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”
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:
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%).
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.
February 7th – 10th, 2019
Orlando Money Show
Omni Orlando Resort @ Champions Gate
February 7th – 10th 2019
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:
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
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.
- 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%
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