One of our covered call writing exit strategies is rolling-out-and-up. We use this position management technique when our short call is in-the-money (ITM) as expiration approaches and we decide to retain the shares for the next contract month (or week). For example, had we bought a stock for $38.00 and sold the $40.00 call and the shares were trading at $42.00 as expiration approached, we could roll-out-and-up to the $45.00 strike prior to 4 PM ET on expiration Friday. In this case, the cost-basis is $40.00, the value of our shares at the time of the exit strategy. What is our cost-basis if the $40.00 call was closed on expiration Friday and the higher strike wasn’t sold until the following week? This now becomes 2 separate trades. Let’s break down the calculations using a real-life example (provided by Steve) using Global X Silver Miners ETF (NYSE: SIL).
Steve’s SIL rolling trades
- 7/6/2020: Buy 100 x SIL at $36.93
- 7/6/2020: Sell-to-open (STO) the 7/17/2020 $36.00 call for $1.45 (1.44% 11-day initial time-value return)
- 7/17/2020: SIL trading at $41.14
- 7/17/2020: Buy-to-close (BTC) The $36.00 call at $5.20
- 7/20/2020: STO the 8/21/2020 $45.00 call at $1.15 (SIL trading at $43.14, $2.00 higher than Friday)
- 7/20/2020: What is our cost-basis after selling the new $45.00 call?
SIL price chart during these trades
SIL Price Chart July 2020
Cost-to-close the $36.00 call using the “Unwind Now” tab of the Elite and Elite-Plus Calculators
SIL Unwind Calculations
When factoring in unrealized share appreciation from $36.00 (contract obligation to sell) to current market value of $41.14, the time-value cost-to-close is $6.00 per-contract or 0.17%
Cost-basis for the 8/21/2020 STO covered call trade
The realized profit generated from the original covered call trade and share appreciation over the weekend are not factored into the cost-basis we use for the new August contract position. We always use current market value when initiating a new trade, in this case $43.14.
SIL Calculations for the August 2020 Contract
Using the “Multiple tab” of the Elite-Plus or Basic Ellman Calculator we see that there is a robust 2.7% initial time-value return plus 4.3% of upside potential if share price moves up to or higher than the $45.00 strike by contract expiration.
Discussion
Rolling-out-and-up implies closing the near-month call and opening the next-month call simultaneously. If the trades are executed on different days, the cost-basis on the new STO trade is based on share price at the time the subsequent trade is executed. Using this analysis will allow us to make the best trading decisions moving forward. See this related article published 2 weeks ago.
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Hi Alan,
I have read your book on covered call (complete encyclopedia) and recently subscribed to the premium membership in your website.
I still have a concern around exit strategies. You touch on a lot of them, especially regarding the option side. However what about the stock itself? Here is my question, explained through a made up example.
If I am long shares, which I need to be to execute covered calls, at month’s end I have to decide what to do with the option (e.g. rolling out etc). However nothing can be done if in the next cycle there is an earning report. Of course if the option expires OTM, I have to do nothing, but I would be still long shares anyways.
So it means I would still be holding the stock during this following month, of course without any option written against it. However isn’t the ER risky for the stock itself too? What happens for example if in the first month I made 3% on my call and in the next month (the one with the ER), the stock tumbles 10% on the day of earnings?
How do you usually approach this? Do you sell the stock with an upcoming ER, or keep it one month in your portfolio, simply without writing any option against it? Or maybe buying a put option against it?
(I still have to see most of your Ask Alan videos, so maybe you already clarified this – in case, apologies, and please send me the link to the video)
Thanks a lot for all your insights and clarifications, it’s been very helpful so far.
Kind regards,
Andrea
Andrea,
great question. 🙂
For several years I ask myself this question almost every month, and I am waiting for Alan’s answer eagerly with you.
Sometimes the ER is still a few weeks ahead, and I can sell an extra weekly CC, but most of the time I am afraid of the ER event because there is always a 50/50 chance for the stock to drop sharply, and therefore I always sell immediately on Monday, or frequently I will buy back the option near expiration and sell the stock simultaneously to avoid the weekend stress.
