When share price accelerates exponentially with our covered call writing stocks, the strike moves deeper in-the-money. Although the intrinsic-value component of the option premium rises, the time-value component approaches zero. This creates an opportunity to consider our mid-contract unwind exit strategy. Before implementing this, or any others in our exit strategy arsenal, we must identify our post-exit strategy goal(s).
What is the mid-contract unwind (MCU) exit strategy?
This strategy closes both legs of the covered call trade and uses the cash generated from the sale of the underlying security to enter a new covered call trade with the same expiration date. In essence, it represents a second income stream in the same contract month with a similar cash investment. The key to successful implementation of the MCU strategy is to calculate the time-value cost-to-close and identify our target returns in the follow-up step or second income stream.
A real-life example with QCOM (thank you to Joanna for sharing)
- 11/6/2021: Buy 100 x QCOM at $166.86
- 11/6/2021: STO 1 x 11/26/2021 $170.00 call at $3.88
- 11/16/2021: QCOM trading at $180.23
- 11/16/2021: BTC the $170.00 call at $11.70
- 11/16/2021: Sell 100 x QCOM at $180.23
Calculating the time-value cost-to-close with the “unwind now” tab of the Elite, Elite-Plus and Trade Management Calculators (Information entered)
QCOM Unwind: Information Entered
Calculating the time-value cost-to-close with the Elite-Plus Calculator (Final calculations)
QCOM Unwind: Final Calculations
The spreadsheet shows a time-value cost-to-close of $147.00 for the contract which represents 0.86% of the investment.
What is our post-exit strategy goal used to make a final position management decision?
Our goal is to generate at least 1% more than the time-value cost-to-close by contract expiration. In this case, it is 1.86% by 11/26/2021. We check our current watch and corresponding option-chains to make our ultimate trade decision.
Discussion
Exit strategy opportunities are the intersection of preparation and opportunity. Defining our post exit strategy goals must be part of the decision-making process.
The BCI Trade Management Calculator Package is now available/ Discount expires soon
After a year and a half of development and beta-testing our 1-of-a-kind Trade Management Calculator is here. We have packaged it with our new book, The Blue Collar Investor’s Guide to Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts.
We are also offering the opportunity to combine this package with our BCI Package and offering early-order discount coupons for both:
Information on the TMC Package:
https://thebluecollarinvestor.com/minimembership/bci-trade-management-system/
Information on the BCI Package:
https://thebluecollarinvestor.com/minimembership/bci-investor-program/
Early-order discount coupons (expires 5/15/2022):
TMC Package: tmc50 ($50.00 off)
Combined TMC/BCI: superdeal100 ($100.00 off)
We hope you enjoy, and most importantly, benefit from our new products.
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,
Thank you. It has been a great experience and quite a good trading year in 2021 and I’m happy to continue with you for another 13 months.
Best regards,
Sylvain
Upcoming events
1.LIVE at The Money Show Las Vegas
May 10th – 11th
2 presentations:
Portfolio Overwriting (free)
Tuesday May 10th at 1:30 PM – 2:15 PM
Increasing Profits in Our Buy-And-Hold Portfolios Using Covered Call Writing
A Comprehensive Analysis of Covered Call Writing: 2-hour Masters Class (paid event to The Money Show)
Wednesday May 11th at 1:30 PM – 3:30 PM
How to master all aspects of this low-risk option-selling strategy
2.Money Show Canada Virtual Event
Analyzing a 1-Month Covered Call Writing Portfolio from Start-To-Finish
A real-life example with a $100k ETF Select Sector SPDR portfolio
May 24, 2022
10:40 AM ET – 11:10 AM ET
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
- Final results
- Next steps
3. Mad Hedge Investor Summit
June 15th, 2022
12 PM ET – 1 PM ET
Topic & registration link to follow
4.American Association of Individual Investors: Greensboro North Carolina Chapter
Saturday June 18, 2022
10 AM – 12 PM ET
The PCP (put-call-put or wheel) Strategy
Using both covered call writing and selling cash-secured in a multi-tiered low-risk option-selling strategy where we either generate cash-flow or buy a stock at a discount.
Zoom webinar for Chapter members
5. Money Show Orlando live event
October 30th – November 1st, 2022
OMNI ORLANDO RESORT AT CHAMPIONSGATE
Visit Alan, Barry and members of the BCI team at Booth # 415
Details to follow.
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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.
****************************************************************************************************************
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 05/06/22.
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:
http://www.youtube.com/user/BlueCollarInvestor
Best,
Barry and The Blue Collar Investor Team
[email protected]
Dear Alan,
Can you sell a covered call + sell a covered put (at the same time) Say you already had the stock?
Say bought $20 stock (then old out of money call at $22) then sold a put (covered?) at 18$ = you would collect 2 premiums?
Question: Could you do that , what would the risks be?
Thanks and let me know,
Nathan
Nathan,
If we buy a stock at $18.00 and sell the $20.00 call, we have a covered call trade with an OTM strike.
Now, if we also sell the $18.00 OTM put, we are required to secure that put with cash:
[($18 – put premium) x 100 x # contracts]
The stock only “covers” us for the covered call aspect of the trade.
The risk is that we may be required to double our position on a declining stock if share price moves below the $18.00 strike. We may have exit strategies to mitigate but that is the general risk.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
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