LEAPs and Covered Call Writing: American Tower


Yesterday, one of our fellow premium members, Davy, shared a trade with me regarding LEAPs and covered call writing on American Tower. Without a doubt, American Tower has been an outstanding pick for many years and it's actually widened its outperformance gap with the S&P-500 during the latest correction. It seems that American Tower might have set a V-shape bottom. What does this volatile price action mean for our trades? Let's take a look at the real-life trading example of one of our premium members.

Trade Summary

When AMT was trading at $238, he entered the trade:

* $7,180 per contract for the LEAP (March 9, 2020)

* $500 in cash premium for the $260 call (March 9, 2020)

* Buying back the short call and rolling down: additional net credit of $817 per contract, thus $1,317 in net cash (March 23rd, 2020)

* LEAPs are trading at $8,000 per contract; short calls trading at $2,900 per contract

The initial trade returned the following results:

It would take 19 months for Davy to regain his entire LEAP investment, while allowing for share appreciation. Since there are 22 months to expiration in 2022 and most of the premium paid being intrinsic value, this trade was very appealing to take advantage of AMT's impeccable trackrecord and wiser capital allocation.

What Now?

As of now, there's virtually no time value left in the option, but there's an upcoming ex-dividend date next week prior to the April 17th, 2020 expiration meaning the in-the-money covered calls can be assigned early. Keep that in mind!

What if we were to close the position, what would our return look like? Well, we've generated a net credit of $1,317 per contract and an unrealized gain of $890 per LEAP, resulting in a $2,207 profit. Had we not rolled down the calls, our return would have been $890 + $500 = $1,390. However, since the $220 call is deep in-the-money, our results are exaggerated. In fact we have to buy it back for $2,900. This results in a loss of $693 per contract. Rolling down has not been to our advantage given the unforeseen and pretty sharp rebound in AMT's share price.

Now, we still have plenty of time left before expiration (January 2022) so how can push the short call back in out-of-the-money territory? There are two simple answers to that question:

* Start selling weekly options and roll out for zero-credit/debit. In case of this situation, we can roll out per 2.5 dollar increments each week until we have an out-of-the-money short call. After that, we can re-sell monthly options again. It would take 10 weeks to get to the current

* Rolling out in time for a small net credit and a significantly higher strike price (for example, rolling to July). This will lead to a seemingly comfortable position, but does not result in sufficient short-term time decay (positive theta). Stated differently, we don't get enough bang for our buck by rolling out too far.


So, by rolling out for zero-credits/debits, we can get back into out-of-the-money short call territory and then we can count our profits up to what we've been receiving so far ( (the time value profit of $1,317 per contract we've already generated and the unrealized gain on the LEAP). It will take time to achieve that result, however, as long as you stay disciplined everything should work out favorably in the long run.

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