Blue Collar Investors know that there are times we shouldn’t “settle” for maximum returns. In this article, a successful covered call trade with QQQM (an exchange-traded fund or ETF) will be analyzed, detailing how a maximum return was enhanced using the mid-contract unwind (MCU) exit strategy. The QQQM trade was converted to a CAKE trade in a 2-week period.
Real-life example with Invesco Nasdaq 100 ETF (Nasdaq: QQQM) and The Cheesecake Factory Inc. (Nasdaq: CAKE)
- 6/10/2024: Buy 100 x QQQM at $190.92
- 6/10/2024: STO 1 x 6/21/2024 $193.00 OTM call at $1.25
- 6/10/2024: Set up a BTC GTC limit order for the $190.00 call at $0.13 (10% guideline)
- 6/17/2024: QQQM trading at $197.34
- 6/17/2024: BTC the 6/21/2024 $190.00 call at $4.80
- 6/17/2024: Sell 100 x QQQM at $197.34
- 6/17/2024: Buy 100 x CAKE at $39.18 (additional cash went into other trades- percentages is what’s important)
- 6/17/2024: STO 1 x 6/21/2024 $40.00 OTM call at $0.28
What is the Mid-Contract Unwind (MCU) exit strategy?
This is a position management technique used when share price accelerates significantly causing the time-value of the premium to approach $0.00. We close both legs of the covered call trade and initiate a new trade with a different underlying security.
Initial QQQM covered call trade calculations
- Yellow cell: The breakeven price point is $189.67
- Brown cells: The initial 12-day time-value return is 0.65%; 19.91% annualized
- Purple cell: An additional 1.09% of upside potential may be realized
- The maximum return is 1.74% (0.65% + 1.09%)
- Calculations are accomplished using the BCI Trade Management Calculator (TMC)
MCU step #1: Closing the QQQM trade
- The final realized return is 1.50%, 0.24% less than the maximum possible return
- There was a realized option loss and a realized stock gain
- Can the CAKE trade compensate for this small loss and more?
5-day CAKE covered call trade
- Yellow cell: The breakeven price point is $38.90
- Brown cells: The 5-day return is 0.71%; 52.17% annualized
- Purple cell: There is an additional 2.09% of upside potential, should share price rise up to or beyond the OTM strike
- These calculations more than compensate for the 0.24% of lost time-value to close the QQQM trade
Discussion
Many situations will arise where our exit strategy arsenal will allow us to generate greater than maximum returns for our initial investments. The scenarios are not based on luck, but rather on preparation and opportunity.
Covered Call Writing Alternative Strategies
Portfolio Overwriting- using stocks in buy-and-hold portfolios
The Collar Strategy- using protective puts
The Poor Man’s Covered Call- using LEAPS options
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Covered call writing is a cash-generating strategy that lowers our cost basis thereby improving our opportunities for successful investments. One of the many benefits of incorporating this strategy into our investment portfolios is that the system can be crafted to meet our trading style, market assessment, portfolio net worth and personal risk tolerance. This book details three such covered call writing-like strategies
Click here for more information.
Recent video interview with Quasar Market Live:
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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:
Upcoming events
1. Mad Hedge Investor Summit
Tuesday December 3, 2024
3 PM ET – 4 PM ET
Tuesday December 3, 2024
3 PM ET – 4 PM ET
Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow: The PCP (put-call-put or “wheel) Strategy
This presentation will cover the following topics:
Basics for selling cash-secured puts
What is a put option?
- “Moneyness” of put options
- What is selling cash-secured puts?
- Preview example
- Accessing the option-chain
- Put calculations (BCI Trade Management Calculator- TMC)
Basics for covered call writing
- What is a call option?
- “Moneyness” of call options
- What is covered call writing?
- Preview example
- Accessing the option-chain
- Call calculations
The PCP Strategy
- Real-life example with TMUS
- Access the option-chain
- Initial put trade entries & calculations
- Initial call trade entries & calculations
- Downside protection on steroids
Event discount offer (best ever)
Q&A
2. BCI-only Webinar
1/16/2025
8 PM ET – 9:30 PM ET
Information to follow.
3. Long Island Stock Investor Group Part I
Zoom
February 13, 2025
7:30 – 9:00 ET
Details to follow.
4. Las Vegas Money Show
February 17 – 19, 2025
- Ultra Low-Risk Approaches to Covered call Writing and Selling Cash-Secured Puts
- Covered Call Writing Technology Stocks
details to follow.
5. Long Island Stock Investor Group Part II
March 13, 2025
7:30 – 9:00 ET
Details to follow.
6. MoneyShow Masters Symposium Miami 2025
Thursday May 15, 2025
Details to follow.
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 11/22/24.
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:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium Member’s pricing is locked into your current rate and you will never see a rate increase as long as the membership remains active.
Barry and The Blue Collar Investor Team
Alan goes back to college:
This photo was taken after speaking at The University of Central Florida.
The image includes Board members of the Young Investors Club, an impressive group of men and women who are destined to become successful and wealthy.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan,
I was listening to one of your webinars and you mentioned the term “time value cost to close”. Can you explain this concept. I’m just not getting it.
Thanks a lot.
Les
Les,
When trading covered calls, if share price rises exponentially above the call strike, the cost to buy back the option is substantial.
The premium consists of mainly intrinsic-value (the amount the strike is lower than current market value). The remainder of the premium is time-value.
Let’s say we sold a $50.00 call and the stock price is now $60.00. The cost-to-close that call is $10.00 of intrinsic-value + a small time-value component. As an example, the cost to close that $50.00 strike may be $10.50.
Once we close the $50.00 short call, share value is no longer restricted by the $50.00 strike and, therefore, is worth $60.00. This negates the $10.00 in intrinsic-value we paid to close the short call.
This means the actual time-value cost-to-close is $0.50.
We convert this to a % and see if we can generate at least 1% > the time-value-cost-to-close by contract expiration.
Check out the mid-contract unwind (MCU) exit strategy in my books and videos.
Alan
Hi Alan,
As I evolve as a premium seller of options, I have been selling a lot of cash secured puts. I have been writing them at a -.10’ish delta, and really struggling to get to the 0.5% – 1% time value return for weekly puts.
Can you share how the logic works if I sell deem ITM CSP? The current option chain for MRVL priced at $90.21 shows an ATM IV of 84.4% (pretty high).
What happens if I sell the $92 strike for example with a premium of $5.40, when it expires on 12/6? Will I be assigned this position at a loss? You can see the $79 strike returns $.74 a vast difference, but much lower risk of assignment.
I guess I don’t understand the math what happens if I sell at the higher ITM strike? Is that a loser of a trade?
Thanks,
David
David,
First, there could be better examples, as MRVL has an upcoming earnings report on 12/3, and these should always be avoided. This accounts for the high IV.
Now, if our goal is cash generation and not share ownership, we should only sell OTM puts. If an ITM put is sold, the breakeven price point is strike – total premium.
If the goal is .5% – 1%/week, the $79.00 put seems to fit the bill. Have a look at the attached screenshot using our TMC.
Mainly … Avoid ERs.
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Alan
Premium members:
This week’s 4-page report of top-performing ETFs, along with our sample trade of the week, 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.
We have also included a sample trade taken from one of our BCI watchlists.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
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Happy Thanksgiving to all.
Alan and the BCI team