Exit strategies for covered call writing includes closing a trade when share price rises above the original strike price sold. When formulating these decisions, we must factor in the cost-to-close as it relates to the opportunity to generate more profit. On November 8, 2017, Marion shared with me a trade with Activision Blizzard, Inc. (NASDAQ: ATVI) that called for such evaluation. Marion wanted to know if the position should be closed or if no action is called for at this time.
Marion’s trade
- 11/6/2017: Buy 100 x ATVI at $60.34
- 11/6/2017: Sell 1 x December 8, 2017 $61.00 call for $1.62
- 11/8/2017: Date email was sent to me: ATVI trading at $64.55
- 11/9/2017: ATVI trading at $63.30 as I respond to Marion’s email
ATVI option chain on 11/9/2017
ATVI Option Chain on 11/9/2017
The cost-to-close the $61.00 short call is $3.60 per-share. Next, we will populate the blue cells in the Elite version of the Ellman Calculator (free to premium members) to measure the actual time value cost-to-close.
ATVI calculating the cost-to-close
covered call writing exit strategies
Although the buy-to-close premium is $3.60, $2.30 is intrinsic value. This means, we are benefitting by $2.30 as share value moves from the $61.00 strike price to the current market value of $63.30. This leaves a time value cost-to-close of $1.30 which represents a loss of 2.13% based on the current strike price ($61.00). That is the realistic amount it will cost us to close this entire position (less small trading commissions).
Practical trading based on these calculations
To close or not to close, that is the question. Shakespearean reference aside, this is a critical decision that we are faced with frequently as option-sellers. The brown field shows that we are spending 2.13% of our investment to close both legs of this trade. The cash can then be used to enter another trade. We ask ourselves if the new trade can generate more than 2.13% in the remainder of the contract month to justify closing. Since there is a full month remaining, it is not unreasonable to assume that this would be possible. A successful second trade in the current contract month may generate, let’s say, 3%, leaving a net credit of 0.87% for closing and entering the second covered call trade (less small commissions). The other choice is to take no action leaving us in a position where the initial trade is maximized at 3.8% ($1.62 option premium + $0.66 share appreciation up to the $61.00 strike). We also have downside protection of that 3.8% 1-month profit of 3.6% ($2.30/$63.30). Both are great choices…which would you select?
Discussion
More aggressive traders may opt to close and hope to generate an additional 1% net credit. More conservative investors (I’m guilty as charged) would lean to the latter choice of taking no action and relying on that 3.6% cushion to protect the healthy 3.8%, 1-month return. Of course, we continue to monitor our position which may lead to taking advantage of a position management maneuver later in the contract.
Upcoming event
San Francisco Money Show
August 23rd and 24th
Hilton San Francisco Union Square
1.Thursday August 23rd: 12:30 PM – 1:15 PM
All Stars of Options: “How to Select the Best Covered Call Options in Bull and Bear Markets”
2. Friday August 24th: 10:15 AM – 1:15 PM
Masters Class: “How to Generate Monthly Cash Flow and Buy a Stock at a Discount Using 2 Low- Risk Option Strategies (covered call writing and selling cash-secured puts)”
3. Friday August 24th: 6:00 PM – 6:45 PM
Workshop: “Converting Non-Dividend Stocks to Dividend Stocks using Stock Options”
Market tone
This week’s economic news of importance:
- NFIB small business index July 107.9 (107.2 last)
- Import price index July 0.1% (-0.1% last)
- Retail sales July 0.5% (0.1% expected)
- Productivity Q2 2.9% (2.4% expected)
- Industrial production July 0.1% (0.3% expected)
- Home builders’ index August 67 (68 last)
- Business inventories June 0.1% (0.3% last)
- Weekly jobless claims 8/11 212,000 (215,000 expected)
- Housing starts July 1.168 million (1.270 million expected)
- Building permits July 1.311 million (1.292 million last)
- Consumer sentiment August 95.3 (98.5 expected)
- Leading economic indicators 0.6% (0.5% last)
THE WEEK AHEAD
Mon August 20th
- None scheduled
Tue August 21st
- None scheduled
Wed August 22nd
- Existing home sales July
- FOMC minutes
Thu August 23rd
- Weekly jobless claims 8/18
- Markit manufacturing PMI August
- Markit services PMI August
- New home sales July
Fri August 24thth
- Durable goods orders July
For the week, the S&P 500 moved down by 0.59% for a year-to-date return of 6.60%
Summary
IBD: Market in confirmed uptrend
GMI: 6/6- Bullish signal since market close of July 9, 2018
BCI: Using an equal number of in-the-money and out-of-the-money strikes. Not willing to get more aggressive at this time.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a bullish tone. In the past six months, the S&P 500 was up 5% while the VIX (12.64) down by 39%.
Wishing you much success,
Alan and the BCI team
Good morning friends,
Alan, I am with you, I would take the latter choice!
I covered most of my ETF’s for Sept. on the Thursday bounce. And you heard it here first, folks, this retail hobbyist thinks the market will be lower a month from now! That said, you will find no better contrary indicator than me :).
I read several articles this week all drawing similar conclusions – dangerous in itself.
The irony of the Trade War is it has forestalled a larger crash or correction in the market by injecting pessimism, restraint, caution and even fear into the minds of investors. Markets don’t crash at these sentiment levels. Crashes require “irrational exhuberance”.
