Moderna Covid-19 vaccine
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It’s time to think about skipping strike prices across the surface of the options market.
The trade is a lot like skipping stones across the surface of a lake, only it’s potentially profitable, and nowhere near as relaxing. But with so many stock prices at or near record highs, stock investors may find some appeal—and a lot of potential money—selling weekly call options with strike prices that are at, or just above, the associated stock price.
The strategy is a way to get paid potentially princely premiums in the options market for agreeing to sell stock positions. The risk is that the stock price surges above the call strike price, but more on that later.
Consider Moderna (ticker: MRNA), one of the stock market’s top-performing names. The vaccine maker’s shares are up some 255% this year, reflecting the company’s leading role fighting the Covid-19 pandemic.
In a normal world, many investors would take profits, selling some or all of the position. But many investors want to hang on to what they have because they think—and lately they haven’t been wrong—that stock prices only advance. Besides, the Covid virus shows no sign of going away.
With Moderna’s stock at $389.84, for instance, aggressive investors could sell the September $395 calls that expire Sept. 10 and that were recently trading around $12.15. If the stock remains below the $395 strike, investors can keep the premium. Should the stock exceed the strike, investors can skip the call to the next weekly expiration, picking the same call, or even a different one.
During the past 52 weeks, Moderna’s stock has ranged from $54.21 to $497.49. Shares are up 503% over the past year.
If Moderna’s stock races higher and moves above the strike price, investors must adjust the call if they don’t want to sell the stock. The ideal time to adjust the position is usually no later than the morning of expiration Friday. In these cases, the call can be rolled out another week, or even a few weeks, to reposition the strike price, ideally just above the stock price. When rolling positions, investors are trying to get paid again by the options market for moving the call.
This type of trading is aggressive, and isn’t for everyone. Investors must be unsentimental about the stock that they are trading. They must be focused on using the equity as a vehicle that enables them to potentially extract money from the options market in quick bursts. Moreover, there is nothing tax efficient about this approach unless the trading is done in a retirement account. The options premiums will almost certainly be taxed as personal income.
As always, it’s important to understand the “event risk” that is packed into any options expiration. Events can cause a stock to move more, or less, than expected. On Sept. 9, Moderna is scheduled to host an R&D Day. On Oct. 29, the company is scheduled to report third-quarter earnings.
The skipping strategy is radically different from the last Moderna trade we suggested. In July, we urged investors to consider an August bull spread in Moderna in anticipation that the stock might push higher on renewed Covid-variant concerns.
At the time, Moderna’s stock was at $321.11, and investors could buy the August $325 call that expired on Aug. 6 and sell the August $350 call with the same expiration for $9. The “bull spread” increased in value to $16 because the stock closed at $413.72 on that expiration Friday.
The returns on the spread were meaningful, but the potential returns on the skipping strategy can make those spread strategies seem like a bank CDs. B
Steven M. Sears is the president and chief operating officer of Options Solutions, a specialized asset-management firm. Neither he nor the firm has a position in the options or underlying securities mentioned in this column.
