaching the price, $5.50, where they could be called away (the person that bought the call from me has the right to buy the shares at the strike price on the call at any time prior to expiration).
The opportunity to gain an immediate 3.7% with the strike price 13.8% away from the share price is one I will jump at every time.
What I sold and why I sold it
The CCS Portfolio is not where you go to fall in love with a stock. You must keep this in mind, first and foremost.
This portfolio is about capturing immediate cash gains while simultaneously offsetting downside risk. What you give up in exchange is the possibility that your shares are called away.
The good news is, you often get an opportunity to buy them back. I outline this near the end of my newsletter on building a small account to $1.4 million under the section, “Be Willing to Let Go.”
Check it out here: Turning $2,383 into $1.4 Million Selling Options
For both DKNG and SOFI the shares were sold because they were called away. Let’s take a look at what I did right and what I could’ve done differently.
DKNG
The strike price I chose for DKNG was 12.7% higher than where I bought my shares. This is a decent gain in one month which is why I was ok with choosing this strike price.
I could have instead sold much shorter dated options but because of the strong, positive moves from DKNG I most likely would have made less in premium and still had the shares called away.
I also could have waited to sell the option but ultimately I prefer to immediately capture an offset to any downside when I’m buying near or at recent lows.
Overall, I am happy with this great return even though I missed out on some big gains that followed. There are no certainties, only probabilities.
Do you remember how uneasy the markets were to start the year? DKNG had dropped from above $18 in September 2022 down to $10.50 in January 2023.
I had locked in gains to offset any drop that could have happened, which seemed somewhat likely at the time given the selling. This is an underrated characteristic of selling covered calls. Take some time to consider the mental edge gained by doing this.
While everyone was trying to figure out which direction the market was heading, I took a long position in shares of stock to capture upside and sold calls to buffer the downside risk.
Send me an email or DM if you have any questions about this. I’d be happy to talk through how this strategy can keep you actively trading while alleviating a lot of the stress that comes with other approaches.
SOFI
The mistake I made with SOFI was not paying attention to the date of the earnings call relative to the option expiration. There was a good chance of a large move in either direction and choosing an expiration just shy of earnings would have been wise.
That really is the only thing I would have changed.
The strike price of $5.50 was good. It was at both a proven resistance level and far enough away that solid double digit gains would be had if the shares took off, which they did. But perhaps $6.00 would have been more prudent given the stronger resistance at $5.80.
Call Options
I also took in cash for selling calls against my 100 shares of NIO as well as taking a quick 1% in against my newest position, Marathon Digital Holdings (MARA).
I will touch on MARA below but the majority of the action has been with NIO. Take a look at these call option sales against the position I opened just over a week ago.
Read the above snippet from bottom to top.
I bought 100 shares at $10.875 for a total of $1,088
I sold a $12 strike call for $21 on 2/7
I closed that call with a “buy to close” price of $5, net +$16
I sold the $10.50 strike call for $29
I bought it back for $5, net +$24
I sold another $10.50 strike call for $28, expiring a week later
Total collected: $16 + $24 + $28 = $68 or 6.25% in under two weeks.
The last $28 is not counted against this month’s total gains yet because I have not closed the position. Follow me on Twitter to follow the narrative: @tradernatehere.
I also have my CCS Portfolio available to follow on Savvy Trader, free to subscribe: Covered Call Strategy Portfolio.
What I am buying next for the CCS Portfolio
Last week I posted my latest purchase to Twitter, 100 shares of MARA. The move up in Bitcoin and the chart for MARA got my interest.
Bitcoin touched 25,000 for the first time in a long time and the candles on the MARA chart formed a Cup and Handle pattern. I like to buy stocks when they are breaking out, looking for a continuation higher.
Cup and Handle Pattern: A chart pattern that resembles the cup and handle of a coffee mug. Typically a bullish set up, waiting for the break above the top of the cup line.
MARA
The volume was strong on the breakout this week for MARA and I am looking for $7.25 to hold as support. As mentioned earlier, I’ve sold the $9.50 strike call that expired 2/17 and collected 1% already.
