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Exit Strategy Considerations When a Strike Moves Deep ITM Early in a Contract + The BCI Trade Management Calculator/New Book Now Available- Discount Coupons

When our covered call writing and put-selling trades start out much better than anticipated, Blue Collar Investors immediately evaluate our exit strategy arsenal to see if we can achieve even higher returns. On 11/12/2021, one of our premium members shared with me a trade he had initiated with Big 5 Sporting Goods Corp. (Nasdaq: BGFV) where an quickly moved deep, deep ITM. Let’s evaluate the exit strategy choices.

 

Exit strategy opportunities

  • Rolling-up in the same contract cycle
  • Rolling-out or out-and-up
  • Mid-contract unwind exit strategy (MCU)
  • Take no action

Rolling-up: The risk with this approach is that profit-taking after a quick and substantial rise in price may take a maximum trade and turn it into a lower return or even a losing trade.

Rolling-out or out-and-up: This strategy is usually reserved for late in a contract where the time-value component of the option premium is eroding due to Theta. Selling the next contract expiration will result in a net time-value credit for rolling-out or a or credit for rolling-out-and-up.

Mid-contract unwind exit strategy: We consider this exit strategy when share value accelerates significantly leaving the strike deep ITM and the time-value component of the premium approaching zero. When this the case, both legs of the covered call trade are closed and the cash is used to enter a new trade with a new underlying security.

Take no action: We take this path when there are no exit strategy opportunities.

 

5-day chart of BGFV incorporating 11/8/2021 – 11/12/2021

BGFV Rapid Price Acceleration

 

Exit strategy evaluations

It’s too early in the contract (expiration more than 1-month away) to consider rolling-out or out-and-up so we will consider the mid-contract unwind strategy or taking no action.

 

BGFV Unwind Now Calculations (Elite and Elite-Plus Calculators) versus “Take no action”

 

Cost-To-Close the BGFV Trade

 

The time-value cost-to-close is $178.00 per-contract or 5.93%. We ask ourselves if we can generate at least 1% more than 5.93% by contract expiration which is 1-month away. It would take another highly volatile stock to do so. Using the MCU strategy at this time may be appropriate for some aggressive investors but most conservative retail investors will take no action and continue to monitor this trade which has a favorable outlook at this point in time.

 

Discussion

Position management or exit strategies is the 3rd required skill for successful option-trading. After selecting the underlying security and associated option to sell, we must have a plan in place to react, non-emotionally, to every possible outcome. That said, not every change in circumstance will represent an exit strategy opportunity. In the case of BGFV, the outlook is favorable but there are no exit strategy opportunities at this point in time that will enhance the trade. We continue to monitor the trade as such circumstances may come up later in the contract.

 

The BCI Trade Management Calculator Package is now available

After a year and a half of development and beta-testing our 1-of-a-kind Trade Management Calculator is here. We have packaged it with our new book, The ’s Guide to Exit Strategies for Covered Call Writing and Selling .

We are also offering the opportunity to combine this package with our BCI Package and offering early-order discount coupons for both:

Information on the TMC Package:

https://thebluecollarinvestor.com/minimembership/bci-trade-management-system/

 

Information on the BCI Package:

https://thebluecollarinvestor.com/minimembership/bci-investor-program/

 

Early-order discount coupons:

TMC Package: tmc50 ($50.00 off)

Combined TMC/BCI: superdeal100 ($100.00 off)

 

We hope you enjoy, and most importantly, benefit from our new products.

 

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

Facebook post on The Complete Encyclopedia for Covered Call Writing:

My absolute favorite trading book ever. I have purchased it for 3 of my friends.

 

Upcoming events

1.LIVE at The Money Show Las Vegas

May 10th – 11th

Click here for information

2 presentations:

Portfolio Overwriting (free)

Tuesday May 10th at 1:30 PM – 2:15 PM

Increasing Profits in Our Buy-And-Hold Portfolios Using

A Comprehensive Analysis of Covered Call Writing: 2-hour Masters Class (paid event to The Money Show)

Wednesday May 11th at 1:30 PM – 3:30 PM

How to master all aspects of this low-risk strategy

 

2.Money Show Canada Virtual Event

Analyzing a 1-Month Covered Call Writing Portfolio from Start-To-Finish

A real-life example with a $100k ETF Select Sector SPDR portfolio 

May 24, 2022

10:40 AM ET – 11:10 AM ET

Covered call writing is a low-risk option-selling strategy that generates weekly or monthly cash flow. This presentation will demonstrate how to implement this strategy using a database of only 11 exchange-traded funds for a 1-month option contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s portfolios with screenshots verifying each trade. A final monthly contract result compared to the performance of the S&P 500 will be calculated.

