One of the BCI exit strategies that helps distinguish us from all other covered call writers is known as “hitting a double” We use this position management technique when share value declines such that option value drops to 20% (in the first half of a monthly contract) or 10% (in the second half of a monthly contract) of the original option premium received. If and when share value recovers, the same option is resold at a higher price than the cost-to-close the original short call. This article will detail how the “multiple tab” of the Ellman Calculator can be used to calculate “hitting a double results throughout the contract month.
Hypothetical example for “hitting a double”
- Buy BCI at $48.00 per share
- Sell the $50.00 out-of-the-money call option for a premium of $2.00
- Stock price drops such that option value meets our 20% guideline and we buy-to-close the short call at $0.40 (20% of the original $2.00 premium)
- Share price then moves up allowing us to re-sell the $50.00 call at $1.00
Typical chart pattern for an option when “hitting a double”
“Hitting a Double” Option Chart Pattern
The red arrows show the option sale and re-sale while the blue arrow highlights the closing of the initial short call. The chart will show a V-shaped pattern.
Multiple tab of the Ellman Calculator
After the initial trade is set up, the option credit can be adjusted based on the cost-to-close (adjusted down) and then the re-sale of the option (adjusted higher). This can be accomplished on the same row as the one when the trade was initially set up, but the screenshot below will show the trades in 3 separate rows:
The Ellman Calculator- Multiple Tab
Note the following:
- The figures within the red oval show the updated net option premium returns in dollar amounts:
- $2.00 (original premium generated)
- $1.60 (net premium after buying back the option for $0.40)
- $2.60 (net premium after re-selling the $50.00 call)
- The brown cells reflect the net option returns (ROOs)after each step of the trade series
- The yellow cells show the upside potential from share purchase price ($48.00) up to the strike sold ($50.00)
“Hitting a Double increased the time value return by 1.2% (from 4.2% to 5.4%).
Discussion
The key takeaways are that the trade can be adjusted to keep the current calculation status accurate and that the option returns went from 4.2% to 5.4% as a result of taking advantage of this exit strategy opportunity. Final trade results will be influenced by the status of share price at expiration.
Stock Repair Calculator now available in Blue Collar store
Our recently developed stock repair calculator and its associated user guide and now available to assist in mitigating losses in stock-only portfolios. For more information click here.
Upcoming event
February 7th – 10th, 2019
Orlando Money Show
Omni Orlando Resort @ Champions Gate
February 7th – 10th 2019
Speaking schedule:
1. Getting Started with Stock Options: Creating Monthly Cash Flow with Covered Call Writing
February 8, 2019, 3:10 pm – 3:40 pm
2. Getting Started with Stock Options: How to Select the Best Options in Bull and Bear markets
February 9, 2019, 2:00 pm – 2:45 pm
Your generous testimonials (new feature)
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:
Alan,
Thank you for sharing your life passion. You are making a difference in our financial lives. You are an accomplished communicator, teacher and writer.
Ron S., CPA
Market tone
This week’s economic news of importance:
- Markit manufacturing PMI Dec. 53.8 (53.9 last)
- ADP Employment Dec. 53.8 (53.9 last)
- Weekly jobless claims 12/29 231,000 (218,000 expected)
- ISM manufacturing index Dec. 54.1 (57.0 expected)
- Nonfarm payrolls Dec. 312,000 (182,000 expected)
- Unemployment rate Dec. 3.9% (3.6% expected)
- Average hourly earnings Dec. 0.4% (0.3% expected)
- Markit services PMI Dec. 54.4 (53.4 last)
THE WEEK AHEAD
Mon Jan. 7th
- None scheduled
Tue Jan 8th
- NFIB small business index Dec.
- International trade Nov.
- Job openings Nov.
- Consumer credit Nov.
Wed Jan.9th
- FOMC minutes
Thu Jan. 10th
- Weekly jobless claims 1/5
- Wholesale inventories Nov.
Fri Jan. 11th
- Consumer price index Dec.
