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)
- 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
- 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.
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.
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