Topics included in this webinar:

  • What are the Select Sector SPDRs?
  • How to establish a covered call writing portfolio
  • What is the role of diversification?
  • What is the role of cash allocation?
  • Calculating initial returns
  • Analyzing each trade in the monthly contract
  • Final results
  • Next steps

Register for free here

 

3.American Association of Individual Investors: Greensboro North Carolina Chapter

Saturday June 18, 2022

10 AM – 12 PM ET

The PCP (put-call-put or wheel) Strategy

Using both covered call writing and selling cash-secured in a multi-tiered low-risk option-selling strategy where we either generate cash-flow or buy a stock at a discount.

Zoom webinar for Chapter members

 

4. Money Show Orlando

October 30th – November 1st, 2022

OMNI ORLANDO RESORT AT CHAMPIONSGATE

Visit Alan, Barry and members of the BCI team at Booth # 415

Details to follow.

 

Alan speaking at a Money Show event

***********************************************************************************************************************

Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

****************************************************************************************************************

 

About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

25 Responses to “Exit Strategy Considerations When a Strike Moves Deep ITM Early in a Contract + The BCI Trade Management Calculator/New Book Now Available- Discount Coupons”

  1. Alex Polanco April 30, 2022 10:13 am #

    Hi Alan. How long will the Early-order discount coupons be available? Also, it seems that the coupon tmc50 is invalid for the TMC package.

    • Alan Ellman April 30, 2022 10:17 am #

      My team is working on the code.

      Ends May 15th.

      If you place the order, a refund will be issued. Or wait for the fix.

      Alan

      • Alan Ellman April 30, 2022 10:26 am #

        Coupon code active and working now.

        Alan

  2. Tim B April 30, 2022 11:49 am #

    Hi Alan, I am using your worksheet and have a question about the ITM Final Net Option column “AK. Here is the trade XOP 4/14/22-5/20/22. Price $142.61 @ $125 for $19.56. The TV would be $1.95 and IV $17.61. My calculations have the final initial and final ROO at 1.56% but column AK is showing a Final Net Option of $19.56 and Return of 13.79%. Please advise.

    • Alan Ellman April 30, 2022 12:25 pm #

      Tim,

      There is a difference between initial and final calculations, and it is critical to differentiate between the two to get an accurate representation of our results.

      Let’s assume there are no exit strategy interventions during the May contracts and the $125.00 strikes expires ITM and shares are sold at $125.00.

      We enter $125.00 into Column AI and will receive the results shown in the screenshot below:

      Final net option profit = $1956.00
      Final stock loss = $1761.00
      Final net combined profit $ = $195.00
      Final net combined profit % = 1.37%

      For more color on “allowing exercise” of ITM covered call strikes, see pages 15 – 18 of the new exit strategy book.

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

      Alan

      • Tim B April 30, 2022 1:02 pm #

        Thanks Alan, I get it now. As usual your explanations are spot on. I am really liking the TMC and I am putting all my current trades in it. It’s giving me a handle on how to account for the exit strategy and final return bookkeeping. Thanks

        • Alan Ellman May 1, 2022 6:11 am #

          Tim,

          You made my day. The BCI team spent a year and a half developing this new product to enter, adjust, calculate initial and final individual trade and total portfolio returns and then archive all of our option-selling trades. We are hoping our members find this one-of-a-kind tool a game-changer.

          Alan

  3. Alex Polanco May 1, 2022 10:58 am #

    Dear Alan,

    With the current volatile Market, do you consider a good time for high dividend yield strategy. I was reviewing the BCI report for second quarter and I am analyzing to do the following paper trade:

    MO at $55.57
    Sell $47.50 Call with expiration Jan 20, 2023 at $8.95. Delta is .8042
    Dividend yield: 6.5% annual / $3.60 / 4 annual payments= $0.90 X 3 payments from May 2022-January 2023= $2.70

    Return in 9 months
    a) Dividend $2.70 / Cost basis $47.50 = 5.7%
    b) Covered Call: Time Value 0.88 / Cost basis $47.50 = 1.9%

    Total return: 5.7% + 1.9%= 7.5%

    • Alan Ellman May 2, 2022 8:08 am #

      Alex,

      This is a reasonable trade to consider for the High Dividend Yield Capture strategy.

