Hitting a Double is a covered call writing exit strategy where the short call is bought back after share price declines and resold when share price recovers. At expiration, we may decide to buy back the 2nd short call and sell the shares. This article will analyze such a series of trades, shared by a BCI member, using the BCI Trade Management Calculator (TMC) and an exchange-traded fund (XLE).
Real-life example with Energy Select Sector SPDR Fund (NYSE: XLE)
- 4/22/2024: Buy 300 x XLE at $96.19
- 4/22/2024: STO 3 x 5/17/2024 $93.00 calls at $4.25
- 5/1/2024: BTC 3 x 5/17/2024 $93.00 calls at $0.85 (share price decline)
- 5/3/2024: STO 3 x 5/17/2024 $93.00 calls at $1.58 (Hitting a double)
- 5/17/2024: BTC 3 x 5/17/2024 $93.00 calls at $2.09
- 5/17/2024: Sell 300 x XLE at $95.08
Trade entries & calculations in the TMC
- The initial trade resulted in an initial time-value return of 1.14%, 16.00% annualized
- The BTC entry of $0.85 is entered using the exit strategy Hitting Double/Sell Stock
- The STO of the 2nd option is combined with the cost-to-close at expiration (+ $1.58/-$2.09- highlighted in brown cells above)
- The final net option return for the 26-day trade is 3.00%
- The final realized share loss is 1.15%
- The final realized net cash return is $534.00
- This translates to a 1.85%, 26-day return (25.97% annualized)
Discussion
When using the hitting a double exit strategy and then deciding to buy back in-the-money strikes prior to expiration to sell the shares, we can incorporate the cost-to-close with the 2nd option premium sale and this approach will result in accurate calculations. The BCI Trade Management Calculator (TMC) will facilitate all these transactions.
Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts
This book will detail how to enter, manage and calculate trade adjustments for all market conditions. After we select the underlying security and sell the corresponding option, we immediately move into position management mode. There are over 20 exit strategies defined, as well and when and how to implement these plans.
Click here for more information.
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Morning Alan,
I was watching this video above with great interest, and it got me
thinking once I tested some options in the TMC. I was generating very
low weekly returns on the equities I tested for cash secured put selling
with -10 Delta. So I started increasing the IV to between 50 – 100 and
saw ‘better’ premiums pushing the return up to .83% for the same time
period. What is the risk I should perceive in pushing up the IV but
still with -10 Delta? (using a roughly 8 day time frame of November 1st.)
I am certain this will increase the volatility of the contract, but
still with a low Delta the chance of assignment to me still seems low.
And the 10%/20% stop guidelines are used.
My other question related to CSP, while I know we want to own elite
companies, I have no intention of taking possession of the equities I am
selling against. As long as they have a positive chart technically, high
IV, low (-10 Delta), clearing earnings dates, stochastics, MACD and MA
filters but may not be on our BCI weekly list, what am I not considering
risk wise or what am I overlooking with this line of thinking? I realize
this may be outside the BCI guidelines, but hopefully still within the
framework of the BCI overall thought process.
What input could you offer as to my line of thinking? As always, thanks
for you insight (of course not recommendation) and hope you enjoy the
weekend!
—
Thanks,
Dave
Dave,
As long as the specific CSP strike you are considering shows a Delta of 10, consider the trade relatively safe in terms of avoiding exercise.
We can also confirm by using the BCI Expected Price Movement Calculator, where we use implied volatility stats of ATM strikes to generate a trading range with approximately 84% accuracy. Using the CSP strike at the low end of the range will create an approximate 16% risk of exercise. Strikes can be determined using both IV and Delta, confirming from 2 perspectives.
The 20%/10% guidelines for CSPs, apply when share price accelerates. We have our 3% guideline when share price declines.
Certainly, there are viable CSP underlying candidates not found on our weekly stock screen and watch list. They may represent high quality candidates that fall just short of the BCI rigorous screening process.
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 10/25/24.
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.
NOTE: I will be out of the country next week with limited internet access. The Weekly Stock Report for November 01, 2024, will be uploaded late on Monday, November 04, 2024.
Barry and The Blue Collar Investor Team
Link to Alan’s recent interview with Quasar Market Live:
https://youtu.be/7itH6becYNc
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
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