Hi Charlie,

Unfortunately, it’s not that easy. Covered call writing is all about generating a monthly cash flow and we are very sensitive about giving back cash realized from option sales. In the trade you described, you generated an initial option return that met your 1-month goal + additional share appreciation from purchase price to strike. Great job so far, you achieved a maximum return on your trade.

Now, as the strike goes from OTM to ATM, the time value can actually increase resulting in an options debit. True you are capturing intrinsic value but losing time value, our focus using this strategy.

One mistake many cc writers make is to confuse cc writing with other strategy goals. This is not long-term share ownership nor is it dividend capture, it is generating monthly cash flow by selling options and perhaps share appreciation to the strike.

Now, I am all for making more than a max return and that’s why I developed the mid-contract unwind exit stratregy (pages 264 – 271 of the Encyclopedia…). In this case, the time to act is when the time value approaches zero as the strike moves deeper ITM. Otherwise, consider a rolling out strategy as expiration Friday approaches.

Being a CPA with a gift for math I know you’ll get this.

Alan

]]>Adrian,

First congratulations on a series of excellent trades. I’ve done well with this one as also.

The confusion is understandable because we have 2 sets of calculations…one for making the best investment decision at any point in time (the main reason I developed the Ellman Calculator) and one for P&L and tax purposes.

For the former, use the “unwind now” and “mid-contract unwind” tabs of the Elite version of the Ellman Calculator. For the latter, use the P&L spreadsheet found in the “resources/downloads” section of the premium site or the Schedule D within the Elite Calculator (as a premium member you have free access to the expanded version of the Ellman Calculator).

Use tabs D2, D3 and D4 as shown in the screenshot below. Until the long stock position is closed, you have a series of options trades where you STO then BTC where the acquistion date is later than the sale date.

If you want to do a 2-month evaluation of your position, calculate the share profit + option debits + option credits and divide by the cost to purchase for a 2-month return. Mutiply by 6 to annualize.

CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

Alan

]]>I’ve been doing some ETF options and some paper trades. All successful. Plus I’ve reviewed your exit strategies in your Complete Encyclopedia.

Wouldn’t you always want to sell your OTM option when it hits the strike price since your gain is capped, so you can roll up or out? Why not put an automatic sell (Buy to Close) when your OTM reaches the strike price? Is it that easy or am I missing something?

While my option goes deeper in the money, only for me to buy back, I miss the gain above the strike price.

I haven’t seen this question.

Thanks again for doing what you do.

Charlie

]]>– Now as this article is about the MCU strategy, I thought I had better ask you about a recent papertrade I did. This was a 2-month trade, on a Rolling out & up and then a MCU after that.

Using the stock ‘THRM’ at 17th Apr(expiry) I did a BTC on the $35C(for Apr) at $1.10, and then STO the May $40C@ 0.45c,- with the stock at $35.85 at April expiry. This stock rose up, and ends the May expiry at $39.79.

I decided to keep the stock as chart positive, so STO the $40C for June at $2.(price now is at $40.99)

And then on 6th June price is at $43.36 so I look to do a MCU, with a BTC of the $40C@ $3.90 and then selling the stock.

– Now I have my Calculations for this 2-month trade but wonder if you can show me how you worked out the profits/returns, so I can confirm if I am correct?

– Also my main confusion here is when the price at May expiry is at $39.79 (under the $40 strike), then wouldn’t this be the next cost-basis amount – after the original $35 that I did a BTC on at the April expiry? (because I had worked out a $4.79 capital gain into my calculation for May)?

even though it has shown me good returns lately has also left me a bit confused over the calculations in it.

Even though this trade has shown me good returns lately, it has also left me a bit confused over the calculations in it, so hopefully you can show me how the returns are formatted out. Thanks

]]>Jon,

When you enter a trade we look @ ROO which is our initial option return. We have no definitive idea how the trade will end up. The formula is time value option credit/cost basis. The cost basis is the cost per share x 100 per contract or the strike price x 100 per contract whichever is less. In this case, the option credit is $806 per contract as you stated in your question and the cost basis (money we have to set aside to leverage the options) is $22,461 per contract. Now the math:

$806/$22,461 = 3.6% intial return

Without the protective put:

$1105/$22,461 = 4.9%, 1-month return

As a general rule; when a return appears too good to be true…it usually is.

Keep up the good work.

Alan

]]>I have been looking at TSLA as a candidate for a collar trade.

Here are the details:

– Current stock price (as of close on 6/16) is $224.61

– I would be long the stock, and sell the July 19 $225 call

– I would then buy the July 19 $200 put for downside protection (next earnings announcement isn’t until early August)

– The sale of the call would generate $11.05

– The cost of the put is $2.99

– Net credit is therefore $8.06

Since my maximum loss (i.e. capital at risk) would be $25/share (and that assumes I would exercise the put and sell/realize the loss, and also excludes the receipt of the net credit), would it be accurate to think the ROO on this trade is: $8.06/$25, or 32.2%?

Thanks,

Jonathan

Jim,

At the time of this response, here are the stats:

AKRX trading @ $28.70

Cost to close $30 call = $0.20

Roll down to $25 strike credit = $3.60 (can likely “negotiate” a better price)

If the option expired today, you would have an unrealized share loss of $0.50 and a realized option profit of $0.75 for a 1%, 1-month return.

If you roll down, the option credits and debit along with share loss down to $25 would result in a trade wash. The latter should be executed only if you have a bearish outlook for the stock over the next 4 days. Under normal circumstances the BCI methodology guidelines dictate “take no action”

Alan

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