I closed this call out by buying it back (buy to close) for $1 so I could sell another call before the long weekend. And that is what I did.
I sold the $8.00 strike call option expiring 2/24 and collected an additional 4.5%.
My thought process behind the $8.00 strike price is as follows.
I’ve locked in 5.5% collected in cash and now am looking for the shares to trade sideways for the upcoming week. Getting into a bit of consolidation before making the move higher.
I think overall, the markets look ready for a rest as does Bitcoin. The coming week could continue to stay stuck in a sideways motion before breakng out for more upside.
If we do get a pullback near $7.25 I am looking to add another 100 shares of MARA and will sell calls at the $9 strike price, expiring Friday 2/24. My target will be to collect at least 2.5% which would bring in about $20 per call option.
I have already collected $7 + $36 = $43 against an investment of just $798. That is a realized gain of over 5% in just over one week. The volatility of this stock allows for higher premiums to be charged which means I get to collect more cash for the options I sell.
The high options premiums and strength of Bitcoin have me focused fairly heavily on MARA currently.
Lucid Group (LCID)
While I am unsure about the long-term prospects of LCID, I do like the short-term trading set up. I also like the massive premiums that can be collected by selling LCID call options, similar to MARA.
Is this another Cup and Handle Pattern forming?
Now take a look at the options premiums you can collect. These prices are as of Friday’s close (2/17/23) and will have decayed over the weekend. But this gives you an idea of what can be collected in a short amount of time.
The $12 strike price for the call options expiring 2/24 would have sold for $59 which is roughly a 5% realized gain. There are only four days left for the shares to move up the nearly 10% required to get above $12. I like selling this call option here.
Tuesday, the same call option may be selling for half of Friday’s price with the share price remaining flat. That would still be an opportunity to collect 2.5% in only four days. I think well worth considering.
Again, I am not sure about the long-term prospects for LCID but the short-term trading has my attention. I would look to manage risk by selling if the shares break below last week’s low of $9.64.
Who You Are is What Matters Most
I will repeat what I stated in last week’s newsletter because I think it is worth reiterating again and again. Who you are is truly what matters the most when it comes to trading.
I wasted a lot of time trying to learn which trading system was “the best” and which investment style would “make me rich” the fastest. I was focused on the wrong thing.
I should have been thinking about my personality and how that would impact my ability to trade successfully. When I figured this out, everything changed.
I no longer agonize over my trades. I enjoy them thoroughly. Every one of them, even when they don’t do what I expected. I understand why.
How is this possible? I am aligned with every trade I make. I’ve found trading strategies that feel like the perfect fit. And I sleep well.
I want to help everyone build generational wealth, that is why I am sharing what I know. I enjoy it as much as I enjoy trading. And I hope you get a lot of value out of this newsletter.
I firmly believe the key to successful trading is utilizing a strategy or strategies that align with who you are and all that you’ve got going on in life.
Message me any time if you are interested in talking more about how your personality and lifestyle impact your trading and what strategies might fit best for your goals. I enjoy hearing from you!
Twitter Spaces - Chart Reviews, Trading Strategies
Every weekend I am hosting a Twitter Space with friend Shaun Clarke - @ShaunClarke_, reviewing a dozen or so charts and talking strategies for the upcoming week.
I also am lining up Keynote Speakers for future Spaces to talk about trading strategies, stocks, Bitcoin, and anything related to the stock market and wealth building.
Whether you just want to listen and learn or even better, if you’d like to contribute to the conversation, I would love to see you there!
Link to this week’s Twitter Space: Sunday Chart Review Session
I hope you found this information useful each and every week. I will continue to post ideas on Twitter for stocks I consider to be in ideal spots for buying shares or selling calls. I will also highlight which call options you might consider selling and why.
If you have any questions, be sure to find me on Twitter @tradernatehere and send me a DM! I am always up for talking trading.
Also, be sure to follow for daily posts on trade updates and trading strategies as I pursue my goal of educating thousands on the many ways trading options can help build your account.
Have a great week of trading ahead!