      Using our ultra-low-risk strategies (using IV and Delta) and PCP are also considerations for these challenging market conditions.

      Alan

  4. Roni May 1, 2022 11:17 am #

    Alan,

    Last Tuesday, when the market seemed to have recovered from the previous disasters, I neglected my worries. Instead of liquidating all my positions, I entered several new 05/22/2022 CC trades and became 100% invested.

    It seems like it was a dead cat bounce, and the market went down sharply each following day.
    Some of my 20% buy-back orders were filled, and I had to unwind some at a loss.
    I replaced some of my bad trades, but last Friday struck me very hard, and it set my portfolio back another 3%.

    This year has been challenging and disappointing for me.

    Roni 🙁

    • Alan Ellman May 2, 2022 8:01 am #

      Roni,

      Yes, this year-to-date has been disappointing for the entire investment community. Only 1 of my portfolios is up for the year (Select Sector SPDRs).

      When markets decline precipitously or accelerate exponentially, we know that historically there will be a reversion to the mean where markets go up 8% – 10% per-year.

      Despite this, there will always be discomfort during these challenging market conditions.

      Better days ahead.

      Alan

      • Roni May 2, 2022 3:13 pm #

        Thank you for your kind words, Alan.

        I will hang on.

        Roni

  5. Barry B May 1, 2022 10:49 pm #

    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 04/29/22.

    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:

    http://www.youtube.com/user/BlueCollarInvestor

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  6. Donnell May 2, 2022 1:41 am #

    Dr. Ellman:

    Unfortunately, my May trade in AGRO and CMC didn’t work out as the stock price dropped significantly– in a matter of four or five days. Fortunately, I am aware of the BCI exit strategies and “converted dead money to cash profits”, which will result in a positive return by the end of the contract month if the market cooperates.

    I purchased the TMC earlier today, and input my information for the May 2022 option month, but didn’t notice the “Convert dead money to cash profits” option under column AC (Exit Strategy Selected). Was this an oversight, or is there another way for me to enter these trade exits into the TMC?

    As always, thanks to you for answering my questions and to the BCI team for the new calculator, book and the work you all do every week with the reports.

    Donnell

    • Alan Ellman May 2, 2022 7:55 am #

      Donnell,

      When we use the “CDMCP” exit strategy, we are closing both legs of the trade and using the cash from the stock sale to enter a new trade. Nice going, taking this action in an extremely challenging market aberration.

      Since we are closing both legs of the trade, we can enter the mid-contract unwind exit strategy as shown in the screenshot and the final sold stock price into column “AI” This will now close the current position and we enter a new trade on another row in the spreadsheet in the same contract cycle.

      Remember to use the capital adjustment section so the cash investment isn’t redundant.

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

      Alan

  7. Charles May 2, 2022 12:10 pm #

    Alan,

    I am an avid follower and fan. I only do C/Cs, and I almost exclusively do them on a handful of stocks I want in my portfolio (mainly precious metal-related stocks like RGLD and WPM). The problem I run into with these pretty volatile stocks is that occasionally my portfolio can get heavily weighted with shares bought at the higher end of the stocks cycle. If I dare to sell C/Cs on these high-basis shares when the stock is at the lower end of its cycle I can get caught selling C/Cs with SP at or near the current (low) price and then have the C/C move deep ITM as the stock price rises rapidly. In these instances often none of the Blue Collar exit strategies work; i.e., the results are all negative.

    Is my only option to only write C/Cs on shares whose basis is at or near the current market price, and wait for the price to cycle high before writing calls on those shares with a much higher basis?

    Thanks Alan,
    Charles

    • Alan Ellman May 3, 2022 7:56 am #

      Charles,

      We always have plenty of choices how to manage our option-selling portfolios. Sometimes, there is not a great answer, but there’s always a best answer.

      We start with defining our goals and that will make our decisions much easier and apparent.

      Let’s say your goal is to retain the shares you alluded to for the long haul. The strategy we are looking at is “portfolio overwriting” where we sell call options deeper out-of-the-money, decreasing the probability of exercise, or exit strategies to avoid exercise, while decreasing premium returns.

      Next, we’ll assume share price decline. Here, the rolling-down to out-of-the-money strikes should be considered to mitigate share value losses by increasing time-value option returns.

      Finally, let’s assume share price remains below the strike at expiration and the option expires worthless as we own shares at a much lower price than our cost-basis. The options mitigated losses, but we are still in a losing overall position. What strikes should we consider given that we still want to retain the shares (in this hypothetical scenario)?

