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Trading Covered Calls: Flagstar Bancorp Inc (NYSE:FBC) : A Clever Covered Call




Flagstar Bancorp Inc (NYSE:FBC) : A Clever Covered Call

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PREFACE
As we look at Flagstar Bancorp Inc we note that a covered call is one of the most common implementations of an option strategy, but the analysis completed when employing the covered call often times lacks the necessary rigor especially surrounding earnings. With relative ease, we can go much further -- to identify the risks we want to take, and those that we don't in order to optimize our results. This is one of those cases.

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STORY
There's actually a lot less 'luck' involved in successful option trading than many people realize. We'll get specific with covered calls on FBC. Let's look at a two-year back-test of a covered call strategy with these quick guidelines:

* We'll test monthly options (roll the trade every 30-days).
* We will avoid earnings.
* We will examine an out of the money call -- in this case, 30 delta.
* We will test this covered call looking back at two-years of history.

What we want to impress upon you is how easy this is with the right tools. Just tap the appropriate settings.



Now we can peruse the results.

RESULTS
If we did this 30 delta covered call in Flagstar Bancorp Inc (NYSE:FBC) over the last two-years but always skipped earnings we get these findings:

Buy FBC Stock, Sell 30 Delta Call
* Trade Frequency: 30 Days
* Always Avoid Earnings

Gross Gain: $2,104
Gross Loss: -$1,254
Covered Call Return:  43.3% 

Selling a covered call every 30-days in FBC has been a substantial winner over the test period returning  43.3%. Even better, the strategy has outperformed the covered call that was held during earnings. Let's turn to that piece, now.

GOING FURTHER WITH FLAGSTAR BANCORP INC
Just doing our first step, which was to evaluate the covered call while avoiding earnings is clever -- certainly an analysis that gets us ahead of most casual option traders. But let's take the analysis even further.

This time, we will do the exact same back-test, but we will only look at earnings. Specifically, we will hold the stock and sell the covered call two-days before earnings, let earnings happen, then close both the stock and the option position two-days after earnings.

Here are those results for the same 30 delta covered call:

Buy FBC Stock, Sell 30 Delta Call
* Trade Frequency: 30 Days
* Only Trade Earnings

Gross Gain: $593
Gross Loss: -$318
Covered Call Return:  11.1% 

While selling a covered call in Flagstar Bancorp Inc during earnings did prove to be a winner, more importantly, it returned less than the same covered call that avoided earnings. While this clever use of avoiding earnings has outperformed the covered call that was held during earnings, there's a bigger picture here. Let's turn to that piece, now.

TRADING TRUTHS
Moving through the analysis on Flagstar Bancorp Inc (NYSE:FBC) has done more than show us returns, it has revealed that the concept of expertise in options has been made made overly complex. The point is simple: having the knowledge before placing a trade shapes the thought process about what to trade, when to trade it and even if the trade is worth it at all. Here's how all this works in real-life, beyond Flagstar Bancorp Inc and covered calls.