Options calculations are an integral part of our BCI methodology both in guiding us in making the best investment decisions and also in determining our trading success. To assist in achieving these goals I developed the Ellman Calculator six years ago and with the benefit of your suggestions my team and I have been enhancing the tools and information this spreadsheet provides. In this article, I will describe the additions we are proud to announce for the 2014 additions of both the Basic and Elite versions of the Ellman Calculators.
Enhancements to both the Basic and Elite versions of the Ellman Calculators
We have added a breakeven column, based on the feedback of many of our members. This is quite different from the downside protection column which applies only to in-the-money strikes where the intrinsic value of the premium protects the time value of the premium. In the screenshot below, I have highlighted the breakeven column which is the price paid for the shares minus the entire option premium.
In the top row, we paid $128.02 for the stock and sold the $125 call for $7.10 resulting in a breakeven of $120.92. Once the share price drops below $120 92 can have an unrealized loss.
What now tab for rolling options
This tab is used for calculating our returns when rolling options on or near expiration Friday. We have added a statistic for the percentage of downside protection we generate when rolling out or rolling out and up to an in-the-money strike as shown in the screenshot below:
The past versions of the Ellman Calculator showed only a dollar amount per contract of downside protection. For example, if a stock was trading @ $32 and we rolled out to the $30 call, our downside protection showed as $200. With this enhancement, it will also show as 6.25% ($2/$32), similar to the downside protection column used in the multiple tab. In the above screenshot, the downside protection for rolling out (next month’s same strike) came to 33.30% and rolling out and up to the next month’s higher in-the-money strike came to 2.80%. This is the percentage amount the intrinsic value of the premium protects the time value of the premium.
Enhancements only to the Elite version of the Ellman Calculator
Unwind now tab
This tab is used to determine if the mid-contract unwind exit strategy (see pages 264 – 271 of the Complete Encyclopedia for Covered Call Writing) makes sense. This is when the stock price rises well above the original strike sold and the time value of the option approaches zero. The goal is to close the entire position at little or no cost and use the cash to generate a second income stream in the same month with the same cash (see pages 264 – 271 of the Complete Encyclopedia For Covered Call Writing). The enhancement we created is the time value cost to close and the percentage of the cost basis we are paying to close this position. We can then determine if the cash freed up by closing can generate a significantly higher return than the cost to close. Below is a screenshot of this enhanced tab in action:
In this case, the cost to close is $20 or a fraction of 1% (0.29%). If the cash generated from the sale of the stock can produce > 0.29%, then it makes sense to unleash the mid-contract unwind exit strategy.
Schedule D entry codes
Previous versions of the Elite Calculator showed dollar amounts of gain (loss). We have now added two columns on the right side of the page that will calculate % gain (loss) and annualized % gain (loss) as demonstrated in the graphic below:
The original versions, the calculator showed only a gain of $190 per contract. Now we can visualize this return as a 2.73% return which annualizes to 31.14% based on the number of days the trade was on.
Where can I get these calculators?
The Basic Ellman Calculator is free to all and can be downloaded to your computer directly from the “free resources” link located on the top black bar of these web pages. Just put in your email address and you’re in. The Elite version of the Ellman Calculator is available for purchase in the Blue Collar store or free to premium members in the “resources/downloads” section of the premium site. Just scroll down to “Elite Calculator”
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Despite the Commerce Department’s 3rd and lowest estimate for the 1st quarter GDP, where the economy shrank to 2.9% on an annualized basis, the financial markets appeared resilient and positive. The reason has to do with the unusual circumstances of severe weather, loss of temporary benefits for the long-term unemployed and unusual buildups of business inventories in the 2nd half of 2013:
- The Conference Board’s Index of Consumer Confidence (a gauge of consumers’ attitudes about the present economic situation as well as their expectations regarding future conditions. Consumer confidence tends to have a strong correlation with consumer spending patterns) rose to 85.2 in June, the highest level since 2008 and ahead of the 83.5 reading expected
- According to the Commerce Department, sales of new homes rose by an impressive 18.6% in May, a 6-year high. This represents an annualized figure of 504,000, well above the 400,000 predicted by experts
- The median price for new homes rose to $282,000 in May from $269,700 in April
- On a year-to-year basis, new home sales were up 16.9% and the median price of those homes rose by 6.9%
- The number of new homes on the market in May declined to 4.5 months of supply, down from 5.3 months in April
- According to the national Association of Realtors, existing home sales rose by 4.9% in May, the best showing in 3 years. This represents an annualized rate of 4.89 million units compared to the 4.73 million analysts were projecting
- Supply of existing homes fell to 5.6 months in May from 5.7 months in April
- In May, the median price of existing homes rose to $213,400 from $201,500 in April
For the week, the S&P 500 was unchanged for a year-to-date return of 7.2%
IBD: Confirmed uptrend
BCI: Moderately bullish favoring out-of-the-money strikes 2-to-1
Wishing you the best in investing,
Alan ([email protected])