When cash-secured puts are sold, many investors prefer to avoid exercise and having the shares put to them. If the (originally) out-of-the-money (OTM) strike is in-the-money (ITM) as expiration approaches due to share price decline, buying back that put option will avoid exercise. This article will explore a scenario where the put option is OTM on expiration Friday and the cost-to-close the option is miniscule. I decided to take this path because I could not be in front of my computer to monitor the trade through 4PM ET on expiration Friday. Why not buy back that put option early in the day and not have any concerns of share decline below the put strike by 4 PM ET? This article will also include one of our exit strategies, rolling-up.
Real-life weekly example with NVIDIA Corp. (Nasdaq: NVDA)
- 6/26/2023: NVDA trading at $415.25 (1)
- 6/26/2023: STO 1 x 6/30/2023 $397.50 OTM put at $1.61 (1)
- 6/27/2023: BTC 1 x 6/30/2023 $397.50 put at $0.73 (2)
- 6/27/2023: STO 1 6/30/2023 $400.00 put at $0.98 (rolling-up) (3)
- 6/30/2023: NVDA trading at $416.75 (4)
- 6/30/2023: BTC 1 6/30/2023 $400.00 put at $0.03 (4)
Price chart of NVDA from 6/26/2023 – 6/30/2023
With NVDA trading at $416.75 and the $400.00 strike still OTM, I decided to close the trade at a cost of $3.00 (+0.65 commission) to eliminate the possibility of NVDA dropping below the $400.00 put strike. Although the likelihood of exercise was remote, for $3.65, it was an issue I would never have to deal with. As it turned out, NVDA closed at $423.26 (purple circle).
Initial (pre-rolling) calculations using the BCI Trade Management Calculator
Based on this 5-day trade, the initial time-value return is 0.41%, 29.69% annualized.
Post-rolling results with and without the BTC at expiration
Rolling-up increased the 5-day return from 0.41% to 0.47%, an increase of 14.63% (brown cell). Using the $0.03 BTC on expiration reduced the final return from 0.47% to 0.46%, a reduction of 2.12% (pink cell).
Discussion
When selling cash-secured puts and one of our stated goals is to avoid exercise and the subsequent purchase of the underlying securities, buying back OTM strikes at a miniscule cost should be given consideration. As expiration approaches, the time-value component of OTM premiums approaches $0.00, so the cost-to-close will be negligible, allowing us to avoid the risk of unexpected price movement to the downside risk by expiration.
Covered Call Writing Online Video Course with Downloadable Workbook
Use discount coupon calldvd25 for $25.00 off this product.
Our objective was to create the most complete and comprehensive video program on covered call writing found anywhere. The 4-set video curriculum takes us through the 3 required skills: stock selection, option selection, and position management. The 4th section highlights special circumstances like writing calls against long-term buy-and-hold portfolios.
You Will Learn:
– How to locate the greatest performing stocks for option-selling
– Which Is the best option to sell
– How To calculate your returns
– How To utilize exit strategies – Decrease losses & enhance gains
The program is based on 25 years of actual trading options, not on computer models. All the rules and guidelines presented are based on these real-life experiences. This series will benefit both beginners and more experienced investors and addresses all scenarios that can arise before, during and after trade executions.
Use discount coupon calldvd25 for $25.00 off this product.
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email 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 & Barry,
You guys are the best. I’ve been searching high and low for a system that is similar to my investment risk profile along with the ability to have great teaching. You guys have exceeded my expectations. Not only do you do those things, but you also give me a great list of potential stock picks to consider. I love the system and will be patient and wait for the credit/debit spread info to unfold. I honestly plan to be a member for many years.
Sincerely,
Tom
Upcoming events
1. Mad Hedge Investor Summit
December 5 at 11 AM ET – 12 PM ET
Tuesday December 5, 2023
11 AM ET – 12 PM ET
Register for free here.
Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow
Investing with Stock Options
Hosted by Dr. Alan Ellman, President of The Blue Collar Investor Corp.
Barry Bergman, BCI Managing Director
Selling stock options is a proven way to lower our cost basis and beat the market on a consistent basis. Two such low-risk strategies are covered call writing and selling cash-secured puts. This presentation will detail how to incorporate both strategies into one multi-tiered option-selling strategy where we either generate cash-flow or buy a stock at a discount. I refer to this as the Put-Call-Put (PCP) Strategy, also referred to as the wheel strategy.
The basics and pros & cons are discussed as well as a real-life example and introduction into the BCI Trade Management Calculator (TMC). This seminar is appropriate for those who look to generate modest, but consistent, returns which will enable us to beat the market on a consistent basis while focusing on capital preservation.
Register for free here.
