In this article, we will analyze a series of covered call trades shared with me by a BCI premium member. These trade executions involve establishing a bullish covered call position, then rolling-down and then rolling-out. All of our trades serve as learning opportunities and these ELV trades are no exceptions.
ELV trades from 11/7/2022 to 12/1/2022
- 11/7/2022: Buy 200 x ELV at $532.09
- 11/7/2022: Sell 2 x 12/16/2022 $530.00 calls at $26.50 (bullish near-the-money strike)
- 11/11/2022: ELV trading near $490.00
- 11/11/2022: BTC 2 x 12/16/2022 $530.00 calls at $4.30
- 11/17/2022: ELV declines to $477.00
- 11/17/2022: STO 2 x 12/16/2022 $490.00 calls at $9.12 (rolling-down)
- 12/1/2022: ELV trading at $529.50 (missed a “hitting a double” opportunity)
- 12/1/2022: BTC 2 x 12/16/2022 $490.00 calls at $41.00
- 12/1/2022: STO 2 x 12/30/2022 $530.00 calls at $10.40 (rolling-out for a net debit of $30.60)
BCI Trade Management Calculator showing initial trade structuring and rolling-down adjustments
ELV: Initial Calculations and Rolling-Down Exit Strategy
- #1: Initial trade entries
- #2: Initial returns (4.61%; 42.03% annualized based on a 40-day trade). The downside protection of 0.39% is negligible as we are using a near-the-money strike
- #3: Rolling-down trade entries (shares cannot be worth more than the new rolled-down $490.00 strike)
- #4: Final post adjustment option return after rolling-down: 5.89%
- #5: Post adjustment unrealized stock loss (-7.91%) and net stock and option unrealized loss (-2.02%)
BCI Trade Management Calculator showing rolling-out initial trade status
ELV: Rolling-Out Calculations
Note the following:
- The value of the shares at the time of the roll was $490.00, the previous contract strike or our obligation to sell at that price
- The BTC-STO net premium was -$30.60 (-6.24%)
- The success of this trade depends on upside potential (8.16%), if share price moves up to or beyond the $530.00 strike
Discussion and lessons learned
- The BTC on 11/11 was excellent (near our 20% guideline)
- The BCI guideline is that prior to the last 2 weeks of a monthly contract after breach of the 20%/10% guidelines, we seek to “hit a double” if share price recovers (may have worked out in this case). If not, we roll-down in the last 2 weeks of that contract
- By rolling -down on 11/17, a share loss of $42.09 was locked in ($532.09 – $490.00)
- On 12/1, $41.00 was paid to make shares worth $39.50 more ($529.50 – $490.00). It is possible, another $0.50 could be gained, if share price moves up to or beyond the $530.00 strike but no more due to the contract obligation to sell at $530.00
- Whether share price moves to $532.00 or $535.00 or $1000.00, shares can only be worth $530.00, the new strike
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Exit Strategy Choices After Exercise of Cash-Secured Puts
When we sell cash-secured puts, we are undertaking the contractual obligation to buy shares at the strike price by the expiration date. Typically, we only sell puts on elite-performers that we would be agreeable to own in our portfolio.
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July 10th -11th
Covered Call Writing: Multiple Applications Based on Current Market Conditions
Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)
Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:
- Normal to bull markets
- Bear and volatile markets
- Low interest-rate environments
A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.
Date and time to follow.
Hello Alan and Barry,
I took a trade from premium watchlist, as follows and not able to enter lost leg BTC in the calculator.
Details of Trade.
Security Ticker, ELF
04/26/23: 100 Shares purchased at $92.94
04/26/23: STO1, 1 Contract Expiration May 19 23 Strike $95 call at $2.70 premium.
05/03/23: BTC1, $95 call at $0.15
05/15/23: STO2, $95 call at $0.50 premium.
05/17/23: BTC2, $95 call at $0.05
05/19/23 Expiration day shares not sold and retained.
Able to enter till 05/15/23 STO2, trade.
Please guide how to enter 05/17/23 BTC 2 $95 call entry and close the entries for final calculation.
Which exit strategy to use and how to enter. Looked in multiple exit and Hit double not selling stocks strategies.
Thanks and Regards
Venkat
Venkat,
Here’s how I would manage these trades using the BCI Trade Management Calculator (TMC):
•Section 1: Initial trade entries.
•Section 2: Initial (pre-adjustment) calculations.
•Section 3: Adjusted trade entries
o The STO premium is the net credit for the STO2 and the
BTC2 ($0.50 – $0.05 = $0.45)
o Enter the price of ELF after contract expiration.
•Section 4: Final post-adjusted returns for stock (unrealized) and options (realized) and combined. The strategy is “hitting a double and keeping the stock”
Had the BTC2 been followed with a STO3, that would be entered on a new line on the spreadsheet with additional entries in the capital adjustment section, to keep the cash investment accurate.
Alan
Hello Alan,
the market has been quite challenging, but I am fully invested.
Just like Venkat, I am trading ELF since late April. Here is my trade:
04/24/23: Bought 100 ELF shares at 94.68
04/24/23: STO 1 ELF 05/19/2023 95.00 C at 3.68
05/03/23: BTC 1 ELF 05/19/2023 95.00 C at 0.75 (20%)
05/25/23: STO 1 ELF 06/16/2023 100.00 C at 3.61
ELF reported earnings on 05/24 and the market reacted very favorably, so I sold the 06/16 option immediately. I have also placed a purchase order at 0.70 (20%) limit.
ELF is now trading at 102.94, and I wish that my call will expire ITM.
Good luck to all with the House vote on the debt ceiling – Roni
Hi Roni,
Great to hear from you… hope all is well.
Best,
Barry
Well done, Roni.
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 05/26/23.
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:
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Best,
Barry and The Blue Collar Investor Team
barry@thebluecollarinvestor.com
Hi Alan,
I recently saw the video on your 20%/10% guidelines.
Question how does this apply to weekly options?
Thanks,
Sam
Sam,
The BCI guidelines for the 20%/10% BTC GTC (good until cancelled) limit orders, is to use the 10% limit order during the last 2 weeks of a monthly contract. The 10% limit order will, therefore, apply to all weekly contracts.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
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Alan and the BCI team