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Analyzing a Defensive Turned Aggressive Covered Call Trade: A Real-Life Example with Select Sector SPDR Utilities (NYSE: XLU)

When we craft our covered call trades, we must decide if a defensive (in-the-money or ITM calls) or aggressive (out-of-the-money or OTM) position should be established. We base this on overall market assessment, chart technical pattern and personal risk-tolerance. We should also have a plan in place should share value move up or down significantly after the trade is executed. On 1/22/2022, a premium member asked me to analyze a series of trades he executed with XLU where an initial defensive position was adjusted to an aggressive one. This article will detail my analysis.

 

XLU trades from 11/8/2022 to 11/22/2022

  • 11/8/2022: Buy 3100 x XLU at $66.42
  • 11/8/2022: STO 31 x 12/16/2022 ITM $64.00 calls at $3.80
  • 11/22/2022: XLU trading at $69.50
  • 11/22/2022: BTC 31 x 12/16/2022 $64.00 calls at $6.20
  • 11/22/2022: STO 31 x 12/16/2022 OTM $71.00 calls at 1.05
  • What are the pros & cons of rolling-up the deep ITM $64.00 call to the OTM $71.00 call?

 

Initial (defensive) trade calculations with the BCI Trade Management Calculator (TMC)

 

XLU: Initial Trade Calculations

  • Yellow cell: Breakeven price point is $62.62
  • Brown cells: Initial and initial annualized time-value returns (2.16%; 20.18%)
  • Purple cell: Downside protection of the initial time-value profit (3.64%)
  • Pink cell: Amount of time-value cash initially generated ($4278.00)

 

Status of rolling-up (aggressive) trade if share price remains at $69.50 at expiration

 

XLU: Rolled-Up Trade Calculations

 

  • Purple cells: Per-share option debit is $1.35 or -2.03%
  • Yellow cells: Per-share unrealized stock profit is $3.08 or 4.64%
  • Brown cell: The combined net unrealized profit is 2.60%, slightly more than the initial trade profit of 2.16%
  • *** Note that the exit strategy dropdown selected was “roll-out-and-up” when, in fact, it was simply rolled-up. This is because we rarely roll-up in the same call contract cycle. A note would be made in the Trade Journal section of the TMC when this occurs.

 

Discussion

Our covered call trades are established with a defensive, neutral or aggressive bias. The XLU trade was a well-structured trade from a defensive perspective. The change to a more bullish position did not generate significant unrealized benefit and was dependent on continued share appreciation to make a difference. On the other hand, leaving the trade and not rolling the option on 11/22/2022, would leave the trade at a maximum return with plenty of downside protection to the original $64.00 call strike. An alternative exit strategy consideration would be the mid-contract unwind exit strategy (see pages 29 -34 in my book, Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts) if the time-value component of the $64.00 call continued to move towards $0.00.

 

BCI Community live Zoom webinar May 11th: A streamlined version of covered call writing: Register here.

 

New Book + 2 New Spreadsheets

Previously shared with premium members and now with the entire BCI community. For those with busy schedules who seek to generate cash flow and beat the market on a consistent basis in a user-friendly and time-efficient manner. A “don’t miss” presentation.

  • Thursday May 11th at 8 PM ET
  • Reduce the # of stocks (ETFs) considered from 8000+ to 11
  • Reduce the # of exit strategy choices from 14 to 4
  •  Registration form below
  • Our platform allows 500 attendees
  • Login a few minutes early to ensure a seat
  • To ensure a spot, fill out the registration form by clicking here:

 

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:

Alan,

Thank you for your prompt response to my issues.

I’m loving your content and courses.

I hope to be a successful, better covered call trader.

No doubt your methods will help me achieve greatness.

Thanks.

Brian

______________________________

Upcoming events

To request a private webinar for your investment club, hosted by Alan & Barry: [email protected]

 

1.BCI total community webinar plus Q&A

Covered Call Writing: A Streamlined Approach (CEO Strategy introduction)

Thursday May 11,2023

8 PM ET

Zoom login link for 1st 500 attendees.

Alan Ellman is inviting you to a scheduled Zoom meeting. 

Topic: Covered Call Writing: A Streamlined Approach: Live Webinar

Time: May 11, 2023 08:00 PM Eastern Time (US and Canada) 

Join Zoom Meeting on May 11th

https://us06web.zoom.us/j/84531413211?pwd=VWw0VzVydWlnNHgwVjJSOHdQTUJYZz09 

Meeting ID: 845 3141 3211

Passcode: 000501

To ensure a spot, fill out the registration form on the right side of this page.

 

2. Mad Hedge Investor Summit

June 14th – 16th

Details to follow.

 

3. Your Mid-Year Portfolio Review Virtual Expo 

June 27th – 29th, 2023

Specific time, date, topic & description and registration link to follow.