- Federal budget Dec.
For the week, the S&P 500 moved up 1.86% for a year-to-date return of 1.00%
Summary
IBD: Market in confirmed uptrend
GMI: 0/6- Bearish signal since market close of November 13th, 2018 as of Friday morning
BCI: With the VIX stabilizing, China negotiations looking better and positive remarks from Fed Chairman Powell, I am putting the cash I have on sidelines (25% of my portfolio net worth) back to work and using an equal number of in-the-money and out-of-the-money strikes.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to an improving market tone. In the past six months, the S&P 500 down 7% while the VIX (21.38) moved up by 43%, both improvements over last week.
Wishing you the best in investing,
Alan and the BCI team
Premium Members,
This week’s Weekly Stock Screen And Watch List, the first of the New Year, 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 01/04/19.
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
Best,
Barry and The BCI Team
barry@thebluecollarinvestor.com
Alan,
Happy New Year to you and BCI.
I was listening to CNBC on Friday and one of the experts (can’t recall his name) said that companies would be using the cash they got from the tax reductions would be used for share buy-backs and that would be positive for the stock market. Can you explain how that works?
Thanks a lot.
Marsha
Marsha,
This relates to the fundamental analysis institutional investors (mutual funds, hedge funds, insurance companies and banks) incorporate into in their algorithms when evaluating stocks for purchase.
When corporations buy back shares, it reduces the number of “outstanding shares” available to the public. Corporate earnings remain the same but calculating earnings-per-share (EPS) will increase.
One of the most looked at fundamental ratios is the price-to-earnings ratio (PE ratio). When EPS rises, PE ratios will decline making the stock more attractive for purchase. There is an anticipation that there will be a substantial amount of share buybacks in 2019 and this is a bullish factor for the stock market.
Alan
Just printed out the colorful 2019 Expiration Calendar available at the OCC.
Just search for … 2019 options expiration calendar … and select in the results the calendar from the OCC web site.
Mario
Alan,
Please update the Options Expiration Calendar in your Resources / Downloads area. Just noticed you had a Typo and listed last years as 2108… a Century ahead!….
Happy New Year! to everyone.
Mario
Thanks Mario,
The 2019 version of the Options Expiration Calendar has been uploaded to the “resources/downloads” section of the premium members site.
Alan
Alan.
I am impressed by your courses and would like to try a little bit. Would you please let me know the minimum dollar amount that may start BCI covered call writing?
Thank you for your attention.
Charles
Charles,
As a guideline:
$10k – $15k when using exchange-traded funds (ETFs)
$35k – $50k when using individual stocks
For those looking to build up an adequate cash balance to meet these guidelines, see my book, “Stock Investing for Students”
Please keep in touch and let us know how you’re progressing.
Alan
Charles – Also remember to use the powerful Google search feature of this blog to read about past blog comments on many subjects. Lots of information at your fingertips.
Mario
Charlotte seminar:
Just added:
Saturday September 14th
Information to follow
Linda and I are looking forward to our return to this beautiful city.
Alan
Would you do similar calulations for a stock that you have been holding for a while and collecting dividends and seccling CCs on?
For example, I bought CVX in May 2021 @ 107.32 for a dividend capture play. I have held the stock since, collecting two dividends on it and selling CCs as it’s price has gone down far below my purchase price and now sits a little above it.
If I were entering this into the Ellman Calculator to evaluate the next CC to sell against it, would I just keep the cost of the stock he same at $107.32 but put as the option price per share the total sum of:
dividends (plus) calls sold (minus) buybacks ?
If so, the the only other changes I would need to make, I assume are the strike price of the option I am looking at selling and the expiration date?
Alan,
When making a trade decision, we use current market value. Past prices and dividends pay no role in our trading decisions today.
If rolling an ITM strike, we use the previous strike as our cost-basis. Use the “What Now” tab of our calculators, when rolling.
Those other factors do come into play when we are calculating final results or for tax purposes.
Alan