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Analyzing a Covered Call Trade Over 2 Expiration Cycles: A Rea-Life Example with Interactive Brokers Group (Nasdaq: IBKR)

Covered call writing exit strategies can involve trade adjustments over 1 or more expiration cycles. This article will analyze a series of trades shared with me by Ken, where the share price of IBKR declined after entering the trade and a decision to retain the shares for the next cycle and the (now) out-of-the-money call was rolled out to a later date expiration.

 

Ken’s IBKR trades

  • 11/2/2022: Buy 200 x IBKR at $80.30
  • 11/2/2022: STO 2 x 11/18/2022 $80.00 calls at $2.52
  • 11/11/2022: BTC 2 x 11/18/2022 $80.00 calls at $0.25 as share price declined to $75.06
  • 11/21/2022: STO 2 x 12/16/2022 $80.00 calls at $0.80 (rolled-out but not at the same date for each step)

 

Questions to analyze

  • How do we enter these trades into the Trade Management Calculator (TMC) or another spreadsheet?
  • How many spreadsheets are required?
  • How are these trades archived in our spreadsheets?
  • Could these trades have been better managed to create opportunities to mitigate current losses? Analyzing our trades make us all better investors and the learning process never ends.

 

TMC entries & calculations

IBKR: Initial Entries and Final Calculations + Rolling Initial Calculations

The screenshot shows both trades in the same image for easier viewing but, typically, we would use 2 separate spreadsheets based on the 2 expiration dates. As an example:

  • TMC_11-18-2022
  • TMC_12-16-2022

Note the following:

Top section:

  • Initial covered call trade entries
  • Initial rolling-out trade entries

Middle section:

  • Initial calculations of both trades, before entering share loss at the time of the “roll”
  • Brown cells: Initial covered call trade calculations (2.78%, 34.93% annualized)
  • Yellow cells: Initial rolling-out calculations at the time of the roll (this is where the 2nd trade stands now)

Bottom section:

  • Final results of initial covered call trade, after closing the first short call and prior to rolling
  • The exit strategy is named (buying back call and keeping the stock)
  • The cost to buy back the call is entered ($0.25)
  • The final price prior to rolling is entered ($75.06)
  • Final loss is calculated in the pink cell for the initial trade (3.7%) and we move on to the (now) rolled-out trade

 

Evaluating the trade decisions: Our thought processes

  • On 11/11, why was I bullish on IBKR that motivated retaining the shares? If we can think of no reason, the BTC and retain shares decision should be re-evaluated
  • Prior to the last 2 weeks, after closing a short call (usually the result of breach of the 20% guidelines), should waiting to “hit a double” opportunity been considered (yes), rather than rolling-out?
  • If share price did not recover, should rolling-down in the same expiration cycle be considered in the last 2 weeks of the contract or, perhaps, selling the stock (yes)?
  • Were the 20%/10% guidelines breached (yes, but BTC was at 10%, should have been closed earlier at $0.50 … fortunately, did not miss out on any exit strategy opportunities)?
  • If a decision to roll-out to the 12/16/2022 expiration was made after closing the short call, should that have occurred on 11/11/2-22, rather than 11/21/2022 to capture 10 additional days of time-value premium (yes)

 

Discussion

By forcing ourselves to associate a rationale for every trade or trade adjustment decision, we will allow ourselves to make non-emotional trades based on sound fundamental, technical and common-sense principles.

 

Premium Member Benefits Video: This is a great time to join our premium member community with its stock screening and educational (over 250 videos) benefits. We offer more benefits than ever before. For information, click here.

For video explanation, click here.

 

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI teaemail testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:

Hey Alan,

I was looking at your recent example using the calculator with AAPL and saw you were using much deeper ITM LEAPS.  I tried that and got the YES.

Thanks again for your help.  You are the consistent authority in this field, and I have found myself coming back to your material.  Much appreciated!!!

Best regards,

Doug

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Exit Strategy Choices After Exercise of Cash-Secured Puts 

When we sell cash-secured puts, we are undertaking the contractual obligation to buy shares at the strike price by the expiration date. Typically, we only sell puts on elite-performers that we would be agreeable to own in our portfolio.

This presentation will analyze 4 potential exit strategy opportunities to consider should the put option be exercised. Information on the following strategies will be highlighted:

  • Selling the stock
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In addition to these strategies, the following topics will also be included in the webinar:

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Covered call writing and selling cash-secured puts are low-risk, option-selling strategies focused on generating cash-flow. Our trades can be structured to represent aggressive or defensive postures or somewhere in between.

This presentation will detail how to structure our trades to decrease risk, particularly in bear and volatile market conditions while still generating significant returns. It will also be of interest to investors who have a low personal risk-tolerance but still want to generate higher than risk-free returns.

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Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:

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Alan speaking at a Money Show event***********************************************************************************************************************

About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

13 Responses to “Analyzing a Covered Call Trade Over 2 Expiration Cycles: A Rea-Life Example with Interactive Brokers Group (Nasdaq: IBKR)”

  1. Victor May 20, 2023 2:04 am #

    Alan,

    I am a oremium member and love the BCI methodology. I have a question about your pcp strategy.