 

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.

12 Responses to “Analyzing a Defensive Turned Aggressive Covered Call Trade: A Real-Life Example with Select Sector SPDR Utilities (NYSE: XLU)”

  1. Brian April 29, 2023 2:15 am #

    Alan,

    I wanted to ask about your recommended BTC percentages to exit. I understand 20% until fourteen days and 10% until seven days, but I cannot find on the BCI site what your recommendation is with less than seven days to go.

    Thanks Alan,

    Brian

    • Alan Ellman April 29, 2023 7:55 am #

      Brian,

      The 20% BTC GTC (good-until-cancelled) limit order applies to the 1st 2 weeks of a 4-week monthly contract and the 1st 3 weeks of a 5-week contract. The 10% guideline applies to the last 2 weeks of all monthly contracts, and therefore, the last week of monthly contracts or all weekly contracts.

      The limit order can be removed as expiration approaches only if we are able to monitor our trades several times a day up to expiration.

      Here is a link to a rare, but pertinent, series of trades I previously published where I “hit a double” on the last day of a contract using the 10% guideline:

      https://www.thebluecollarinvestor.com/hitting-a-double-on-the-last-day-of-a-contract/

      Alan

  2. John April 30, 2023 12:01 pm #

    Alan,

    GDX great pick for last few weeks . Did well on weekly and monthly covered calls .

    Thanks
    John

    • Alan Ellman May 1, 2023 7:22 am #

      John,

      So glad to learn of your recent success.

      BCI’s rigorous screening process provides our members elite-performing stocks and ETFs and additional data which allows our members to make the most appropriate selections based on personal risk-tolerance and strategy goals.

      Keep up the good work.

      Alan

  3. Dennis May 1, 2023 11:16 am #

    I am excited to here your next talk coming up in May.
    My question is have you done any back-testing of any of your strategies to see how they work over say the last 10 or 15 years, and if so are the results published anywhere?
    Dennis

    • Alan Ellman May 1, 2023 3:47 pm #

      Dennis,

      Glad you can make the presentation. We will be making a special offer to those registered for the webinar.

      For this CEO Strategy (streamlined approach to covered call writing), I’ve done something so much better than back testing. Let’s call it front testing, for lack of a better term.

      It was the result of 3 years of due-diligence in response to members who were asking for a more user-friendly and time-efficient approach to covered call writing.

      I archived every trade and exit strategy trade adjustment I made over a 1-year period with screenshots taken directly from my brokerage account. Rules, guidelines and rationale was discussed, and 12 monthly comparative results were published using the new spreadsheets we will present on May 11th.

      Final annualized returns with comparison to the market (S&P 500), complete with accompanying screenshots.

      Back testing is good, but following hundreds of actual trades in real-time is so much more productive.

      See you on May 11th.

      Alan

  4. Stacy May 2, 2023 1:04 am #

    Alan,

    I am a new premium member. I have 2 questions:

    1. How often do you publish the Premium report?

    2. How late in a four week period do you buy stocks and sell options?

    All the best – Stacy

    • Alan Ellman May 2, 2023 7:17 am #

      Stacy,

      Welcome to our premium member community.

      1. The stock report (weekends) and the ETF Report (mid-week) are published weekly. The Blue Chip (Dow 30) report is published monthly on the week of expiration Friday and the High Dividend Yield Report (dividend capture strategy) is published quarterly.

      2. In my monthly portfolios, I enter my trades the Monday or Tuesday after expiration Friday. In my weekly portfolios, I enter my trades on Monday. If we need a replacement stock or ETF, those trades can be entered at any time.

      I enter my initial trades between 11 AM ET and 3 PM ET to avoid early morning and late afternoon institutional computerized trading.

      Alan

      • Stacy May 2, 2023 9:39 am #

        Thanks Alan – I am enroute to becoming one of your biggest disciples.

        All the Best – Stacy!

  5. Alan Ellman May 3, 2023 5:09 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:

    https://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

  6. Cornelius May 4, 2023 5:36 am #

    Good Morning Alan,

    I registered for the above mentioned online-event.
    There are just two questions open for me at the moment.

    1) the event will start at 20:00 your timezone and will it be recorded?

    2) the streamlined version of your system will be available as a book soon? I did not find anything in the store on your website.

    Best regards,
    Cornelius

    • Alan Ellman May 4, 2023 7:13 am #

      Cornelius,

      1. Yes, the event will be recorded and sent to all those who registered here:

      https://forms.aweber.com/form/42/850353942.htm

      2. My new book, “Covered Call Writing: A Streamlined Approach”, is available in PDF format with all 3 of the CEO Packages, to be detailed at the webinar. The softcover version will be available as a standalone product a few weeks later.

      Glad you can make it on May 11th.

      Alan

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