Roni
Andrea,
If you want to keep the stock in question, an alternative to selling the stock or using weeklies in the month that the stock has an ER, you could write a covered call and buy a protective put…turning the trade into a “Collar”. This way, you will have downside protection if the stock has a “poor” ER. The premium that you receive from the covered call can pay for the protection (or at least a large part of it).
Assuming that the stock has a “good” ER, then you can sell the protective put in a day or two after the ER and recapture a portion of the cost of the put.
Best,
Barry
Barry,
your response to Andrea is wonderful.
I wonder why I never thought of using a “collar” in such a situation.
There are always lessons to be learned here at the BCI weekly blog, and tools to be added to our toolbox.
Thank you – Roni
Hi Roni,
I hope you and your wife are doing well during this pandemic.
The Collar is my favorite trade because of its’ flexibility. Like yourself, I’m very conservative in my trading. I use it when:
– If I want to keep and trade a stock that has an upcoming ER
– When I go on vacation (or anytime that I cannot be near my trading platform) and not able to check up on my trades
– In a bearish market when I want to generate income
– When I want to trade more aggressive stocks but want downside protection
– When, in general, “I want to sleep better at night”
Best,
Barry
Thank you, Barry we are well.
We are COVID high-risk age group, and therefore totally confined to our apartment since March 15. Almost a full year. My partner 67 years old, passed away two weeks ago. He was 6’5″ tall, strong as a bull, never sick, but not very careful. Several other friends and acquaintances were killed by this plague in the last 6 months.
The collar will now become a large part of my trading method, which is 100% BCI, with a laser focus on monthly CC trades.
Take care – Roni
Andrea,
The topic of the “Collar” trade is covered extensively in our book “Covered Call Writing Alternative Strategies”. We also have a Collar Calculator available as well.
Best,
Barry
Alan, I am trying to remember from my previous CC writing experience….
When you enter let’s say 10 positions on a $100,000 trading account and say generate $5000 in premiums.
I know once you but the underlying stocks and sell those calls, the premiums immediately enter your account.
However, I don’t think they are immediately visible as on your account balances they are offset by the cost of the call until near expiration when they all begin to reach no value?
Is that true? Will a $100,000 account still show about 100K until the value of the option starts diminishing? All else being equal (no movement in share price or option price, just time decay?)
Michael
Michael,
The brokerage account will show the current value of the stocks and their cost-basis.
The options will be posted in brackets of with a “-” sign to reflect short positions. This can be a bit confusing to new option traders because the cash is actually delivered into our cash accounts but the position is open until the option expires worthless, is exercised or is closed.
Alan
Alan,
How do I manage the stock portion of the covered call? If it’s lower, how do I know when to sell. If I choose the stock from your spreadsheet recommendation, would it change there from buy to hold jr sell? Can I get stock guidance that way, as a premium member with access to your spreadsheets on stocks?
Thanks,
Lew
Lew,
We update our stock and ETF reports of eligible option-selling securities every week. If we use a stock from these lists that begins declining in value, we manage these trades as detailed in my books/online video courses, not by their removal from our lists.
However, if we close a position and need a replacement security mid-contract, we select from the most recent report.
The key is to master our position management skill set such that we know how to react under every possible hurdle or opportunity.
For members who are looking for a guideline regarding a % of share decline to close the long position (after closing the short call), a 7% threshold is reasonable and the one we included in the Elite-Plus Calculator.
Alan
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 02/12/21.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
http://www.youtube.com/user/BlueCollarInvestor
On the front page of the Weekly Stock Report, we now display the Top 10 ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Premium Members…the report for 03/05/21 will be uploaded on Monday, 03/08/21 in the late afternoon.
Best,
Barry and The Blue Collar Investor Team
barry@thebluecollarinvestor.com
Alan,
I like your article about rolling out and up.
Normally, after each earnings season, there are some opportunities to use this alternative, and I will consider it from now on.
My reasons for preferring to let my successful monthly trades expire and be assigned were always regarding fear of losing hard-earned profits, and also related to the new weekly watchlist coming out on the following Sunday.
But I guess I was being overcautious.
Thanks – Roni
Roni,
The question we ask ourselves is “would I buy this stock today at the current price?” We base this decision on company fundamentals, the price chart and common-sense principles (like no ER). Since the strike is in-the-money and there was no corporate earnings report, the answer is probably “yes”
So, why roll and not allow assignment and buy the stock on Monday? If we want to include this stock in our next-month option-selling portfolio and the calculations meet our stated time-value return goal range, we take the “deal” and roll.
