You no doubt saw the mighty giant Google take a costly misstep regarding their earnings release. R.R. Donnelley & Sons mistakenly released Google’s third quarter earnings four hours early. GOOG shares plummeted double digits during the trading day after investors got word of the earnings draft.
This midday massacre of Google’s share price raises an important issue. You have to continue to watch your covered call positions, all the time, not just during earnings. Looking at the chart below you see that Google was trading at around $754 a share before the premature earnings release hit the wire.
Once the news was all over the internet and television, trading was halted at $687.30 before any more damage could be done to their market capitalization.
In the event you were implementing a relatively conservative covered call strategy of selling slightly out of the money calls you would have taken a massive dive in account value. The $760 November ’12 calls we trading around $22.50 per option before the crash. That same option was trading under $2 right before trading was halted.
If you had just recently purchased Google to write calls on, lets say for $754.00 a share, you would have lost much more than you gained by writing the calls. About $6,700 in stock value would have been lost by the drop from $754 to $687. If you sold the $760 November calls for $22.50 that would have only gotten you $2,250 in premium.
You would still be short $4,450 ($6700 – $2250) from putting on that position.
Again, the longer you have held Google, and the lower you original entry price was, the less this drop could have affected you. Covered calls are profitable but you still have to diligently watch the daily news reports of all stocks you hold.