End of last month, 27th October, I bought Copano Energy, LLC (CPNO) at 18.82 and sold the Nov 17.5 call at 1.32.
Now I know why I didn’t write about this before. This was a dumb trade. There is no time value in the call, it is exactly 1.32 below the stock price.
The reason is that the ex-dividend date was two days later on the 29th. The stock would drop by nearly the dividend paid, fifty seven and a half cents a share, and the call will stay where it is. On that day, CPNO closed at 17.93 from 18.25 the day before. Dropping just 0.32.
A few days later I compounded my error. CPNO was trading at 16.90 and the call was at 0.38. If I closed out the trade, I would have a 1.98 loss on the stock, a 0.94 gain on the call and 0.575 in dividends for a loss of 0.465 plus commissions. CPNO was out of the break even zone of the buy-write.
What I did was to buy the 17.5 call and sell the 15 call for a credit of 1.55. That way I felt protected. When I closed out the trade a few days later, my loss was 0.442 after commissions. Slightly better than closing it out earlier, but not worth the extra few days.
Hi Gil, I’m assuming you thought your original calls would be assigned before ex-dividend? It is surprising that they weren’t, given they had no time value at the time–although they did have 3 more weeks to run. I assume the IV jumped way up after the ex date.
Yes, Vance, that is why it wasn’t a well thought out trade. The calls would have been exercised had the stock stayed where it started. Since I put on the trade with no time value in the calls, I would have made nothing. As you say, after the ex date, the stock drops and the calls stay where they are, so the implied volatility increases.
Great post this will really help me.