Alan
Thank you, Alan.
Yes, of course, you are right again, and I will certainly use this method from now on.
I am learning so much, and at the same time, I feel there is always more to learn. Every week I read your articles and watch the “Ask Alan” videos, and my posts are always somehow related to my doubts and fears.
On the other hand, as my skills improve, I am rewarded by constant income, far ahead of any other investment I ever made.
I can’t thank you enough.
Roni
Roni,
The questions and comments you bring to this blog are the same ones I had as I was teaching myself these strategies. I thank you for bringing them to this forum so that we can discuss and learn from each other so that we all become elite option-sellers.
Alan
Alan, thanks for your timely information.
I do have a question: When investing with covered calls, what would be the advantage and disadvantage of using say a covered strangle. The call portion would be covered, and one could realize double premium; one on the call, and one on the put. I have a few stock gems with extremely low cost basis. A few trade in a fairly defined range and pay a reasonable dividend. These are the ones I’d consider. I’d like not to take the tax hit with losing the stock, thus I’d set the strike price fairly wide, recognizing the hit to premium.
Your thoughts would be appreciated,
Bob
Hi Bob,
The covered strangle is an interesting trade. While it does give you increased premium, it opens up more downside risk. One way to reduce that risk to a defined value is to add a long put under your short put. This would turn the initial trade into two trades…a covered call and a bull put spread. With the bull put spread, the long put protects the downside. The trade-off is that you will reduce the premium from the put side, but you’ll sleep better at night.
Best,
Barry
Hi Alan,
Using a concrete example from this week Premium Report, SGH (Smart Global Holding) is eligible for the monthly option expiring on March 19th and has the next ER on Apr the 6th (i.e. it will not be eligible for the next option cycle)
So if I buy 100 shares now and sell a covered call on it, if the call expires OTM on March 19th, I would then proceed to sell the stock on the market to avoid holding it during the ER month.
If I understand correctly that’s what you would normally do, is that right?
The point which is not still clear to me is whether to bring down the risk of losing more money on the stock than what we made on the option – for example, let’s say we make 3% return of the call – this could be erased by a possible decline in price of the stock of more than that (or e.g. mitigated, if the stock goes down 2% during the month when we hold the option, thereby bringing total return down from 3% to 1%)
I must say I still miss practical trading with options, so these are just scenarios which I am trying to understand in my head so far.
Thanks for the great support and insight and kind regards,
Andrea
Andrea,
It’s important to analyze and be prepared for these scenarios before entering trades so your inquiry is critical to our success.
If SGH had Weekly options (it does not) we could write weekly calls and avoid the week of the ER. Since this is not a choice we avoid SGH for the April contracts.
In the current month, we have our 20%/10% guidelines in place to assist in determining when to close the short calls if share price declines significantly. If option profit is 3% and share loss is 2%, we still have a 12% annualized return. How does a 12% CD look today? (rhetorical).
Now, not all our trades will be winning ones. However, if we have a month where we hold 20 positions and 12 are winners and 4 are break-evens and 4 are losers where we mitigated losses and enhanced gains via position management… we’ve had one heck of a month.
Keep up the good work.
Alan
Hello Alan
I have recently subscribed to the BCI community. The amount of information provided is amazing.
I have a couple of question which I hope are easy to get answered:
1) We are in a position which allows us to spend time managing accounts. Are there any negatives in writing large numbers of puts or calls on different securities versus dividing the account into the 5 -10 categories and buying multiple contracts of each other than of the overhead of managing individual contracts?
2) Living in Australia we are obviously not exposed to the US trading times. Would we have any undesirable time zoning issues managing the account outside the US stock market trading day?
Apologies if these have been answered already through the huge amount of resources.
Regards
Sonja
Sonja,
We are fortunate to have a large number of international members, many from Australia. My responses:
1. We must always set ourselves up for success. Adequate diversification is a must. In the BCI methodology, we require a minimum of 5 different stocks in 5 different industries unless using ETFs. More is better. There are no negatives using more than 5 – 10 positions (I do) as long as we can manage them comfortably. The number will differ from investor-to-investor. Start with 10 and work yourself up until you find the number that matches your comfort level.
