Our covered call writing trades offer 2 income streams when using out-of-the-money (OTM) call strikes. (Make that 3, if we incorporate dividends into the strategy). These consist of option premium + share appreciation from current market value up to, or beyond the call strike. These combined income streams are considered by many to be our maximum return for the cash investment inherent in the trade. This article will analyze a series of trades with Invesco Nasdaq 100 ETF (Nasdaq: QQQM), an exchange-traded fund, and The Cheesecake Factory Inc. (Nasdaq: CAKE) where the maximum return was more than doubled, using the mid-contract unwind (MCU) exit strategy.

What is the Mid-Contract Unwind (MCU) exit strategy?

This is a covered call writing exit strategy employed when share price rises substantially after the trade is initiated. Additional profit cannot be realized as the trade stands. Both legs of the trade are closed, and the cash generated from the security sale is used to enter a new covered call trade, in the same contract cycle, with a new stock or ETF.

What is the rationale behind MCU?

As share price moves up, the time-value component of the premium will approach (but never reach) $0.00. Yes, intrinsic value will increase, but this is negated by the increase in share value when the option ceiling is eliminated.

Real-Life Trades with Invesco Nasdaq 100 ETF (Nasdaq: QQQM) &
The Cheesecake Factory, Inc. (Nasdaq: CAKE)

• 6/10/2024: Buy 100 x QQQM at $190.92
• 6/10/2024: STO 1 x 6/21/2024 $193.00 call at $1.34
• 6/10/2024: Set a BTC GTC limit order at $0.13 (10% guideline to protect against share price decline)
• 6/17/2024: BTC the 6/21/2024 $193.00 call at $4.80 (ignore the 10% guideline as share price accelerated to $197.34)
• Of that $4.80, only $0.44 is time-value
• 6/17/2024: Sell 100 x QQQM at $197.34
• 6/17/2024: Buy 100 x CAKE at 39.18
• Remaining cash from the sale of QQQM went into other trades to diversify
• 6/17/2024: STO 1 x 6/21/2024 $40.00 call at $0.28
• 6/17/2024: Set a BTC GTC limit order at $0.03

Initial QQQM calculations on 6/10/2024

The Trade Management Calculator (TMC) shows a maximum return of 1.79% (0.70% + 1.09%).

Executing the MCU exit strategy: Final realized QQQM returns

The final, realized return is 1.50%, a loss of 0.29% from the original maximum return.

The CAKE trade initial return

The TMC shows a maximum return of 2.80% (0.71% + 2.09%).

What happened with the CAKE trade at expiration?

CAKE closed at $40.01 at expiration, $0.01 higher than the strike and shares were sold at $40.00, realizing the maximum profit for this 2nd trade in the same contract cycle.

Review of % Initial Versus Final Post-Adjusted Returns

• QQQM: Initial max return = 0.70% + 1.09% = 1.79%
• QQQM: Final return after MCU = 1.50% (-0.29% cost-to-close)
• CAKE: Final realized return: 2.80% (0.71% + 2.09%)
• QQQM/CAKE: Combined 12-day return: 4.30% (1.50% + 2.80%)
• MCU increased trade results by *140%
• *The % return is very slightly lower because additional cash was added to the trades when closing the QQQM short call
• The remaining cash from the sale of QQQM also resulted in additional cash profits

Discussion

Our option trades can be enhanced using exit strategy implementation, when those opportunities arise. MCU can benefit us when share price rises significantly after trade entry. We must be prepared to act and take advantage of these scenarios.

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Selling Cash-Secured Puts Online Video Course:  Basic and Advanced Principles

Selling Cash-Secured Puts is a 6-part Video Series + downloadable workbook. All aspects of Put-Selling including stock selection, option selection and position management. A huge section on exit strategies and a deeper dive into ultra-low risk approaches to selling cash-secured puts have been added to previous versions of this course. The Companion Workbook contains 111 all-color pages of all charts, graphs and slides. Download Table Of Contents (PDF)

This course contains 6- parts in the video course:

Section I: Option basics (definitions and foundational information)
Section II: Traditional put-selling (stock & option selection + position management)
Section III: PCP (wheel) strategy (adding covered calls to selling cash-secured puts)
Section IV: Buy a stock at a discount instead of a limit order (buy a stock at our target price or get paid not to buy the stock)
Section V: Ultra-low-risk put/Delta strategy (High probability, low-risk trades)
Section VI: Ultra-low-risk put/implied volatility strategy (High probability, low-risk trades)

Click here for more information.

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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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:

Upcoming events

1. Mad Hedge Investor Summit

Tuesday December 3, 2024

3 PM ET – 4 PM ET

Tuesday December 3, 2024

3 PM ET – 4 PM ET

Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow: The PCP (put-call-put or “wheel) Strategy 

This presentation will cover the following topics: 

Basics for selling cash-secured puts

What is a put option?

• “Moneyness” of put options
• What is selling cash-secured puts?
• Preview example
• Accessing the option-chain
• Put calculations (BCI Trade Management Calculator- TMC)

Basics for covered call writing

• What is a call option?
• “Moneyness” of call options
• What is covered call writing?
• Preview example
• Accessing the option-chain
• Call calculations

The PCP Strategy

• Real-life example with TMUS
• Access the option-chain
• Initial put trade entries & calculations
• Initial call trade entries & calculations
• Downside protection on steroids

Event discount offer (best ever)

Q&A

Register here.

2. BCI-only Webinar

1/16/2025

8 PM ET – 9:30 PM ET

The Collar Strategy: Covered Call Writing with Protective Puts

Protecting covered call trades from catastrophic share loss 

This is the strategy Bernie Madoff pretended to use. He called it the split strike conversion strategy, but it was simply a collar. The covered call sets a ceiling on the trade and the protective put guarantees a floor on the trade.

Topics discussed

• What is the collar strategy?
• Uses for the collar
• Entering a collar trade
• Option basics for calls
• Option basics for puts
• Real-life example with NVDA
• What is an option-chain?
• Real-life example using the BCI Trade Management Calculator (TMC)
• Strategy pros & cons
• Educational products & discount coupon
• Q&A

Registration link & details to follow.

3. Long Island Stock Investor Group Part I

Zoom

February 13, 2025

7:30 – 9:00 ET

Private investment club

Covered Call Writing Dividend Stocks

 

4. Las Vegas Money Show

February 17 – 19, 2025

1. Ultra Low-Risk Approaches to Covered Call Writing and Selling Cash-Secured Puts
2. Covered Call Writing Technology Stocks

details to follow.

5. Long Island Stock Investor Group Part II

March 13, 2025

7:30 – 9:00 ET

Private investment club

Cash-Secured Puts: 2 Outcomes

6. MoneyShow Masters Symposium Miami 2025

Thursday May 15, 2025

Details to follow.