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This video analyzes a series of covered call trades where 2 income streams were generated using exit strategy management.
The stock lost money of the 26-day series of trades, but the investor made 1.85% in that time frame.
Calculations and trade entries are shown using the BCI Trade Management Calculator (TMC).
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Good morning Alan,
A few minutes ago, I watched with much interest your Ask Alan #226 webcast. I am curious about the TMC entry “STO Entry #2 Option Premium [$/sh] which was a negative $0.51. My question is, why would anyone be happy to spend an extra $0.51 per share? Wouldn’t the trade me be more profitable if the trader did not inter into the second buy-sell option trade (the double)?
Also, in your summary, you mentioned that “initiating the CC trade with a defensive posture (ITM strike) played a large role in the success of the trade”. My question here is, is it your position that CC trades should be initiated from a defensive posture? I am sorry if you feel that you will be repeating yourself but I would really like to her that sentiment expressed again. Thanks for the work that you do.
Edmund,
Every question at BCI is a good one.
Let’s start with the big picture. Stephen’s exit strategy executions turned a 26-day 1.14%, 16% annualized initial return into a 1.85%, 25.97% annualized return. Can’t argue with success.
Now, let’s focus on the TMC -$0.51 entry. This represents the final STO and BTC “hitting a double” premium entry. The second option was sold at $1.58 and closed at $2.09, prior to selling the shares at $95.08. This second round of option trades netted a debit of -$0.51. However, shares were sold at $95.08, current market value. Prior to buying back the option at $2.09, shares could only be worth $93.00, the contract obligation to sell. The share price benefit was $2.08, and the option debit was $2.09, so a loss of $0.01 per-share, no big deal.
Now, Stephen didn’t have to take this last step, since the $93.00 strike was ITM and shares would have been sold the day after expiration Friday, but the calculations would have been virtually the same.
Bottom line: The stock was down in this contract cycle and Stephen walked away with a 25.97% annualized return.
Regarding your question about using ITM covered call strikes: These should be given serious consideration in bear and volatile markets or if it aligns with our personal risk tolerance. One size does not fit all. I believe that OTM covered calls should be favored in normal to bull markets. ITM strikes should always be an available choice for our trade execution arsenal.
Alan