Embryo-Level-Newbie Covered Calls Question

Community AMA
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Hey all. I have this, um, friend. Let’s call him “Dandypedia”. This, um, friend of mine allowed himself to be suckered into buying a bunch of UWMC a while ago because he believed in DD he had seen in a popular retarded forum during his first few trading weeks. Anyway, yeah, it is the only stock of which I own > 100 shares, and while that “sweet dividend” might earn me enough to change my car’s oil once or twice per year, I don’t expect holding my shares will yield very much return anytime soon. The thought has crossed my mind to write CCs.

I want to do it right, which is why I’m posting here and asking for your perspectives. I know that I’d need enough shares to cover in case they get assigned (right?). Would I need to allocate any further capital toward this? And given the stock and its lack of upward movement in the last year, is this something you would do? At this point, I’m not sure whether I should sell and cut my (heavy) losses, sit on it and reinvest the dividends, write CCs while I hold the shares, or any combination of the three.

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Selling a covered call means you have 100 shares in your account to “cover” said call. Selling a “naked” call means you don’t have the shares.

Without knowing your cost basis, and if the amount of money is significant to you, then I won’t comment on simply “cutting” your loss right now, that is something for you to decide.

First thing - Right now this is near the low for the market, everything has been beaten down recently. Being patient and waiting for a market turnaround would likely be the most prudent move if you don’t need the money immediately.

Wasn’t UWMC the company where they were going to do a share dilution, and people went apes**t and the stock knifed, so then they were like “just kidding, we’re going to do a share buy back now!”

The analyst price targets aren’t exactly the greatest, but they are higher than what the stock is currently at. Likewise come march with the interest rate hikes, that should benefit the company as a mortgage lender.

They haven’t announced it yet, but their quarterly earnings should happen sometime this month. That could be a bullish sentiment. Likewise you never know if there is going to be some random news out of nowhere that pumps the stock briefly.

So, now on to selling covered calls. Realistically the company just dropped below $5 like four trading days ago and is currently at $4.31. For such a low prices stock that has been in constant decline, you aren’t going to get much for selling OTM calls, and if there is a reversal then you’re gonna get burned real quick.

If you believe it is going to continue the decline, you could sell an ITM CC for decent money, hoping it will go OTM. But again, if it reverses then you are shooting yourself in the foot.

One month ago, the stock was at $5.95, so it has dropped ~$1.65. Looking at a March 4th 6c, you would be lucky if you could sell the contract for .05 (minus any fees from your brokerage). Not worth it.

If it was me personally, I would wait for two factors if I didn’t immediately need the money.

  1. Earnings which should be sometime between the 14th-25th.
  2. Fed rate hike in March and see how that affects mortgage rates (possibly making their business more profitable).
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Depending on your entry point, and to build on what TheMadBeaker shared -

let’s say you are into the stock for say, $10 a share. You could sell CC’s for $10 or $11 for $1 and hope it fills. While it isn’t much over time it will bring the cost average down, while a whole $1 isn’t much it is better than nothing. Since it has weeklies, that is a plus. As TheMadBeaker explained, I would be careful going too close to the current price cause it pops you lose it all.

I got into a similar mess with ANY - been selling off $1 calls every week - since it doesn’t take much time and I don’t really need the money or want to take the loss. Granted at this rate my break even is 3.8 yrs away but at some point, if it does pop back up I am that much closer to even.

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I was in the exact same situation. I started trading around the gme craze, saw some dd on uwmc (probably the same one as you) and decided to buy in. It turned out to be a p&d and tanked the very next day. As the price fell, I kept “buying the dip” and ended up with a bunch of money in it. I end up selling off around $6 or so and lost a bunch of money.

I didnt want to sell at first because I was afraid that it would turn around as soon as I did and I would miss out but after discovering Valhalla, I realized that there were better opportunities.

Uwmc is down quite a bit and even if it did start recovering, it would probably be a while before it recovers completely. Matt Ishba is giving the company a bad image after the ultimatum and now the suing. He also holds like 95% of the float and refuses to give any up. Hes too stubborn and the company is suffering because of it. The only positive is the fact that the dividends are at like 10% at the current price but who knows how long that will last.

Sorry for the rant. I know this had nothing to do with covered calls but hopefully it gave you something to think about with your position. Obviously, its your decision on if you want to continue holding but for me, its been far more enjoyable using that money in other trades on this forum, even though I lost a bunch to essc. Its better then staring at a big red number every day.