This morning PayPal announced earnings and is down sharply. We have some short puts so the stock will be “put” to us at February expiration. As such, we will get a head start on selling covered calls for income. These calls are “naked” in the sense that we don’t own the stock yet. However, since there is a 99% probability of owning the stock in a couple of weeks, we don’t see them as fully naked. The more conservative route would be to wait to sell covered calls until after expiration which is fine to do as well. The covered call is as follow:
Sold to open: PYPL Feb 20th (monthly) 47.00 strike call
Credit: 0.27If the stock finishes below 47/share the calls expire.
If the stock finishes above 47/share we could buy back the calls to continue owning the stock. Or, let our stock get called away and move back to selling puts again. If the stock were to move above 50/share, then we could end up “naked” the calls and would hedge accordingly.