After entering our covered call writing and put-selling trades, we can calculate the current status of our trades mid-contract with a few simple entries into our Trade Management Calculator. In this article, a real-life covered call writing example with BMY will be highlighted. Hypothetical examples of closing winning and losing trades mid-contract will be detailed utilizing the spreadsheet.
BMY initial trade details
- 7/5/2022: Buy 100 x BMY at $76.84
- 7/5/2022: STO 1 x 7/22/2022 $78.00 call at $0.98
- 7/12/2022: BMY trading at $80.00; $78.00 call option has an ask price of $2.40 (winning trade)
- 7/12/2022: BMY trading at $74.00; $78.00 call has an ask price of $0.25 (losing trade)
Option-chain for BMY on 7/5/2022
Initial trade entries and calculations
- Initial time-value return is 1.28%
- Annualized initial return is 25.86% based on an 18-day trade
- Additional upside potential of 1.51% if BMY moves up to or beyond the $78.00 strike
Mid-contract status of winning and losing positions
When BMY moves to $80.00 (top rows)
- Net option loss of 1.85%
- Net stock gain of 4.11%
- Total $ gain of $174.00 per-contract
- Total % gain of 2.26% from 7/5/2022 to 7/12/2022
When BMY moves to $74.00 (bottom rows)
- Net option gain of 0.95%
- Net stock loss of 3.70%
- Total $ loss of $211.00
- Total % loss of 2.75% from 7/5/2022 to 7/12/2022
Important to note
- Be sure the mid-contract status calculations are deleted and final closing entries made to assess actual final contract calculations
- Mid-contract status calculations can be computed multiple times during the contract with no limitations
- The mid-contract share price can also be entered into the “Final Unsold Stock Price [$/Sh]” column. The calculations will be the same
The current status of our option-selling trades can easily be determined with a few simple entries into the BCI Trade Management Calculator. Based on these calculations, we can make decisions regarding the need for trade management implementation.
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I stumbled across BCI about a year ago and purchased The Complete Encyclopedia for Covered Call Writing and it clearly shaped some changes in my buy writing strategies. I also have executed a number of PMCC and too have been refined from a video or two. You have educated and enhanced my processes as I am always looking for an edge.
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Long Island Stock Traders Meetup Group
Analyzing a 1-Month Covered Call Writing Portfolio from Start to Finish
Thursday February 16,2023
7:30 PM ET- 9 PM ET
A real-life example with a $100k ETF Select Sector SPDR portfolio
Covered call writing is a low-risk option-selling strategy that generates weekly or
monthly cash flow. This presentation will demonstrate how to implement this
strategy using a database of only 11 exchange-traded funds for a 1-month option
contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s
portfolios with screenshots verifying each trade. A final monthly contract result
compared to the performance of the S&P 500 will be calculated.
Topics included in this webinar:
What are the Select Sector SPDRs?
How to establish a covered call writing portfolio
What is the role of diversification?
What is the role of cash allocation?
Calculating initial returns
Analyzing each trade in the monthly contract
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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
I read an in depth article of yours about covered calls and as a newbie, I’m currently in quite a pickle that I’m trying to understand and potentially do something about!
I got 1000 shares of $Bili and placed covered call options on them with strike prices of $14 and $17 and unfortunately the stock flew up during these past two weeks to $24 where the little bit of premium received (~$2K) is nothing compared to the current gain of the underlying long stocks (~$10K). The covered calls are due mid January. Is there any way I can reverse/sell/execute/assign them earlier for a profit here – or am I doomed to hold on until mid January and will have to be satisfied with just the premium received upfront?
I’m a newbie to covered calls and can’t find an answer to this on Google! Any help/guidance from you would be super appreciated!
No need to panic.
A few comments you should find useful:
• As long as the $14 and $17 calls are in place, the shares can be worth no more than those strikes
• As of now, you have an unrealized maximum gain on these trades as they were initially established (accepted the premium and agreed to sell your shares at the strike)
• You do not have to wait to close the trade, you can close at any time by buying back the calls and selling (or holding) the stock
• Buying back the call, will make the shares worth current market value, but the cost will be the difference between the strike and current market value + a time-value component
• As an example, if you sold the 1/6/2023 $17.00 call and shares are now worth $25.76, the posted cost-to-close the $17.00 call is $9.70 per-share. If that is done, shares are now worth $25.76 or an additional $8.76 above the previous strike. This means, you are paying $0.94 in time-value to close the $17.00 call. You can then sell a higher strike call if you feel that share price will continue to accelerate
• Bili is an extremely volatile security. It can go down as fast as it went up. Great premiums but great risk with these type of underlying securities
• Bottom line: You haven’t lost $. You have maximized your profits (unrealized until the trade is concluded) as the trade was initially crafted. In other words, champagne rather than Kleenex in this case.
