# Evaluating the Time Value Cost-To-Close to Assist in Covered Call Trade Decisions

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We enter a covered call trade and share price rises exponentially, leaving the strike deep in-of-the-money (ITM). Should we close the position since we cannot benefit from additional share appreciation? Should we take no action and continue to monitor the trade with our 20%/10% guidelines in place? In this article, a real-life example, shared with me by a premium member, with Broadcom Inc. (Nasdaq: AVGO) will be analyzed. In addition to the huge share appreciation, this trade stood out because a LEAPS option was originally sold and still had 13+ months to get to contract expiration.

• 5/25/20243: Buy 100 x AVGO at \$728.80
• 5/25/2023: Sell-to-open (STO) 1 1/19/2025 \$940.00 LEAPS call at \$300.00
• 12/12/2023: AVGO trading at \$1030.00
• 12/12/2023: “Ask price” to close the 1/19/2025 \$940.00 call is \$196.70
• Should both legs of the trade be closed?

Understanding the math behind closing deep ITM call strikes

Prior to closing the short call, shares of AVGO can be worth no more than \$940.00, our contract obligation to sell. By closing the “ceiling” of the call strike, shares are now worth current market value, \$1030.00, in this scenario. This unrealized increase in share value must be factored into our trade decisions. The BCI Trade Management Calculator (TMC), has a worksheet tab called the Unwind Now tab at the bottom of the spreadsheet. This will calculate for us the time-value cost-to-close. We must focus on this number when making our potential exit strategy decisions.

The Unwind Now tab of the TMC

• If the trade is closed, a realized return of 55.50%, 97% annualized concludes the trade (red ovals)
• The time-value cost-to-close is 11.35% (red arrow). This is how much we are actually paying to close both legs of the trade. This calculation gives us a basis for making our trade decision

Discussion

If we feel that we can generate > 11.35% over the next 13 months after closing both legs of the trade, unwinding should be considered. If not, we will continue to monitor the trade with our 20%/10% BTC GTC limit orders in place.

Two additional factors stand out with this AVGO trade. First, by selling LEAPS options, we are minimizing our annualized returns even though this trade was so successful. Second, over the next 13 months, AVGO will be enduring the risk of 4 earnings reports, which have the potential to hammer share price value. For me, I would take the money and run and close both legs of the trade.

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### 9 Responses to “Evaluating the Time Value Cost-To-Close to Assist in Covered Call Trade Decisions”

1. Michelle April 13, 2024 11:53 am #

Alan and Barry,

Thanks for a very information webinar on Thursday.

I’m going to be implementing the ultra low risk approach with weekly cash secured puts on Monday. I’m a little concerned about the market and this is the perfect solution to continue to generate cash while taking less risk.

Please keep doing what you’re doing!

Michelle

• Alan Ellman April 14, 2024 7:07 am #

Michelle,

Thanks for attending. We had an amazing response and registration, so we will be doing these BCI-only events quarterly moving forward.

The ultra-low risk strategies Barry & I presented on Thursday are examples of how we can craft low-risk option-selling strategies for every market condition.

Alan

2. Alan Ellman April 13, 2024 9:31 pm #

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 04/12/24.

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:

Reminder: Premium Member’s pricing is locked into your current rate and will never see a rate increase as long as the membership remains active.

Barry and The Blue Collar Investor Team

3. David April 14, 2024 5:12 am #

Alan,

In your seminar on Thursday, you discussed delta and implied volatility to get trading ranges. Is one more reliable than the other or are they about the same?

Thanks for providing us retail investors with all this valuable information.

David

• Alan Ellman April 14, 2024 5:19 pm #

David,

Several months ago, I checked several dozen stocks comparing Delta & IV for this strategy approach. They provided the same strike results in a vast majority of the cases, as I demonstrated in the webinar.

Although the strikes generated using these strategies were not 100% the same, I would feel comfortable using either approach.

Alan

4. Otto April 14, 2024 12:15 pm #

Alan,

In your seminar you discussed how to find the low end of a trading range for cash secured puts with 84% accuracy (approximate you said).

Is that the breakeven price also?

Thanks a lot,
Otto

• Alan Ellman April 15, 2024 5:44 am #

Otto,

Close, but not precisely.

When we sell deep out-of-the-money (OTM) cash-secured puts, the premium is lower than those we receive for traditional selling of cash-secured puts.

The formula for the breakeven price points is:

Let’s say we use Delta or IV and determine that a strike of \$50.00 has an 84% probability of not expiring in-the-money (with intrinsic-value).

We sell the \$50.00 cash-secured put for a premium of \$0.50, in this hypothetical. The breakeven price point is \$49.50, [(\$50.00 – (\$0.50)].

Alan

5. Alan Ellman April 17, 2024 7:59 am #

The new Blue Chip Report for the best-performing Dow 30 stocks for the May 2024 contracts has been uploaded to your member site.

Alan & the BCI team

6. Alan Ellman April 17, 2024 4:48 pm #

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.