Calculating Our Rolling-Out Trades: 2 Approaches Using the BCI Trade Management Calculator (TMC)

click ↑ 4 Featured

When we roll-out our covered call writing trades, the initial strike is in-the-money (ITM) as expiration is approaching and we made a decision to retain the underlying security for the next contract cycle. We have maximized our initial contract return and are initiating a new trade with a later-dated expiration. This article will analyze 2 methods of entering these trades into our TMC.

Hypothetical rolling-out-and-up trade

• 10/23/2023: Buy 100 x BCI at $24.00
• 10/23/2023: Sell-to-open (STO) 1 x 11/17/2023 $25.00 call at $1.00
• 11/17/2023: BCI trading at $30.80 on expiration Friday
• 11/17/2023: Buy-to-close (BTC) the 11/17/2023 $25.00 call at $5.83
• 11/17/2023: STO 1 x 12/15/2023 $30.00 call at $2.00 (rolling-out-and-up to an ITM strike)

2 approaches to archiving and calculating these rolling-out-and-up trades

• We can enter the $5.83 BTC debit in the 1st or 2nd contract cycle
• If we enter the debit in the 2nd cycle (12/15/2023 expiration), we will get an accurate maximum return result for the original (11/17/2023 expiration) contract but skewed exit strategy stats in the next cycle that will require manual adjustments. In this scenario, we enter the premium as a net debit of $3.83 ($5.83 – $2.00) in the latter dated expiration (12/15/2023)
• If we enter the $5.83 debit in the 1st cycle (11/17/2023 expiration), the results will not reflect a maximum return in the initial trade, but will give accurate data and exit strategy statistics in the next contract cycle (12/15/2023 expiration)
• Both approaches will result in an accurate 2-contract combined total result. It’s simply a matter of trader preference

Approach # 1: BTC debit entered into 2nd contract cycle (12/15/2023 expiration)

• A maximum 1st contract cycle return of 8.33% is unrealized at that point in time (shares not yet sold)
• A note is made in the trade journal, indicating a rolling-out-and-up to an ITM strike trade
• The BCI Trade Management Calculator (TMC) is used for these computations

Entries into the next contract cycle

• In the 12/15/2023 cycle, a net option debit of $3.83 is entered
• This results in a total option debit of -15.32% and an unrealized share gain of $5.00 ($500.00 per-contract)
• This results in a net credit of $117.00 per-contract
• Since a negative option premium is entered, exit strategy buyback price points will need to be manually adjusted, based on the $2.00, 2nd contract premium (red arrows on bottom)

Approach # 2: BTC debit entered into 1st contract cycle (11/17/2023 expiration)

• #1: Initial trade entries
• #2: Initial trade returns with upside potential
• #3: BTC debit entered with current market value noted
• #4: Final 1st contract results reflect a negative option return and an unrealized share gain, netting a total unrealized return of 8.21%

Calculations in the next contract cycle

• Current share price (at the time of the roll) and 2nd contract premium ($2.00) are entered
• Calculations proceed normally, reflecting an initial time-value return of 4.00% with downside protection of 2.60%, since an ITM strike is used
• The exit strategy buyback price points (green arrows) are accurate and do not need manual adjusting

Discussion

There are 2 methodologies for archiving and entering our covered call writing rolling-out trades. The first involves entering our BTC option debit in the latter contract cycle. This will result in an accurate reflection of a maximum return in the first contract but will require adjustments of exit strategy price points in the 2nd contract cycle.

In the 2nd approach, we enter the BTC debit in the 1st contract cycle, which will result in an option reduction and an unrealized share appreciation. There will be no need to adjust exit strategy buyback price points in the next contract cycle.

Both methods work and both will produce an accurate representation of the total 2-contract results. It’s simply a matter of investor preference.

Stock Investing for Students: A Plan to Get Rich Slowly and Retire Young

This is Alan’s financial literacy book (not option-related), currently used in 4 universities in the US.

Self-investing starting at a young age can ensure a successful financial future and an early and comfortable retirement. So why is nobody doing this? The answer includes such factors as the social pressures facing our youth, certain pre-conceived ideas regarding our ability to successfully self-invest and the education or lack thereof needed to motivate our youth to undertake such a long-term project. The purpose of this book is to change that way of thinking and create a goal and a user-friendly methodology that will facilitate a plan which will allow you to retire financially secure at a relatively young age.

Click here for more information and purchase link.

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:

Hi Alan,

As a long-term premium member, I just want to pass on how much I appreciate what you and Barry and “The Team” have provided to all of us over the years. It has been an invaluable source of education and guidance. Thank you!

Best regards,

Mike D.

Upcoming events

1. Mad Hedge Stock Investor Summit (online event)

June 4, 2024

11 AM ET – 12 PM ET

Register here.

Covered Call Writing: Multiple Applications Based on Current

Market Conditions

Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)

Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:

• Normal to bull markets
• Bear and volatile markets
• Low interest-rate environments

A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.

Register here.

2. BCI-Only Webinar (Zoom)

July 18, 2024

Exit Strategy Choices After Exercise of Cash-Secured Puts

When we sell cash-secured puts, we are undertaking the contractual obligation to buy shares at the strike price by the expiration date. Typically, we only sell puts on elite-performers that we would be agreeable to own in our portfolio.

This presentation will analyze 4 potential exit strategy opportunities to consider should the put option be exercised. Information on the following strategies will be highlighted:

• Selling the stock
• Holding the stock in our long-term buy-and-hold portfolio
• Write a covered call (PCP or “wheel” strategy)
• Implement the Stock Repair Strategy

In addition to these strategies, the following topics will also be included in the webinar:

• Option basics for selling cash-secured puts
• Option basics for covered call writing
• Real-life examples
• Calculations using the BCI Trade Management Calculator (TMC)
• Event super discount offer

There will be information offered to all levels of options trades, from beginners to advanced.

Registration link to follow.

3. Investment Masters Symposium (live, in person event)

August 1, 2024

Presentation #1: 8:45 AM – 10:45 AM

Paris Hotel, Las Vegas

Register here.

Covered Call Writing & Selling Cash-Secured Puts to Generate Consistent Cash Flow

Basic & advanced principles for trading low-risk stock options with capital preservation in mind

This presentation will detail stock selection, option selection and position management, the 3 required skills to become elite covered call writers and put sellers. It will also include ultra-conservative approaches to these strategies using Delta and implied volatility to create statistically beneficial trades. Rules and guidelines will be discussed to take the emotions out of our trades resulting in high-probability positive outcomes.

Detailed analysis will be provided regarding how to craft our trades to the current market environment, personal risk-tolerance and strategy return goals.

A multi-tiered option-selling strategy which combines both covered call writing and selling cash-secured puts will also be examined. It is known as the PCP (put-call-put) or “wheel strategy.”

Attendees will be introduced to a one-of-a-kind trade management tool, the Trade Management Calculator, which is used to enter, manage and generate final realized and unrealized trade results.

The course is structured to benefit both beginner and advanced option traders, using real-life examples to enhance the learning process.

Presentation #2: All Stars of Option Trading Event

Register here.

4. Stock Traders Expo- live event in Orlando Florida

October 17 -20

Details to follow.