Exit strategies for covered call writing will frequently allow us to convert losing trades to profitable ones. To corroborate this concept, a real-life example with Nike Inc. (NYSE: NKE) will be detailed.

 

Initial trade structuring

  • On 6/22/2020, 200 shares of NKE was purchased at $97.72
  • 2 July 17, 2020 $99.00 calls were sold for $1.60
  • Buy-to-close limit orders were set up using the 20% guideline (BTC at $0.30)
  • The BTC limit order was changed to 10% ($0.15) on 7/6/2020

 

Initial trade calculations using the Multiple Tab of the Ellman Calculator

NKE: Initial Calculations

 

The yellow cells show an initial 1-month time-value return (ROO) of 1.6% with upside potential of 1.3% creating a maximum 2.9%, 1-month return.

 

Rolling-down exit strategies used during the July contract

  • The 20% threshold ($0.30) was not reached
  • The 10% threshold ($0.15) was realized for the first time on 7/16/2020
  • The $99.00 call was rolled-down to the $98.00 strike ($0.48) on7/16/2020
  • The new 10% threshold for the $98.00 call ($0.05) was reached on 7/16/2020
  • A sell-to-open order for the $97.00 call was executed for $0.13

 

Broker statement showing the 2 rolling-down exit strategy trades

NKE: Rolling-Down Trades

 

The yellow fields show the BTC orders and the brown fields reflect the STO orders executed.

 

Turning a losing trade into a profitable trade

Share price declined from $97.72 to $96.28 resulting in an unrealized loss of $288.00 for the 200 shares. We received per-share option credits of ($1.60 + $0.48 + $0.13) and option debits of ($0.15 + $0.05). This resulted in a net option credit of $402.00 for the 200 shares. Factoring in unrealized share loss and realized option credit, the trade resulted in a net profit of $114.00.

 

Discussion

Option-selling exit strategies will mitigate losses, enhance gains and turn losses into profits. This NKE real-life example demonstrates how multiple rolling -down exit strategies put cash into, rather than out of, our pockets.

 

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Covered Call Writing with 4 Practical Applications

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