    Let’s say I pick a stock from the stock watch list to sell a cs put. At expiration, the price is below the put strike and I decide let it get exercised.

    My question is how to enter the trade in the trade management calculator. Also, what price do we enter for the covered call trade?

    Thanks for all you do,
    Victor

    • Alan Ellman May 20, 2023 6:12 am #

      Victor,

      Great to have you part of our premium member community.

      We use 2 TMC spreadsheets for this hypothetical PCP series of trades. For example, we can “save as” TMC_5-19-2023″ for the put trade and “save as 6-16-2023” for the covered call leg.

      Put trade: Enter the current market value of the stock at the time of exercise and the spreadsheet will calculate final results based on option credits and share debit.

      Call trade: Enter the breakeven price point from the put trade (put strike – put premium) as the cost basis of the security for the next leg of PCP, the covered call trade.

      See chapter 27 of my book, “Exit Strategies for Covered call Writing and Selling Cash-Secured Puts” for a real-life example.

      Alan

  2. Barry B May 20, 2023 10:38 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 05/19/23.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    https://www.youtube.com/user/BlueCollarInvestor

    Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as the membership remains active.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  3. Bob May 21, 2023 11:53 am #

    Alan,

    Can you help me calculate this rolling-up cash secured put trade with SMCI, please.

    STO 1 x 6/2 $135 put at $4.09

    BTC the $135 put at $2

    STO the 6/2 $140 put at $4.65 (price went up)

    Since I had to add additional cash to secure the second put, I’m unsure how to calculate my results, if unexercised.

    Thanks a lot.

    Bob

    • Alan Ellman May 21, 2023 4:59 pm #

      Bob,

      Sure, glad to help.

      Let’s simplify this with the following thinking:

      The maximum investment or cash required to secure the put is the $140.00 strike [($140.00 – $4.65) x 100] = $13,535.00.

      The net option credit = ($4.09 – $2.00 + $4.65) = $6.74

      $6.74/$13,535.00 = 4.98%

      Based on a 16-day trade, this annualizes to 113.60%

      Alan

  4. Bob May 21, 2023 9:55 pm #

    Thank you.

    I was making it too complicated, but arrived at nearly same conclusion (120% ARR)

    Elegant.

    Thanks

    Bob

  5. Robert May 23, 2023 3:21 pm #

    Alan,

    I am almost embarrassed to ask this question on a trade that got away from me.

    My breakeven on AVGO (Broadcom) is $421, including option earnings.

    I have been periodically selling CC’s and total is $45/ share on 500 shares.

    The stock price ran away from me and today is near $700.

    I rolled out and up continuously as it suddenly shot up a few months ago.

    So I am sitting on 700 calls expiring 1/17/25 ( bid is about 111.75).

    I don’t think I should buy back at current price. My strategy is to sit on the stock and option and just earn the dividend (4.3% on cost or 2.7% current) until the expiration date.

    Not a great result but still a nice gain.

    Am I strategizing correctly?

    Appreciate your thoughts and perspective.

    Respectfully,

    Robert

    • Alan Ellman May 24, 2023 6:52 am #

      Robert,

      Without having all the specifics of these trades, I can make some general comments regarding strikes that move deep, deep in-the-money (ITM) as share price accelerates dramatically.

      Use the “Unwind Now” worksheet tab of the Trade Management Calculator to determine the time-value cost-to-close. One of the characteristics of deep ITM call strikes is that the time value component of the premium approaches $0.00. If that’s the case, we can close both legs of the covered call trade and use the cash from the sale of the underlying security to initiate a second income stream.

      The question we ask ourselves when making this determination is: Can we generate at least 1% more than the time-value cost-to-close by contract expiration, by unwinding and initiating a new trade?

      Additional observations:

      1. Using shorter-term options will generate greater annualized returns.

      2.We are incurring additional risk when we establish trades that are subjected to multiple earnings reports.

      That said, if we are to learn from our trades to become even better investors, it’s nice to do so when we have maximized are initial trade structuring results.

      Alan

  6. JP May 24, 2023 6:29 am #

    Alan,

    Hope all is well.

    Do you still favor monthly calls over weekly and weekly puts over monthly?

    When a stock has only monthly puts is that ok if they meet other criteria or do you just recommend looking elsewhere?

    best,

    JP

    • Alan Ellman May 24, 2023 6:55 am #

      JP,

      I have multiple option selling portfolios. Most are Monthlys, a few Weeklys.

      It is absolutely okay to use securities for selling cash-secured puts that only have monthly expirations.

      Alan

  7. Alan Ellman May 24, 2023 4:31 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.

    Premium member video link:

    https://youtu.be/EXMO-KwZuJs

    For your convenience, here is the link to login to the premium site:

    https://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

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    Alan and the BCI team

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