Rolling Covered Call Options of Darden Restaurants Holdings
In lessons one I talked about how I changed the expiration date of my Microsoft (MSFT) covered call option to expire earlier and to earn extra cash. As a result, I kept my shares. In lesson two, I extended the 5 VLO contracts by one week on my 500 shares of VLO and raised the price providing the potential for an additional $2,000 in capital gains if the shares are called away. For this third example, the focus is on my 100 DRI shares and the covered call contract. For DRI I wanted to decrease the contract price and extend the expiration date of the contract. This has risk because the earnings date is March 24. If earnings are exciting, then DRI could rocket up. However, the $335 in extra income was very appealing. Suggestion: if you are going to trade options, be mindful of the next earnings date and the next ex-dividend date. Before I speak more about DRI, I feel compelled to talk about something of even more importance and value than entering trades to make money.
Press the Pause Button and Think About Your Purpose
Too many investment decisions are not thoughtful about or mindful of our purpose in life. It is easy to get caught in the spiral of materialism and not realize that wealth should not be an idol, but it often is. When wealth is in its proper place, it is a tool. Please think about why God gives you, an image bearer, wealth on loan. You ultimately leave it behind, or you use it for a greater purpose as an expression of love for God and for our neighbors. Do you image God in your handling of wealth? Do you have that greater purpose in mind, or are you just trying to build a bigger barn and store even more for your relatively short future? I am not doing you a favor if all I give you is ideas for gaining wealth. You need so much more.
Jesus said this in his Sermon on the Mount: “Do not lay up for yourselves treasures on earth, where moth and rust destroy and where thieves break in and steal, but lay up for yourselves treasures in heaven, where neither moth nor rust destroys and where thieves do not break in and steal. For where your treasure is, there your heart will be also.” Matthew 6:19-21 (ESV)
Lest you think you make God happy and merit a place in eternity where treasures never end by good works or giving to the poor, read John’s Gospel or Paul’s Epistle to the Romans. It isn’t what we do that merits heaven. Don’t make that terrible life investment mistake. I welcome your questions about this vital aspect of who you are, why you were made, and where you will spend eternity. Think long, long, long, long term. Don’t be too focused on the short-term to the neglect of the important matters of life.
Back to the Darden Options Roll Trade
My original covered call contract was sold on Monday, February 28. The contract was set to expire next Friday, March 18 at a contract price of $150. I received $199.31 for this covered call. Since that time, the world has entered a lot of uncertainty because of the war in the Ukraine. The value of the DRI shares fell like many other assets.
On Friday afternoon, March 11, using the options roll feature, I bought a closing transaction (BCC) to exit the March 18 contract (ticker symbol -DRI220318C150). Then, the roll software allowed me to specify a new contract date and price. So, I sold an opening transaction call that expires one month later on April 14. The ticker symbol for that trade was -DRI220414C140. If you compare the ticker symbols, you will see that they both contain the DRI ticker symbol, the contract expiration date (YYMMDD), a “C” for call, and a per share contracted dollar amount ($150 for the buy and $140 for the sell). I did not type those ticker symbols, because that is done by the software.
This roll trade was even more profitable. It cost me $14.03 to close the March 18 contract, but I received $349.31 for the new covered call contract. Therefore, I received $534.59 when I combine the first covered call trade, the exit trade, and the new covered call. The reason I could exit the first trade was the value of the shares had dropped, so investors view that covered call as less valuable with only one week left until expiration. The April 14 contract at a lower price is more attractive because it has a longer duration and because the earnings date is scheduled for before April 14.
There is one other unusual characteristic of this new option contract expiration date. April 14 is a Thursday. Most of the time contracts expire on a Friday. However, April 15th is a holiday, so the monthly options will expire the day before the holiday.
Monthly Options or Weekly Options
There is another significant difference that DRI has when compared to my trades for MSFT and VLO. Microsoft and Valero have options that expire every Friday, but DRI only offers monthly options. Monthly options typically expire on the third Friday of every month. This introduces a bit more risk, because you can more easily determine pricing moves for a stock in one week, while pricing can vary quite a bit during thirty days.
What is the Risk I Accept?
Like all trades, there is risk. In the case of the DRI trade, I lowered my profit expectations. In other words, I’m willing to accept $1,000 less for my 100 shares by lowering my price from $150 to $140. So instead of receiving $15,000 if the shares are called away, I am willing to accept $14,000.
A second risk factor is that the shares could shoot up to $150. If that happens, I have to sell them at $140. That is a risk with all options trades. However, I have already determined that I would be happy to sell at $140 because I already made over $500 from the options trades. Therefore, I won’t feel like I missed out, because I could have sold my shares on the open market last week at a lower price.
If DRI drops during the week, I could do another roll. This would look similar to what I did with my MSFT and VLO shares last week. My choices reflect the less optimism I hold for shares of DRI. In my view, exiting sooner rather than later is probably a good thing.
Most Options Contracts Expire Worthless for the Buyer
Just like the other covered call trades, the reality is that most of my covered call contracts expire worthless to the buyer. I get to keep the money the buyer gave me, and I get to keep my shares of stock or the ETF fund. Therefore, I can continue to collect dividends and wait for the stock market to settle down.
I own 100 shares of DRI. Year-to-date I have earned an additional $110 in dividend income on my 100 shares. If we add up the options income and dividend income, I have received $778.91 of income for DRI options trades and dividends in 2.5 months. That isn’t bad for an investment that cost me $14,135. That is a 5.5% return in less than a year. But it really is better than that. Since July of 2021, using options trades, I have made a total of $1,854 in income from covered calls and dividends.
The most important section of this brief lesson isn’t about options. Good investors think long-term, but most don’t think long-long-long-term. Do you? This life isn’t the end. It is only the beginning. Remember where your lasting treasure can and should be. It isn’t in options contracts or dividends or anything else that you cannot cling to for more than 100 years.