Exit strategies for covered call writing 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 QQQ 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
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
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.
For more information on covered call writing and its exit strategies:
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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 share some of these testimonials in our blog articles. We will never use a last name unless given permission:
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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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)
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.
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.
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.
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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?
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.
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:
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:
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.
Barry and The Blue Collar Investor Team
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.
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.
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.
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.
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.
1. Most option-buyers want to be option-sellers, not share owners. there are exceptions. Early exercise is rare but can occur unexpectedly. If the strike is deep in-the-money and the time-value component approaches zero, exercise is more likely. It is also more likely prior to an ex-dividend date.
2. The 20%/10% guidelines are critical exit strategy parameters when share price declines. Here is a link to one of the articles I published on this topic:
Was looking to trade JD. (JD.com inc.) today. I noticed the open interest in December 18 expiration date is almost completely inactive except for 85 and 87.50 strike which are VERY high. The December 24 date has OI that is far more evenly distributed. What’s up? Also, I’m guessing an expiration around a holiday is not ideal?
You are correct. Volume is historically low around holidays as it will be this week.
JD.com historically and currently does have adequate option liquidity.
Thank you for your quick responses. I learned Cash Secured Puts from your video’s and have done a few trades to get started and I really like this strategy in addition to the Covered Call Strategy.
I just have few follow ups:
1. I still have questions on the price. The price column on the list shows as of close on Friday but prices are mostly way up by Monday morning. So, my question is since the stock selection criteria is based on several factors including the price, so is it advisable to wait for the pull back to get to that price listed in the weekly report? Can I assume the target price for buying should be close to that range to buy ?
2. I didn’t realize most of our members are buy/sell traders, I thought most of them are option traders. Do you suggest mostly short term buy/sell strategies or long term? I have not seen any of your videos on position trading. Are there any BCI strategies on trading stocks and position trading?
3. Last but not the least, if weekly reports can be exported into excel, it will be extremely helpful.
Have a great Thanksgiving and thanks again for your help.
1. The price listed in our reports is the price as of market close on the day of publication. It is not a specific target price but does allow our members an opportunity to evaluate shares appropriate for our portfolios. The closing price on Friday may be higher or lower than the price on Monday.
2. 95% of our members are option traders… maybe higher. A small percentage of our members use our reports reports for both options trading as well as buying and selling stock.
3. We do have a copy & paste section in our stock reports to transfer data to a spreadsheet. The remainder of our report is locked for safety and legal reasons.
I have question.
I own SLP and some times when I want to sell I sell via a covered call earn a little more income.
SLP is thinly option traded with some days no trades at all. My question is how do i figure the bid/ask price when the premium goes from 0 to $5.00 and dont have an relationship the real time value. So how do I figure the time value for a out of the money call if I want to buy back the call and try for a double. I have your enclopedia on covered calls.
Stocks with low-liquidity options are generally not good candidates for option-selling. Even if we get a fair price upon entering the trade, it may be challenging to get reasonable prices when executing exit strategies.
If we do decide to move forward with such trades (risky), be sure to integrate leveraging the “Show or Fill Rule” into our investment plan. Here is a link to an article I published on this topic:
Thank you so much for your response.
I normally do not have such a thinly traded position in my portfolio. My top positions are HD, JNJ, EOS, DIS , MCD large cap companies with lots of volume. I found SLP when I was researching prostate cancer and bought it at 20$ as a speculation about 2 years ago.
Your article was right on the money.
Hello Dr. Ellman,
I have been using your 80/90 rule to exit from both call and put positions to great success, thank you.
From an exit strategy/hitting a double perspective, I also have been playing around with a formula that says exit when you have over 50% profit AND if
(% profit)/(% time passed) is greater than 1
Do you agree with that procedure? I hate to have my put margin cash tied up on low earning “remainders” and I’m not exactly sure when to trigger a move… this formula seems to help point out when a trade profit has been nicely attained.
If you are interested I will gladly share my spreadsheet with those calculations, just let me know.
I am a very, very happy subscriber to BCI and I greatly appreciate all you do!
As share price accelerates:
I consider closing a covered call trade mid-contract when the time-value cost-to-close (use the “Unwind Now” tab of the Elite and Elite-Plus Calculators) approaches zero and we can generate at least 1% more than that TV CTC in a new trade by contract expiration.
I consider closing a put-sale using the 20%/10% guidelines detailed in my put book and online video course.
Something fundamental in my C/C analysis that I should be able to figure out, but the answer has eluded me:
If I compare two C/Cs at the same SP and calculate the effective annualized return from one with a 1-month duration and one with a 2-or-more month duration I ALWAYS find a higher annualized return for the 1 month option. What am I missing here? It would seem that the longer duration options with their greater time value should give a higher annualized return, at least some of the times. But it never computes out that way. What am I missing?
You have discovered an important fact regarding option-selling… shorter term option generate higher annualized returns.
Our premiums are directly related to time-to-expiration buy also to implied volatility (IV) of the underlying security. A 2-month option does not have twice the implied volatility as a 1-month option… check any option-chain. It’s the IV that results in higher annualized returns for our shorter-term options.
Thank you very much.
As I expected, you have the answers and can put them into words that make them understandable.
A 2-month option does not have twice the implied volatility as a 1-month option.
Wednesday December 2nd at 11 AM ET
“The PCP (Put-Call-Put) Strategy”: Selling cash-secured puts to enter covered call trades
I recently accepted an invitation to speak at The Mad Hedge Traders and Investors Summit.
Register here for free:
I hope you enjoy and benefit from this presentation.
What factors regarding a potential stock purchase (for covered call writing) do you use when charting that stock?
See the screenshot below.
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This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly option and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
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Happy and healthy Thanksgiving to our BCI community.
Alan and the BCI team
I know you’ve posted an article about non-standard options, but I still have a question. Standard options contracts are in sizes of 100 shares, yet on some exchanges I see option chains listed as “NS- (enter amount) cash in lieu, 100 shares of (enter stock)”. It seems odd that a contract delivering 100 shares would be listed as non-standard. Can you explain this?
NS contracts can have other factors changed outside the # of shres deliverable depending on the corporate event that motivated the contract adjustment. Examples:
Can deliver shares from more than 1 company
Can deliver shares + cash
Option ticker symbol
To access information on contract adjustments:
• Search on top left
• Information memos on right
• Search by keywords (ticker) on left
• Search on bottom
I reside in Canada. Our government doesn’t allow put selling in tax sheltered accounts. but will allow covered calls
So I can trade CSP and CC in non registered account and pay taxes. or just trade covered calls but have limits on contributions (how much $ in the account)and market conditions ( only trade CC) in a tax sheltered account.
Is having the flexibility to trade different strategies more important than having tax advantages?
Your feedback would be appreciated.
I can’t give specific financial advice in this venue but I can tell you that most of my option-selling accounts are sheltered, but not all.
Your question reminds me of a comment made to me by a friend who is a lawyer, CPA and seasoned stock market investor. He said regarding his investments, “My goal is to pay $1 million in taxes next year”
Ok, so are you saying paying taxes is not a big deal, if your making good returns?
I dont expect you to give me legal advice, no worries.
just wanted your take.
I will respond with this rhetorical question…
After having maxed out our sheltered accounts, should we:
A. Make $100.00 and keep $75.00 or…
B. Make $0.00?
Just some food for thought on this Thanksgiving holiday.