Mastering exit strategies is the 3rd required skill for successful covered call writing and put-selling. On November 28, 2018, Nirav wrote to me regarding a series of trades he executed and wanted to know how to categorize the position management aspect of these trades. This article will highlight the differences between “hitting a double” and mid-contract unwind” exit strategies as they relate to Nirav’s trades.

 

Nirav’s trades with Bio Telemetry, Inc. (NASDAQ: BEAT)

  • 11/12/2018: Buy 100 x BEAT at $62.25
  • 11/12/2018: Sell-to-open the 12/21/2018 $60.00 call at $5.00
  • 11/28/2018: BEAT trading at $68.85
  • 11/28/2018: Buy-to-close the $60.00 call at $9.50
  • 11/28/2018: Sell-to-open the 12/21/2018 $70.00 call at $2.50

 

Initial calculations with the Ellman Calculator (multiple tab)

 

covered call writing calculations

BEAT: Initial Time Value Returns with Downside Protection

The initial time value 5-week return was an impressive 4.6% (yellow cell) with 3.6% downside protection (brown cell) of that time value profit.

 

Position management overview

Since share value moved rapidly from $62.25 to $68.85, we look to the “mid-contract unwind” exit strategy to determine if the time value cost-to-close (CTC) is approaching zero, such that a new trade will generate more than this CTC. “Hitting a Double” would apply if the share value declined such that the option premium would approach our 20%/10% guidelines leading us to close the short call and evaluating the next step (rolling down, waiting to “hit a double” or selling the underlying stock). In these trades with BEAT, we are in “mid-contract unwind territory”. The twist here is that Nirav closed to short call at a cost of 1.08% early in the contract and then generated an additional 3.6% for a second income stream net gain of 2.5% with the same stock. We usually turn to a different underlying to avoid profit-taking after a large price movement upward.

 

Calculating the time value cost-to-close using the “unwind now” tab of the Elite version of the Ellman Calculator

 

Covered call writing exit strategies

BEAT: Time Value Cost-To-Close: The brown cells highlight the time value cost-to-close (1.08%), incorporating share appreciation from the original strike price of $60.00 to current market value of $68.85.                                   

 

Discussion

It is important to take advantage of situations when share prices rises significantly causing the time value component of the option premium to approach zero, especially early in a contract month. This strategy is known, in the BCI community, as the “mid-contract unwind exit strategy” and usually involves using a different stock in the second income stream but can be used, in rare circumstances, with the original stock if there is extreme confidence in continued share appreciation.

 

Exit strategy resources

https://www.thebluecollarinvestor.com/alan-ellmans-complete-encyclopedia-for-covered-call-writing-scover/

 https://www.thebluecollarinvestor.com/alan-ellmans-complete-encyclopedia-for-covered-call-writing-volume-2/

 Elite Calculator for Covered Call Writing

 

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