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“Hitting a Double” or “Mid-Contract Unwind Exit Strategy”: Which Exit Strategy Did I Just Use?

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

 

Honored to meet so many BCI members at my recent Las Vegas presentations

 

covered call writing seminars

All Stars of Options at Bally’s Hotel, Las Vegas

 

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:

Hello Alan,

I just wanted to tell you that since last year when I was divorced and had to handle my own investments for the first time, I Have been trying to find someone in the industry to teach me. After trying many avenues and finding NO one who had the ability to teach, I found you.

You are the BEST. I am working my way through your videos, learning and enjoying every minute. You have given me the confidence I need to start managing and growing my investments. Thank you so much!

Mariann

 

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7 PM – 9 PM 

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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.

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2 Responses to ““Hitting a Double” or “Mid-Contract Unwind Exit Strategy”: Which Exit Strategy Did I Just Use?”

  1. Vince May 25, 2019 5:52 am #

    Alan,

    Thank you for all you do for us little guys.

    What happens to the shares that are called away at expiration that are only .01 over the strike? Surly someone has more than that in premiums.Why would they want them underwater? Does the OCC just bank the shares for later ?Can’ find info on internet.

    Thanks again…Vince…

    • Alan Ellman May 25, 2019 8:11 am #

      Vince,

      When we “allow” an option to expire in-the-money by $0.01 or more (in most cases), we become share sellers. The OCC will match up buyers and sellers to complete these trades. The buyer of our shares can be another retail investor or a market-maker who is required to provide a market for the options they are responsible for. Here is a link to an article I published 5 years ago that details the process:

      https://www.thebluecollarinvestor.com/options-clearing-corporation-guaranteeing-our-options-trades/

      Alan

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