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“Hitting a Double” on the Last Day of a Contract

are critical components to our overall success. One of the strategies available to us is hitting a double. This is where we buy back the short call and wait for the stock price to recover allowing us to re-sell the same option. This creates 2 income streams in the same contract month with the same stock and cash investment. Because of time-value erosion (Theta), the opportunities for hitting a double are usually reserved for early-to-mid-contract time frames.

In certain volatile market conditions, hitting a double opportunities may expand to later in a contract. This article will highlight a situation where I hit a double on the last day of the May 2020 contracts using the exchange-traded fund Invesco Trust (NASDAQ: QQQ). The market volatility was a result of the coronavirus crisis.

 

QQQ trades during the May 2020 contracts

  • 4/20/2020: Buy 100 x QQQ at $215.50
  • 4/20/2020: Sell-to-open (STO) 1 x May 2020 $220.00 call at $5.70
  • 4/20/2020: Place a buy-to-close (BTC) limit order to close the short call at $1.15 (20% guideline)
  • 5/3/2020: Change the BTC limit order from $1.15 to $0.60 (20% guideline changed to the 10% guideline mid-contract)
  • 5/15/2020: BTC the short call at $0.60
  • 5/15/2020: STO the May 2020 $220.00 call at $1.54

On 5/15/2020, a double was achieved resulting in a net option credit of $94.00 per contract [($1.54 – $0.60) x 100].

 

Broker statement showing the hitting a double trade

“Hitting a Double” with QQQ

 

By setting the BTC limit order, I was able to take advantage of the early day dip and late afternoon price recovery. This additional cash profit was the result of preparation and opportunity.

 

 

Price chart on 5/15/2020 depicting the hitting a double classic V-shaped pattern

“Hitting a Double” Classic V-Shaped Chart Pattern

 

Discussion

Position management is the third of the 3-required skills (stock selection and option selection are the first 2). BTC limit orders can be placed immediately after entering a covered call trade based on the 20%/10% guidelines. These opportunities can arise at any time during a contract as we must have a plan in place for every possibility prior to entering our trades.

 

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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,

What you have written and lectured on a put-call-put strategy has been extraordinarily successful for me. My income since retiring this year has been many times what I made practicing law or accountancy. The decline in the market earlier in the year was positive for me.

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

10 Responses to ““Hitting a Double” on the Last Day of a Contract”

  1. Bob November 21, 2020 2:12 am #

    Hi Alan,

    I’m semi new to options and am enjoying your videos – thank you.

    Question on calculating returns on uneven cash flows.

    10/19: I bought 200 shares of “ABC” stock for $4640
    10/22: I bought an additional 100 shares for $1946 to average down
    11/10: I sold 3 contracts 11/20 for .45 with a $22.50 strike price giving me a me $131 premium
    11/20: “ABC” closed ITM at $25.54 giving me $6750 (300 * 22.50)

    value date
    1 -4640 10/19/2020
    2 -1946 10/22/2020
    3 131 11/10/2020
    4 6750 11/20/2020

    The excel function: =XIRR(A1:A4,B1:B4 return 67.7%
    This seems really high to me. Am I doing something wrong?

    This is my first options trade..

    Being hungry to learn I looked at the other side.

    11/10: the call buyer paid ~$131 to control 300 shares of “ABC” with a strike of 22.50 on 11/20

    11/20: the call is exercised at $22.50 for 300 shares

    1) If the call buyer bought the stock they had an opportunity to gain 13.1% (25.54-22.50 = 3.04; 3.04/22.50 = 13.51%)
    2) If the call buyer sold their now ITM option for $1.80 (actual value today) they would realize a 300% gain having bought for .45 00 and sold for $1.80

    Am I looking at this right? If so, the 300% gain is for the buyers 10 days … not annualized. They risked ~$135 (I don’t know what commission they paid) to get 300% return in 10 days, and I risked over $6586 by buying the stock outright.

    Observations

    1) I feel semi dumb for risking so much for so little return – compared to the buyer of the call.
    2) I feel wonderful to (hopefully) learned a lot and made a profit in doing so.

    Thoughts?

    Bob

  2. Alan Ellman November 21, 2020 6:17 am #

    Bob,

    Let’s simplify these trades by using percentages and per-share calculations:

    The average price-per-share is $21.95. The $22.50 out-of-the-money call was sold at $0.45 resulting in the calculations shown in the screenshot below:

    An 11-day time-value return of 2.1%, 68% annualized was achieved. The upside potential of 2.5% ($21.95 to the $22.50 strike) was realized, resulting in a total 4.6% 11-day return, 152.6% annualized. No need for the Kleenex with these trades.

    Some ideas for consideration:

    1. Being on the sell-side of options (when covered) is much less risky that being on the buy side. In this trade, the breakeven is $21.50 ($21.95 – $0.45). The option buyer has a breakeven of $22.95 ($22.50 + $0.45). There will always be scenarios when the buy side will look more appealing than the sell side and there’s nothing wrong with being more aggressive if that meets the investor’s personal risk-tolerance and return goals. Are we seeking to hit a grand slam home-run or singles and doubles? It’s the latter for me but may be the former for more aggressive investors.

    2. The dollar amount at risk is lower for the option-buyer but it does represent 100% of the investment if the breakeven isn’t reached.

