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Trading Covered Calls: Fortune Brands Home & Security Inc (NYSE:FBHS) : Using Covered Calls to Outperform Earnings




Fortune Brands Home & Security Inc (NYSE:FBHS) : Using Covered Calls to Outperform Earnings

Date Published:

PREFACE
As we look at Fortune Brands Home & Security 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.


Option trading isn't about luck -- this three minute video will change your trading life forever: Option Trading and Truth


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 FBHS. 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 Fortune Brands Home & Security Inc (NYSE:FBHS) over the last two-years but always skipped earnings we get these findings:

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

Gross Gain: $4,713
Gross Loss: -$3,869
Covered Call Return:  15.9% 

Selling a covered call every 30-days in FBHS has been a modest winner over the last two-years returning  15.9%. But, as modest as the gains have been, this clever use of avoiding earnings has outperformed the covered call that was held during earnings. Let's turn to that piece, now.

GOING FURTHER WITH FORTUNE BRANDS HOME & SECURITY 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 FBHS Stock, Sell 30 Delta Call
* Trade Frequency: 30 Days
* Only Trade Earnings

Gross Gain: $959
Gross Loss: -$1,034
Covered Call Return:  -1.2% 

While selling a covered call in Fortune Brands Home & Security Inc was modestly positive, taking on extra risk by actually holding a covered call position during earnings did worse. Yep, taking on more risk yielded worse returns. There's actually a bigger picture here. Let's turn to that piece, now.

TRADING TRUTHS
Moving through the analysis on Fortune Brands Home & Security Inc (NYSE:FBHS) 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 Fortune Brands Home & Security Inc and covered calls.