2. BCI-Only Webinar: Portfolio Overwriting
Portfolio Overwriting: Covered Call Writing Our Buy-And-Hold Stocks
Increasing profits and avoiding tax issues
Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”. Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk covered call writing-like strategy.
Topics discussed
- Brief review of covered call writing
- Option basics
- What is an option-chain?
- Option selection
- Calculating covered call returns: Real-Life examples
- Portfolio overwriting defined
- Pros and cons of portfolio overwriting
- Why early exercise is so rare
- Rolling options
- Role of dividends
- Locating ex-dividend dates
- How to avoid early exercise
- Real-life examples with calculations
- BCI Portfolio Overwriting Calculator
- BCI Trade Management Calculator
- Summary
Details & registration link to follow.
3. Long Island Stock Traders Meetup Group (private investment club- Part I)
Thursday February 15, 2024
7:30 PM ET – 9:00 PM ET.
Club members only.
4. Las Vegas Money Show & Stock Traders Live In-Person Event
February 21 – 23, 2024
Paris Hotel
Details to follow.
5. Long Island Stock Traders Meetup Group (private investment club- Part II)
Thursday March 14, 2024
7:30 PM ET – 9 PM ET
Club members only
Hi Alan,
I saw both of your videos and purchased the Trade Management Calculator (TMC). and then i map my trades in the system however have following questions which I saw video twice and could not find the answers:
1. When we roll one trade such as roll out and up and create a new trade in a separate row in the enter trade section, by doing this we have a limited number of rows and as we can insert more rows so what do we do if we have no rows left to add more trades ?
2. If your reply is that we can create this monthly basis then my question is if I enter one trade in December expiry period and then roll out and up to let’s say January 2024 cycle it means I have to enter new trade in different sheet for January entries and if we do this how we know the total portfolio position.
How do I use this for multiple cycles when I keep rolling the trade.
Will appreciate your advice
Regards,
Burhan
Burhan,
Rolling our options is an area Barry and I spent a lot of time analyzing over the year and a half it took us to develop this spreadsheet. Each chapter, on rolling options, in the associated book, “Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts”, has real-life examples as how to integrate the TMC with these trades. Entries, adjustments and final results are detailed. I also recommend reading Appendix IV of the book which analyzes rolling-out management.
That said, here are some important points to consider:
1. I suggest using a separate spreadsheet for each expiration cycle and label it accordingly. For example, TMC_12-1-2024; TMC_12-15-2024; TMC_12-29-2024 etc. Always retain a blank copy (TMC_BLANK) and name new ones based on the expiration date as shown above.
2. There are 60 rows in each section (covered call writing & selling cash-secured puts) for a total of 120 rows per expiration date. Since there are > 2000 formulas inherent in the spreadsheet, we have locked the calculator so additional rows cannot be added. This protects the integrity of the entries and calculations. For those who execute > 60 trades per strategy per expiration cycle, I suggest using 2 spreadsheets per expiration cycle, TMC_12-1-2024_REVA and TMC_12-1-2024_REVB. Most of us will not be needing a 2nd spreadsheet per expiration cycle.
3. Rolling-up or rolling-down multiple times in the same contract cycle: This is also accounted for in the TMC spreadsheet. After the 1st “roll”, the trade is considered complete, and the next roll (or another exit strategy) is entered on a new line of the same spreadsheet. We must use the “capital adjustment” section of the spreadsheet, in these scenarios. This is detailed in both the associated book and the TMC user guide.
4. Rolling-out: The trade in the current expiration cycle is considered complete based on the initial (now, in-the-money) strike. The new rolled-out trade is entered in a new, later-dated spreadsheet, using a net option premium and the original strike as price of the stock. See Appendix IV of the book or the user guide for more details on rolling options. Suffice it to say, that all scenarios (we could think of) are incorporated into the spreadsheet.
I know this seems like a lot of information to digest, but I must tell you that after a short timeframe, it will be well worth the due diligence. I can’t imagine executing my trades without this spreadsheet.
Alan
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 12/01/23.
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 Member’s pricing is locked 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
Alan,
I just finished reading your latest book on exit strategies. It really opened my eyes as to how many different ways we can improve our trade results. I plan to re-read the book several more times. I’m also using the TMC and finding it quite useful.
My question is how you decided on the 20%-10% guidelines to close covered call trades. Is there a formula you used to get to those numbers?
Thanks a lot,
Stan
Stan,
Early in the development of the BCI methodology, I recognized the need for exit strategy integration which starts with buying back the option, in most cases.
I started trying different combinations of buy-to-close limit orders in various timeframes (days to expiration). Over a 2–3-year period, I came to the conclusion that the 20%/10% guidelines worked best in moist scenarios.
I purposely call these “guidelines” to give the investor some flexibility. Over the past 2 decades, this combination has proven to be a reliable, time-efficient way to manage our trades.
Alan
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