Updated: Jun 23
I'm starting a new series for the blog called Trade Review, if you have a better name for the category let me know!
Today I'm talking about a Goldman Sachs buy-write that I converted into a covered strangle. This is a common income generating trade strategy I use. Below I describe the trade as well as my thought process along the way. This is not financial advice, I am not a financial advisor. I'm just some guy on the internet who has been trading the market for over a decade and want to share some of my strategies. They don't always work and I'll share the losers too in this series so you can learn from my positive and negative experiences!
The Strategy in Simple Terms
A buy-write is when you buy 100 shares of a stock and simultaneously sell a call option (also known as a covered call) . It's a go-to move of mine on stocks I don't mind owning for a little while and it's great in a bullish market, and right now, we're in bull city.
I combine buy-writes when a company's about to go ex-dividend (that's the date when you need to own the shares to get the dividend), I use a buy-write to score a kind of 'double dividend.' The trick here is to sell the shares, aka get 'called away', in the same week as I'm not looking to make a lot of money on the shares I just want to pay some bills. It almost feels like stealing a dividend and getting a little extra, but it doesn't always happen the same week.
Then there's the covered strangle. It's a buy-write with a twist: you sell a put option too. It's a nice move when you're feeling bullish and don't mind buying more shares if the price drops and the stock has a good down move so premium for the put increases. As you know on ex dividend date the stock is going to drop by the amount of the dividend, it might get bought up or it might sell off even more. If it continues to sell off I use the down move to collect even more premium.
Trade Decision Breakdown
So why Goldman Sachs and why now? I was bullish on GS (the market overall is bullish), there was a dividend to collect, and I had a hunch that the stock was on the rise. Of course, no one can predict the future, but part of the game is playing your hunches. You don't make any money if you don't make trades.
The Trade Journey (this is all posted real time in discord)
I bought 100 shares of GS at 330 a share on May 30th and I immediately sold June 2nd 330 call for 2.00 If the stock traded over 330 on Friday I would make $450 in less than a week (the sold call plus the 2.50 dividend. I'm capping my upside and just looking for a quick income trade.
On ex dividend day the stock gapped down and it was a bearish day, I was underwater and this trade was losing, but again I don't mind holding Goldman Sachs as long as I need to.
This is where it gets fun, I sold a put on the first bearish candle (see image above) this is now a Covered Strangle. Remember put premium is higher on down days. I sold the 320 put for 1.15. So my total premium collected was 2.00+2.50+1.15= $565 in premium for the week. If i was put these shares I would have reduced my cost basis even more, buying more shares $10 lower than the first buy.
The next day (June 1st) another LARGE down day (second bearish candle above). I'm losing more than the premium I received if I sold everything right now. This is why you need to follow your plan! I decided to take advantage of 2 down days in a row and I rolled my strangle to the next week (June 9 expiration) for another 2.60 credit exact same strikes. I was looking to get called away at 330 or I'll buy another 100 shares at 320 (reducing my cost basis). This means my total premium is now $825.
Luckily GS made a quick recovery and the short put I sold for 4.48 was only worth .30. I closed this on June 6th. If the stock pulled back again I could always sell another put but I cut the tail risk and locked in a little gain.
On June 9th I saw the following chart pattern: two hammers compressing right after a nice bullish candle with decent volume.
I believe this is why people should learn technical analysis. Compression is a good thing combined with two hammer'ish candles??? Yes please! (Could I have been wrong? Absolutely!) I liked this setup so much that even though I was in Miami on vacation I decided to roll this call for another week as I'm walking along the shore of south beach! This was literally my view as I'm rolling.
I got another 2.06 in premium after this roll. I'm now up to $1,031 in premium collected (but most of this was a gain on paper the only real money I had locked in so far was that 2.50 dividend and the premium from the short put i closed).
GS continued its bullish move, but it was actually moving to fast for my comfort. It was nearing previous resistance. As someone who has used technical analysis for a while I understood previous resistance would be a target for many traders. I decided to sell my shares at 338.52 and I bought my covered call back for $9.65 before it hit resistance as I believed it could pull back. I might have been wrong, but since I trade full time and need income I wanted to lock in my profits. After it was all said and done I made $871.12 on this trade in less than 2 weeks. As you can see on the chart, GS did pull back, could I have traded this better?? Sure if I knew for sure what the stock was going to do, but that's always the case. You see so many 'professionals' show you these trades after, but at GKT we keep it real and post trades in real time.
This was a quick example into how I use buy-writes and covered strangles to generate income and how I also combine some technical analysis to my options trading. Remember, I'm not looking for perfection, and I definitely don't win them all. The goal is to learn, adapt, and hopefully, keep that income flowing. I'm not looking to double my account with this strategy, I am looking to pay my bills! I have other strategies for growth, we can cover that another week!
If you want to get more real-time updates and join the conversation, head on over to our GKT discord! As always, trade responsibly and remember this isn't official financial advice. Happy trading Good Kids!