Samwise Quick Reference Handbook
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Sam,
What is the current thought on the September NVDA covered calls? Just waiting and hoping they don’t get exercised before the correction? Just curious, I know you have said previously we were fine with them getting bought away at a high price.
The September Nvidia covered calls are very likely to expire worthless. There’s a very high probability that Nvidia sustains a correction between no and September 19. So when that happens, we’ll cover our calls.
For example, in Lannister we sold the $150’s for $9.40. That means Nvidia would need to close at or above $159.40 come September 19 for those to have even capped profits.
Chances are between now and September 19, those calls would drop in value by a lot. We’ll probably be able to cover them at $2-3 at some point. It just depends on when Nivida rolls over.
Worst case, we close out our Nvidia related long positions with an effective exit price near $159.40. That’s not a bad exit. Even more certain than a likely correction between now and then is the high degree of likelihood that we will at some point in time in the next 4-6 months will be able to buy Nvidia near $150 or below. At some point in time — whether the correction is delayed or not delayed, be able to buy back at a price well below $150.
So there’s nothing we need to do or worry about. We either get to clsoe out and profit at $159.40 average or we get to cover our calls at a big gain.
Same goes for all of the other covered calls we recently sold. And notice that today’s price on those calls is $21.07. But Nvidia is NOT at $171. It’s at $164. So those calls have $7.00 in premium above today’s value. That premium disappears completely on September 19. IF Nvidia climbs $7.00 between now and then, the September calls go nowhere — they’ll close at $21.00, but our long calls will gain in value.
The sale of these covered calls is a bet that Nvidia will AT SOME POINT in time trade substantially below $159.40. That’s the key.
It doesn’t matter when either. If Nvidia corrects now and falls to $135 by end of August, the $150 calls we sold for $9.40 are going to trade for like $4.00 or so. We’ll have made $5.40. If it happens in September, even better.
The reason for selling them is because we believe Nvidia is at the high end of its trading range and that we’d be willing to exist at an effective price of $159.40 on September 19. That’s the point. The correction either happens between now and September, or it doesn’t and we’re forced out at $159.40 but zero premium at expiration. The $7.00 premium difference goes away first that makes sense.
Like right now we have -$7,000 on teh covered calls we sold and +$24,000 on the long call. A big portion of that -$7,000 is due to premium that will no longer exist come September. The theta decay on the long call will by a small fraction of the $7.00 in premium deterioration felt on the September $150’s if that makes sense.
Meaning, suppose Nvidia runs to $171 come September 19. That’s where it closes. IF that happens, we’ll have lost $7,000 on the covered calls. They will have not gone up at all from where they are today. They may have gone up in value in the interim. But if Nvidai closes at $170, they will be worth exactly $21 on September 19 (what they’re worth today with Nvidia $7.00 lower than it is on September 19).
But that $7.00 gain in the price of Nvidai will lead to upside profit on the Nvidia $100 calls which are presently worth $76.81 as of right now. Those calls might climb to $81-$82 on that move.
While today we have +$23,886 and -$7,002.00 giving us a total gain of $16,884. Come September with Nvidia at $171, it would be $27,000 in gains and -$7,002.00 = $20,000 gains. So we’d gain about $3200 between now and September if Nvidia closed at $171 come September.
That’s the impact of theta decay on the September calls.
From an option point of view, if Nivida closes at $171 in September — as an example — it’s the same as closing out the $100 calls we’re long at $82 – 11 =$71.00. We’d have lost about $11 at worst assuming a delta of 1. Meaning, if we buy back our calls at $71 or lower, it’s as if we never sold them.
But chances are if Nvidia hasn’t yet sustained a correction, it will very well do so at some point soon after September 19 and during that time, we could very easily buy back our Dec 2026 calls at way under $71.00.
That’s why we sold them. It’s a win-win type situation. We’re either forced out at a very high price ($71.00 after having bought them at $37.00) or we get to keep the premium or a large part of the premium which is $9.40. It’s a good result either way is the point.
It takes an extreme for us to get forced out. And that’s the way to play the covered call game. You want to always be very conservative with what covered calls you’re selling and when being forced out, it should only happen under extreme circumstances. This is an extreme circumstance. Nvidia is up nearly 100% and is going to give back a big chunk of those gains. There will be be an opportunity to buy back this year in 2025. At some point this year, Nivida will trade substantially below $150 is the key take away which means we’ll be able to buy back our calls at way under the $71 that we’re forced out at.
But this only works if on waits until actual expiration because we need the September 19 time premium to tick down to $0.00. That way we’re only impacted by the delta difference (Nvidia’s actual price on sep 19 minus $150). If we close it out early, then you’re hit with the current $7.00 premium on top of the difference. The current difference is $14.00. The $21 value today is a 50% mark up on premium alone! A close right here on September 19 would put us at down $4.60 or $2,760 (not $7,002).
Sam, how likely it is from your experience the covered calls get exercised earlier than expiration?
So in all the years I’ve sold covered calls, I’ve never had an early exercise happen. I’d direct questions about how your broker handles early exercise on a covered call or on calls sold against a long call option position.
I’m sure there’s some logical approach to it. Some brokers exercise the long option to deliver. Others add a short position to the account since you’ve essentially sold shares to the exercising party. So you’d have short Nvidia position that you’d then have to cover.
It really depends on how the broker handles it.
Selling calls against a long leap position is a very very common strategy. So different brokers will have different sets of procedures for handling early exercise.
From my experience, it’s very very uncommon.
NVDA puts are toast
I think this scenario was accounted for by Sam:
Layer in the second half of the short position (maybe already today?) and on the inevitable near-term drop, close out the first position at breakeven and the second position with a net gain. Given the prolonged rally without any sell-off whatsoever, perhaps it’s better to wait out the next correction bottom rather than just a near-term dip?
We probably wouldn’t layer into a second position until around $180 as that is the top of the new trading range for Nvidia. Also, we still need the QQQ time to bleed off. The rally still sits at 69 days. We may do nothing at all in fact but just wait for the correction to close out our position.
Instead we might go QQQ short as it reaches the end of the rally days.
they are cooked!