Markets may melt down and we are seeing that with price action but it is unlikely we will have a “Big Bang”. Water torture is the more likely scenario :).
There is a funny saying “the more unpredictable things become the more people rely upon predictions”. Sounds like now….
A nice weekend and successful new week to all. – Jay
Good evening Jay,
I agree. This market has me frightened for a variety of reasons. Your analysis of the Trade War makes a very good point. I too feel like it’s going to be water torture rather than a big crash. Death by a thousand cuts.
I have not analyzed all the big crashes but I tend to agree that crashes to not occur when we have a wall of worry such as we have now.
However I am a fan of Nassim Taleb’s theory of the Black Swan. His book is a compelling read. The gist of the theory (from Wikipedia) is “The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight”.
It is the Black Swans that I fear. 9/11 was a Black Swan. Nov. 8, 2016 was a Black Swan. Dow futures were down 900 points at one point overnight. However things then turned on a dime. I fear we are in the Bermuda Triangle of potential Black Swans.
Now is the time to be disciplined, follow our guidelines, and/or rules and pay attention. Each of us has unique antennae which need to up. My major mistakes were made when I didn’t listen to what myself was telling me.:)
Take care and good fortune,
Hoyt T.
Hello Jay and Hoyt,
You both may be right. Who knows ?
But, IBD says confirmed uptrend. GMI – 6/6 bullish, and BCI not willing to get more aggressive at this time.
So I’m following Alan’s equal ITM and OTM strikes for the 09/21 options cycle.
The cash resulting from my expiry weekend assignment (aprox. 30% of total) must be re-deployed tomorrow or in the next few days.
The trade war is favorable to the strongest (the US), and if Trump meets his last campaign promise, and invests 1 TRILLION in infrastructure, the American economy will perform miracles.
He has met all his other promisses, so I expect him to go ahead with this last one too.
The rest of the world will grumble, but there is not much they can do, except watch and accept.
Actually, it will be good for everybody, cause if the locomotive goes faster, the waggons will follow.
Roni
Thanks Roni, hope you had a pleasant weekend!
If i were still running a month to month covered call business in my IRA – and I may get back to that – for Sept with re-deployment cash I would seek a blend of stocks with healthcare, cyber security, Defense and consumer focus.
I like your locomotive/wagon metaphor and hope you are right about it going faster in days and months to come! – Jay
Jay,
my dear friend, I have been working hard on weekends because my wife is recovering from fractured vertebrea (Osteoporosis), and I must take care of many chores.
But that’s ok, I feel well doing it.
My current positions are diversified, and some are in the industries you recommend :
Left over from last cycle, ILMN, PYPL, PANW, ADBE, AVGO, ULTA, waiting to sell and replace, plus new ones bought today, ORLY and GRUB.
Also I still have some cash earmarked for tomorrow or a bit later this week.
I had LULU, GRUB and NOW assigned, and sold VEEV today, after my calls went worthless. 🙂
Most of my trades are based on Barry’s stock screen bold tickers, so no sweat.
Roni
Dear Roni,
I wish only the speediest complete recovery for your Mrs.. Thank you for your warm greeting, it is mutual.
I love your stock list, thank you for sharing it with us. I will be shocked if you do not continue to out perform the S&P for September!
If you have a few positions you have not covered yet write some ITM calls for Sept just for the hell of it. They may surprise you.
Thanks Jay,
I am searching for 2 more good soldiers with 2% plus ROO ITM, or at most ATM.
Roni
Jay,
I just entered new buy/write ITM 09/21 trades for ALGN and NOW. 🙂
Now I’m 100% invested again.
Roni
Oops, forgot to mention, they are CC trades.
Hey Roni,
Two more great picks!
We could see a positive market move if the US/Mexico trade talks bear fruit. The reverse if they don’t.
I have a bought call spread on GRUB that is doing well so I like that stock also. Been having success with MA selling CSP’s and buying call spreads. Crude oil has been doing well of late so I have traded it and VLO. I have been holding some GLD in my investing account and over writing but it is showing signs of life again so it may be called in Sept. if I do nothing. – Jay
Jay,
great.
Now comes the fun part.
Normally, when a person is 100% invested, he/she would be watching the stocks and waiting. And hoping.
But with the BCI mehtodology, we can fine tune the portfolio all the time, with exit strategies, resales, and other guidelines, having fun until expiry or even after.
Events like the US/Mexico talks you mentioned, are opportunities to test our skill, whichever way they go.
That’s the way I see it.
Roni
Great crowd at my Denver presentation this morning.
Click on image to enlarge and use the back arrow to return to this blog.
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 08/17/18.
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
Since we are still in Earnings Season, be sure to read Alan’s article,”Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season
The report for 8/24/18 will be out before the market opening on Monday, 8/27/18. Most likely, I should be able to get it out to you late on Sunday evening, 8/26/18, upon my return back to the US.
Best,
Barry and The BCI Team
[email protected]
Premium members:
This week’s 8-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 as well as the implied volatility of all eligible candidates. 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
Alan,
your article, as always, hits the spot.
I believe that the later choice is the best, by far.
I understand why Marion, and many CC traders get excited when a trade goes temporarily successful in the first 2 or 3 days after they are initiated, but we need to be patient.
3.8% would annualize at 45%, which is huge, and the greed to make more, is not justified.
Roni
Just finished my 1st seminar in San Francisco. What a great crowd! Two more tomorrow and I’ll sleep on the plane all the way home…
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG…
Alan