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Barry and The Blue Collar Investor Team
Hope all is well.
What is the method you use to calculate Standard Deviation or a stock and the best way of interpreting the answer, especially as it relates to Puts?
Over the years, I have discussed standard deviation as it relates to implied volatility stats. These IV stats are published based on annualized IV projections and 1 standard deviation (falling into the expected trading range 68% of the time).
If looking for a high or low end of the trading range for put trades (typically the low end), the expected price movement based on 1 standard deviation IV stats results in an 84% probability that share [price will not dip below the low end of the range.
BCI Premium members have access to our Expected Price Movement Calculator (based on implied volatility) in the “resources/downloads” section of the premium member site- scroll down to “E”).
Here are links to an article and a podcast I produced related to this topic:
Hello again Alan.
Simple question. In general if you are near last week of contract and stock price is close to strike(at or 1% less) and market is volatile like now—would you consider btc even a week before expiration?
Thanks as always.
With 1-week remaining in a monthly contract, and the short call strike and stock price about the same, the strike is now at-the-money (ATM). These strikes will have the highest time-value when calculating the cost-to-close our entire covered call position.
Let’s say we generated an initial 1-month 2.5% time-value return on our trade. How much of that are we willing to sacrifice to close the trade? Share price can go above the strike, below the strike or stay the same. 2 of the 3 possible outcomes are favorable.
To make this determination, we must calculate the time-value cost-to-close. This can be accomplished using the “unwind now” worksheet tab and/or the “mid-contract unwind” (MCU) exit strategy dropdown choice inherent in the BCI Trade Management Calculator. (See the screenshot below). Once we have that information, we can make an informed decision.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Have you been noticing of late that orders that are put in at the Mid point between ASK and BID (or close to) are immediately not being filled.
When I put the sell Option orders in (under 10 packets) that there are literally hundreds of waiting orders on both sides to be filled but as soon as I do this, it immediately drops to the exact number of my order. Making my order the ASK price and the Mid price then dropping.
Id be interested to hear if you are seeing the same and is it because the BOTS are so fast?
This makes sense. It relates to the SEC’s “Show or Fill Rule”
When we place limit orders that “improve” the market (between the bid and ask prices), the market maker is required to take 1 of 2 actions:
1. Execute the trade as instructed or
2. Publish the new limit order
You had the market-maker rejecting your order and then was required to publish it.
Try this moving forward:
Find the midpoint of the spread (called the “mark”) and place a limit order slightly in favor of the market-maker.
When selling calls, if the spread is $1.00 – $1.50, try $1.15 – $1.20 rather than $1.25.
Here is a link to 1 of the articles I published related to this topic:
Good Morning, Alan
It is very nice to learn from you. Thank you very much for your answers.
When I try to read the weekly report, there is a column called “OI at NTM”, and it says the OI of the options is larger than 100, and the difference between Bid and Ask should be less than 0.3.
My questions are
1, How to define the NTM, for example the two stocks Called A and B), their prices are 100 (A) and 10 (B), should the NTM be within 1%?(or constant dollar).
99 -100 is at NTM for A, and 9.90-10.10 for B, is that correct?
2, Can I trade the options outside of NTM with the OI 0.3?
When we sell options, we want decent liquidity with the options we are trading in much the same way we demand appropriate liquidity for the underlying securities (average trading volume of 250,000 share/day minimum is the BCI guideline).
As a result, BCI created these “guidelines” for the option side of the trades: At least 100 contracts of open interest and/or a bid-ask spread of $0.30 or less. This way, if we decide to close our short positions, we can do so at a reasonable price. A wide spread for illiquid options will make the process challenging.
When we use the term, NTM (near-the-money), we are referring to strike prices slightly above or below the current market value of the stock. If an option trades in $1.00 increments, it could be a few strikes in either direction. If an option trades in $5.00 increments, it would be 1 or perhaps 2 strikes in both directions.
We can definitely trade options deeper in-the-money or deeper out-of-the-money depending on the strategy we are using. For example, I have written about ultra-low-risk strategies where we use deep OTM or ITM strikes. We may veer slightly from our open interest guidelines but should always keep in mind that we may need to close the position and what the projected cost-to-close would be. In these cases, we may accept a slightly lower open interest, but we should avoid options with zero or close to zero liquidity.
I have a few more questions and I would like to ask you.