2. Our BCI community has so many successful investors from Australia as well as many other countries outside the US. Positions must be entered and exited during normal trading hours and a significant part of position management can be automated by entering buy-to-close (BTC) limit orders good-until-cancelled (GTC). You should be available to check your portfolio during normal trading hours at least once a day. This will allow us to take advantage of all the opportunities US exchanges have to offer.
Alan
Good afternoon.
when using the calculator on previously owned stock…..
do you put the cost of what you paid for the stock initially, or the price of the stock when you wrote the option into the calculator.
Thanks in advance.,
Scott
Scott,
We always use the current price of the stock rather than a price from the past, either higher or lower. This will allow us to make the best trading decision at that point in time.
Alan
Hi Alan,
I watched you video on selling covered calls and selling puts.
I was wondering where I can find the delta on on the puts, yahoo finance does not seem to have that number.
Thank you,
Amit.
Amit,
Most broker platforms provide Delta stats. Here is a link to a reliable free site I often show in my articles and videos:
http://www.cboe.com
Click on “I agree”
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Alan
Premium members,
The latest Blue Chip (Dow 30) Report for the March 2021 contracts has been uploaded to your member site on the right side of the page. Notice how earnings season has reconfigured the portfolio from last months securities.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
New members check out the video user guide located above the recent reports.
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
Hi Alan,
With the market falling in the last 2 days, I was seeking your advice if it’s better to sell puts than do covered calls on the stocks in the member list on these types of days. Also, if selling puts is better, should we wait until the stocks start going back up or just keep getting stopped out, wait and sell lower?
Thanks,
Raj
Raj,
Yes, selling cash-secured puts to enter a covered call trade in bear and volatile markets (I do not believe this defines our current market but could be wrong) is a reasonable approach. Here is a link to an article I previously published regarding a strategy I created as a result of the March 2020 COVID- crash:
https://www.thebluecollarinvestor.com/selling-deep-otm-cash-secured-puts-with-exit-strategy-enhancements/
Alan
Alan,
I was thinking of taking 20% of my portfolio and selecting 1 to 2 LEAPS in each of the major sectors. Like today I bought the WMT 1/22 100 for $47.475 and sold 3/21 155 for $1.59.
I would only buy solid companies.
What are your thoughts on structuring this type of portfolio?
Thank you,
Bob
Bob,
There are many ways to make money with stocks and stock options. My personal preferences are traditional covered call writing and selling cash-secured puts. That said, my way isn’t the only way.
The Poor Man’s Covered Call (PMCC) strategy can be an alternative way to generate cash flow. We must first understand all the pros and cons of the strategy and all the moving parts before incorporating this (and other) strategy into our family’s investment plan. I cover this in detail in our book, “Covered Call Writing Alternative Strategies” and our online course, “The Poor Man’s Covered Call” The first step after the education is the initial structuring formula.
Alan
Good morning Alan,
Hope all is well!
I was curious if there is a strategy to hedge a cash secured put similar to a collar for a covered call?
Thanks in advance!
Steve
Steve,
The best protection we have when selling cash-secured puts is our exit strategy arsenal, especially our 3% guideline if share price is declining. This and all other exit strategies are detailed in my book and online video course, “Selling Cash-Secured Puts”
A bearish strategy related to put-selling is the “covered put” Here is a link to an article I previously published on this topic:
https://www.thebluecollarinvestor.com/covered-puts-are-not-cash-secured-puts-our-best-ever-covered-call-writing-streaming-dvd-program-with-50-discount-coupon/
Alan
Hello Steve,
There is another way to hedge a cash-secured put (CSP) trade in addition to the BCI strategies that Alan mentioned. That is, by turning the CSP into a Bull Put Credit Spread (BPS). With a BPS, after selling the short put at your target strike, you buy a put one strike lower than your sold strike. The lower strike put that you bought is your hedge.
While this lowers your return, you have a well-defined trade…you know your max gain and your max loss upfront. By using “delta” you will also know the approximate probability of the outcome of the trade. If you want the stock for a covered call, you can accept assignment and then sell covered calls. By turning the CSP into a BPS, you have a few more options.
Best,
Barry