      The BCI strategies we can consider are the 10-Delta and IV trading range strategies where we identify high probability of success trades. Here is a link to an article I published on this topic:

      https://www.thebluecollarinvestor.com/comparing-implied-volatility-and-delta-when-establishing-projected-trading-ranges-during-our-option-contracts/

      There is always a risk to our trades as we seek to beat risk-free returns but there is also always a best solution to challenging situations.

      Alan

      • Charles May 3, 2022 3:37 pm #

        Thank you, Alan.

        As always your comments are insightful.

        I appreciate you taking the time to answer my question.
        Regards,

        Charles

  8. Kevin May 4, 2022 1:02 am #

    Dear Alan;

    I sold a covered call position on UNG 3/31/22 $19 strike, Exp. May 20/22, premium $2.11. Is a nice problem to have as I will be profitable if assigned, but the current value of the underlying is approx $27.50/share.

    It is hard to look at all that potential profit slip away. I seek your advice on how to manage this position.

    Thanks in advance.

    Sincerely;
    Kevin

    Still slightly bullish on UNG

    • Alan Ellman May 4, 2022 7:48 am #

      Kevin,

      First, congratulations on a successful trade at this point. We are in an unrealized maximum gain situation without exit strategies. Now, the question is should we execute any exit strategies?

      When share price accelerates exponentially as it did with UNG, the first consideration is the mid-contract unwind (MCU) exit strategy where we unwind both legs of the covered call trade. We do so as the time-value approaches zero and we can generate at least 1% more than the time-value cost-to-close by contract expiration with a new security and new covered call trade.

      To make this determination, we use the “Unwind Now” tab of the Elite, Elite-Plus or new TMC Calculators.

      A couple of points:

      1. I understand your comment about “profit slipping away” but I have a different take. If the option expires in-the-money by expiration, we have maximized our return as the trade was originally structured. This calls for champagne, not Kleenex.

      2. UNG was #1 on our ETF Report last week (new report coming out tonight). It has had a strong presence in our reports recently.

      3. UNG also had the highest implied volatility of all the eligible securities … greater risk, greater returns.

      4. Because of the high IV, the time-value component of the option premium will remain high and that is why I suspect the time-value cost-to-close will also be high, negating the use of MCU at this time (I haven’t run the numbers as I type).

      5. If the calculations show that MCU does not apply at this time, we continue to monitor the trade and take no action at this time.

      Remember, champagne, not Kleenex.

      Alan

  9. Jeff May 4, 2022 2:38 pm #

    Alan,

    Love the new Trade management calc. Re-reading user guide

    Quick question, do you use stop loss orders on short puts?

    Jeff

    • Alan Ellman May 4, 2022 7:46 pm #

      Jeff,

      Glad you like our new calculator.

      We have our 3% guidelines for monthly puts when share price declines, but this cannot be automated. Some brokers will send notifications when share price reaches a requested price point. For example, if a stock is trading at $110.00 and we sell the $100.00 monthly OTM put, we BTC the put if share price declines to $97.00 or lower.

      We do enter our 20%/10% guidelines for puts, automating the closing of the short puts when share price accelerates significantly. For example, if we sold a put for $2.00 and share price rises causing put value to decline to $0.40 or less in the 1st half of a monthly contract, we buy back the put and use the cash in another trade, with a different security, a 2nd income stream in the same contract cycle.

      Alan

  10. Roni May 4, 2022 3:17 pm #

    Alan and Barry,

    here is a classic example of ER risk:

    After the 10% buy-back of my CLH call, I decided to take it through the earnings report which came out today.
    The report was very positive and the overall market is up.
    But CLH dropped 6% ???

    It is always unpredictable.

    Roni

  11. Alan Ellman May 4, 2022 4:58 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.

    The mid-week market tone is located on page 1 of the report.

    New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.

    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

  12. Alan Ellman May 4, 2022 6:07 pm #

    Hitting a Double in the same day:

    I hit several doubles in the late afternoon today after the Fed announcement.

    The screenshot below shows that this morning my 20% BTC limit order on an XLP covered call trade (3 contracts) was executed automatically, and the short calls were bought back at $0.17. In the late afternoon, I re-sold the same $80.00 calls for $0.46, resulting in a net credit of $87.00 for about 4 minutes of effort.

    Notice that I now set a 10% BTC limit order on the new premium of $0.05. Who knows, maybe a triple.

    CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

    Alan

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