    3. The amount of risk we incur is directly related to the return opportunities. Lottery tickets are really cheap with the opportunity to become an overnight multi-millionaire. Are they sound investments? At the other end of the spectrum, we have the safety of Treasuries, currently yielding… get me a magnifying glass. We each must find our comfort level before deciding on a strategy.

    4. Which spreadsheet were you referencing? The screenshot shows the “multiple tab ” of the Ellman calculator.

    5. Generally, it’s best to buy the stock and sell the option simultaneously.

    6. Generally, averaging down is risky although it did work out in this case.

    I commend you for your due-diligence. It will pay great dividends in the years and decades ahead.

    CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

    Alan

  3. Jorge November 21, 2020 12:05 pm #

    Alan,

    How did you know to use hit a double instead of roll down? usually hit a double is in the first part of a contract right?

    Jorge

    • Alan Ellman November 22, 2020 7:31 am #

      Jorge,

      My decision to wait an hour or two was based on the extreme market volatility at that point in time. It’s an example of how we can enhance our portfolio returns by analyzing current market conditions and not using a “one size fits all” strategy approach.

      Alan

  4. Barry B November 21, 2020 9:59 pm #

    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 11/20/20.

    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 in the final phase of 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/

    On the front page of the Weekly Stock Report, we now display the Top 10 ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.

    Best,

    Barry and The Blue Collar Investor Team

    [email protected]

  5. Elliot November 22, 2020 12:17 pm #

    Alan,

    I have been using portfolio overwriting with weeklys very successfully for the past 6 months. I follow your rules about earning report dates and ex dividend dates. My question is what is the best way to figure out annual returns when avoiding these dates?

    Thanks for all you do for us retail investors.

    Elliot

    • Alan Ellman November 23, 2020 6:09 am #

      Elliot,

      Worst case scenario, multiply the weekly returns by 44 (52 weeks minus 8 weeks of earnings and ex-dates). It can be more if earnings and ex-dates occur in the same week or if either date occurs on Monday or Tuesday when we can still write a call for that week. The factor will be in the 44 – 48 range.

      Alan

  6. Matt November 22, 2020 1:24 pm #

    Alan,

    I am in a difficult situation and looking for suggestions. I am new to options and covered calls. My long-dated Jan 2023 covered call on NIO electric car stock went wrong. I chose Jan 2023 because got a higher premium-and was the worst mistake.

    I have 500 NIO stocks and I sold 5 covered calls at strike $35. The NIO stock moved up to gapped up and moved up to around $50+ and fallen to below $45. I rolled up my call to $45 strikes.

    Now NIO is trading close to $50 and my stocks are covered at strike $45. Rolling up is possible, however Rolling up and out not possible because call options are not available for months after Jan 2023.

    Can you suggest some strategies for using Spread?

    BTC call Jan 2023 $45 strike
    STO call Jan 2023 $60 strike
    STO Put Jan 2023 $30-40 Strike

    My question is if I do not roll up, how deep in strike my shorted long-dated call has to be to get my shares called away? What is the likelihood of shares being called away before Jan 2023 if I do not roll up and strike goes deep in the money?

    It appears based on analyst projections and NIO company product development, in the next 2-3 months, the possibility of NIO moving up is a lot higher.

    Please suggest.

    Matt

    • Alan Ellman November 23, 2020 6:48 am #

      Matt,

      I can’t give specific financial advice in this venue but I can offer some observations that should be useful:

      1. NIO is an extremely risky stock based on its current implied volatility of 107%, 5x that of the S&P 500. Most conservative retail investors will avoid risky securities when using conservative option-selling strategies.

      2. Option premiums for LEAPS appear appealing because the return amount is so robust. However, selling Weekly or Monthly options over the same time-frames will generate much higher annualized returns.

      3. January 2023 options cause us to incur the risk of 8 -9 earnings reports.

      4. If we are in a trade that is causing us distress, we ask ourselves if the factors that led us to that trade are still in place. If yes, we place our 20% buy-to-close limit orders and manage accordingly. Adding protective puts is reasonable when facing implied volatility and earnings reports concerns. Protective puts will also lower annualized returns which should be factored in.

      5. If no, close the short call (maybe at a loss) and decide if we want to hold the stock as a long-term holding or write shorter-term short calls, understanding the risk in such a high IV security.

      6. If the reasons for entering the trade are no longer present, the entire trade can be closed (maybe at a loss, hopefully at a gain?) and we learn from our mistakes… that’s what I did years ago.

      Every trade we make can be valuable to us either from a cash perspective or as a learning experience. In some cases, both.

      Alan

      • Matt November 23, 2020 10:21 am #

        Alan,

        I greatly appreciate your suggestions on my NIO long dated Jan 2023 short calls. I will join your BCI as a member. You have provided me suggestions spending time.

        I have 2 more questions- I did not find answer for 1 by reading and second suggestion did not understand.

        1. If I do not roll up, how deep in strike my shorted long-dated Jan 20203 call has to be to get my shares called away?
        What is the likelihood of shares being called away before Jan 2023 if share price move from $50 to 100 to 150 to 200? Will the option buyer wait until expiry of short call or may call away shares at their breakeven plus added profit point. These being long dated covered call I am not able to understand if the buyer will wait until expiry.

        2. I did not understand: What is “20% buy-to-close limit orders” > Is it in context to total holding or BTC call premium limit order? Please elaborate.

        Thank you

        Matt

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