1) On page 285 shortly after figure 104 you state:”The time value to buy back the option is also incorporated into the next month´s option premium. If we wait until the following week to sell the call option, the option premium will be worth less at that time and thus will garner less income.”
That means that it will be less than 260 $?
2) What maximum percentage of your account do you go into the market with? If, for instance, I had a 20.000$-account to start my BCI-Investing career. How much should I allocate each month (given a reasonable diversification)? Do you keep a sort of safety amount in your account?
3) As I am currently reading your Complete Encyclopedia for Covered Call Writing, I noticed that you had also written Cashing in on Covered Calls and another book just about the exit strategies. Are the information contained in those books also in the Complete Encyclopedia or is there additional information I should read?
I am looking forward to your reply!
1. On page 284 of The Complete Encyclopedia- classic, the cost-to-close the $35.00 call at expiration with the stock trading at $35.28, is $0.60. Since the $35.00 strike is $0.28 in-the-money, we are paying $0.32 of time value to close the current month short call.
The comment on page 285 is that if we do close that call to roll-out, we will garner approximately an additional $0.32 of time-value when selling the next month $35.00 call by selling it prior to contract expiration.
Therefore, the net premium per-contract remains at $260.00 or 7.4% as initially structured post-roll.
2. Excellent observation. Yes, we always need a cash reserve for potential exit strategy opportunities. The BCI guideline is 2% – 4% of total cash available. For a $20k portfolio, the guideline is to leave $400.00 – $800.00 in reserve.
3. Since you have “The Complete Encyclopedia”, you do not need “Cashing in on Covered Calls” but I would highly recommend my new book on exit strategies along with our latest and best spreadsheet, the “Trade Management Calculator (TMC)” We package the PDF version of the book along with the TMC as one of our “Best Discounted Packages” The link for more information on the TMC Package is below (see 2 videos). Should you decide to purchase this or any other items in our store, use coupon code: holiday15-1, for a 15% total order discount. This offer is good through the holiday season. Here’s the link:
In the pasted example below, the premium received is far below the suggested 2% – 4% monthly gain. Is there a reason this trade was made? Thanks in advance for your reply… Bill
4/18/2022: Buy 300 shares of XLP at $78.59
4/18/2022: STO 3 x 5/20/2022 $80.00 calls at$0.84
Over the past 15 years, I have published that my target initial time-value return goal range when selling monthly options for stocks is 2% – 4%. For those who are more conservative, a lower target range is appropriate and vice-versa.
In your example, XLP, a Select Sector SPDR is used. This is an exchange-traded fund. I have also published that, when using ETFs, a target goal of 1% – 2% is more appropriate. The reason is that ETFs are baskets of stocks, some going up in price and some going down. As an entity, they are generally less volatile than individual securities (there are exceptions). The lower the implied volatility of a stock or ETF, the lower the premiums.
In this XLP example, the initial time-value monthly return is 1.1%, reasonable for a low implied volatility security. There is also an opportunity to generate an additional return of 1.8% if share price moves up to, or beyond the $80.00 strike.
We can craft our option-selling portfolios with stocks, ETFs and options that align with our personal risk-tolerance and strategy goals. This is an example of a conservative approach with significant monthly return possibilities.
The Blue Chip Report for the best-performing Dow 30 stocks for the January 2023 contracts has been uploaded to your member site in the “resources/downloads” section (right side; scroll down to “B”).
Alan & the BCI team
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I wanted to run this by you for your feedback. I’m looking to paper trade the PMCC and can’t seem to get the numbers to work out.
Take AAPL as an example…currently at $143
I buy the LEAP 120 Call, Jan ’25, delta 76, for $44.25
I sell next month’s 20th Jan 150 Call, delta 35, for $2.95
If I add the strike difference, 30 plus the premium received of 2.95, total = $32.95
This is nowhere near the $44.25 paid for the long, and we need the total to be more than the long. Correct?
I’ve tried this with several stocks and it doesn’t seem to add up. What am I missing?
You have the required trade initialization formula correct.
The issue with this trade is that the time-value component of the LEAPS is way too high. Of the $44.25 premium, $23.00 is intrinsic-value ($143.00 – $120.00), leaving a time-value component of $21.25 ($44.25 – $23.00).
To solve this issue, we must look to LEAPS strikes that are deeper in-the-money. As we go deeper ITM, the time-value component of the premiums will get smaller. Yes, the cost of the LEAPS is higher.
In the screenshot below, I used data from this morning’s option-chain showing an example of an AAPL PMCC trade that meets our required formula. This is 1 example, not a specific recommendation.
Moving forward, when the spreadsheet reads “NO”, try deeper ITM LEAPS.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.