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A $134 Prison of My Own Making
Published over 1 year ago • 4 min read
So I did something potentially stupid last week that you might get a kick out of. Also, there's a lesson in it somewhere.
You probably know I've been holding Nexstar Media (NXST) stock for a while now and it's my #1 individual position. On March 3rd, I was staring at Nexstar's stock chart and thinking I could predict the future. The indicators I use were screaming "overbought!" after their earnings report. I convinced myself that $180 was this short-term magical ceiling the stock would have trouble breaking through and holding.
So what did I do? I sold a covered call.
If you just tuned into investing (or maybe just landed on Earth), here's what a covered call is in plain English: I own 100 shares of a stock, and I sell someone else the right to buy those shares from me at a specific price. They pay me cash upfront for this privilege. If the stock goes above that price, I must sell them my shares. If it stays below that price, I keep my shares AND the cash they paid me.
That's it. That's the whole deal.
In my case, I sold someone the right to buy 100 of my Nexstar shares at $180 anytime before March 21st. They paid me $134.34 (after $0.66 in fees) for this privilege. I thought I was clever—getting paid while waiting for what I was SURE would be a pullback.
The evidence.
Fast forward to today: Nexstar is at $177.85 and climbing. That option I sold for $134? It would now cost me $270 to buy back. There is a 101% paper loss in two weeks, meaning I have not yet lost any money...yet. And if Nexstar keeps going up past $180? All those potential gains belong to somebody else, not me.
As J.K. Galbraith once said: "We have two classes of forecasters. Those who don't know — and those who don't know they don't know."
Guess which one I was?
The truth about covered calls is brutally simple: you limit your upside potential on 100 shares, keep all your downside exposure, and get some cash upfront.
There are still a few weeks left, and without getting too technical, I have options.
Wait it out and see if Nexstar Media closes below $180 on March 21st
Repurchase the option contract for a loss or gain depending on price movement
Repurchase the contract (for a gain or loss) and immediately sell another contract further out for a net gain
Let the contract be "assigned", and collect $18,000 + $134.34 I've already received and wait for a lower entry price or sell a cash-secured put (the opposite of a covered call)
Technical analysis sometimes feels like financial astrology. We stare at charts pretending we can see the future in past patterns. And sometimes, the market laughs at us.
Look at this daily chart. All my indicators (RSI, CCI, MACD; red arrows) tell me overbought. I circled a huge gap in the $150's that could fill. And see that $180 level? That's where I drew my magic "resistance line" and convinced myself the stock would struggle holding past:
More evidence.
Now to get a bit technical...Those indicators at the bottom—the RSI hitting 73, the CCI shooting up to nosebleed levels, then collapsing and that surging MACD—tell me, "Pullback incoming!" But charts don't predict the future; they show the past.
So I'm sitting here watching Nexstar creep toward my $180 strike price, hoping for a pullback but knowing I might have to wave goodbye to my shares. All for a measly $134.
The drinks are on me next time. I can still afford that, at least.
Cheers!!
P.S. Writing covered calls limits your upside potential on 100 shares of a stock or ETF, keeps your downside exposure, all for immediate cash income. If you remember nothing else from my rambling, remember that.
I'd love for you to reply and share if you sell covered calls or cash secured puts. I'll respond to every reply!
😁THANK YOU to all who responded to the last newsletter!!
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