About 40 years of market experience screamed at me that EFX had probably overshot to the downside. I bought EFX shares plus sold some April 20, 2018, put options.
After a small rebound, but while volatility remained ultra-high, I also sold out-of-the-money covered calls at various strikes, for the same expiration date as the puts. Those call options reduced my risk by the amount of premium received while still allowing for hefty gains if the stock bounced back over the coming seven months.
Here are the numbers from these real-money trades executed within some of my personal IRAs and a margin-type account. As it turned out, by last Friday, EFX had made an even larger recovery, closing last week above $105.
Mark-to-market paper losses on my short $120 and $125 call positions show as down from 43.9% to 59.5%. In a perfect world, I would have waited a few more days to sell those options.
How can I be so happy to have large-percentage losses on my covered-call options?
By definition, those negatives are more than offset by real dollar gains on the underlying long positions and the short puts.
The reality is even better than the numbers above would indicate. I'm not obligated to do so, but I expect to hold all these positions until the April 20, 2018, expiration date.
At expiration, if nothing changes at all from last week's pricing, the gains on the shares held long would stay exactly the same. All negative mark-to-market values on the covered calls would disappear. Both the $120 and $125 strikes would then be out-of-the-money and worthless.
The expired call premiums would total $3,660 in net gains (100% of premium received upon sale) rather than $1,920 in current paper losses. That alone is a $5,580 positive swing from today's balance sheet.
If nothing changes from current prices, or even if EFX declines to no less than $90, the now out-of-the-money EFX April 18, 2018, $90 puts would also expire worthless. I pocketed a cool $3,956 for selling those.
Rumors of Equifax's demise were likely inaccurate. Here is Morningstar's post-data breach evaluation of EFX. They see fair value as $122 on this wide-moat, high-quality company.
Maximum profitability on my Equifax trades doesn't kick in until the shares exceed $125. That possibility is far from an impossible dream.
Worrying about missing "bigger profits" if your covered calls later become exercisable is like pining over a huge tax bill because you've hit the lottery.
It's a high-quality problem to deal with.
Editor's Note: This commentary originally appeared on Real Money Pro at 07:00 a.m. on Sept. 26. Following this posting, it was announced that Equifax's CEO was stepping down and being replaced in response to the data breach incident. Trading in the shares were halted briefly, but resumed pre-market. Although the initial market reaction was negative (EFX down a bit more than $2 /share) Price sees no change in valuation in relation to this move. Click here to learn about Real Money Pro, our dynamic market information service for active traders.
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At the time of publication, Price was long EFX shares, short EFX covered calls and short EFX naked puts, although positions may change at any time.