After entering our covered call trades, we immediately go into position management mode. Frequently, we can take advantage of a covered call exit strategy opportunity, sometimes more than one. This article will review a trade shared with me by Jim, where his covered call trade was entered, rolled-down and then closed on expiration Friday. Specifically, we will address how the trade and adjustments are entered and final calculations are derived using the BCI Trade Management Calculator (TMC).
Jim’s trades with Scorpio Tankers Inc. (NYSE: STNG)
- 12/22/2022: Buy 100 x STNG at $53.00
- 12/22/2022: STO 1 x 01/20/23 $55.00 Call at $3.00
- 01/04/2023: STNG trading at $47.16
- 01/04/2023: BTC 1 x 01/20/2023 $55.00 Call at $0.60 (20% BTC) and roll down to the $50.00 Call the next day
- 01/05/2023: STO 1 x 01/20/2023 $50.00 Call at $1.60
- 01/20/2023: BTC 1 x 01/20/2023 $50.00 Call at $ .15 (10% guideline)
- 01/20/2023: Sold STNG at $49.60
Dilemma (not really)
The TMC allows us to enter of trades, generate initial calculations and adjust trades (if exit strategy opportunities arise) and then calculate final post-adjusted returns. At this point, the series of trades can be entered in the same line in the spreadsheet. The question becomes how do we integrate the final BTC of the 2nd short call ($50.00 strike) and sale of the shares into the TMC spreadsheet? The screenshot will show how this is easily accomplished on a single line of the spreadsheet.
The TMC Calculator with STNG trades
STNG Entries, Adjustments & Final calculations
The process explained:
This is a single line trade using the Trade Management Calculator.
In the screenshot, each section of the horizontal sections is stacked vertically so it can be read in a single image.
Top-to-bottom:
- Initial trade entries & calculations … this part is easy.
- Rolling-down: I would deduct the final BTC ($0.15) from the STO price ($1.60) to get a final STO stat of $1.45 (top red arrow). An explanatory notation can be made in the Trade Journal section (bottom of image)
- Final results: A net option profit of $385.00 (7.26%) and a net realized share loss of $340.00 (6.42%), resulting in a net profit of $45.00 (0.85%, bottom red arrow)
Discussion
When 1 exit strategy is implemented and then closed prior to contract expiration, the trades can be entered and managed on 1 single line of the TMC. Using the Trade Journal section of the spreadsheet can be especially useful when reviewing the trades at a later date.
If a 2nd exit strategy is implemented, we will use a 2nd line in the spreadsheet and use the capital adjustment section to ensure that our final calculations are 100% accurate.
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July 10th -11th
Covered Call Writing: Multiple Applications Based on Current Market Conditions
Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)
Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:
- Normal to bull markets
- Bear and volatile markets
- Low interest-rate environments
A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.
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Hello Barry/Alan,
Is there an example from Alan’s “The Blue Collar Investor” emails that helps me with this?
I own MSFT stocks.
I sold 9/15/2023 290 Calls, 5 contracts on 4/19/23. Collected $19.80 in premium.
Friday, 6/16/2023 the stock has moved up to $346.
To buy back the 290 Call the premium is $62.28
Is there an example of when Alan had a similar situation and he sold the stock, bought back the call and then sold a Put?
Best Regards,
Prasad
Prasad,
Without knowing all the specifics of your trades, I can make some general comments you should find useful.
1. If a strike moves deep, deep in-the-money and sale of the shares meets with your approval, consider the mid-contract unwind exit strategy.
2. Use the “Unwind Now” worksheet tab of the BCI TMC spreadsheet to determine the time-value cost-to-close.
3. Review Chapter 7, pages 29 -34 in my book, “Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts” for a detailed explanation of the MCU exit strategy with a real-life example.
4. The 9/15/2023 expiration date, takes the trade through multiple earnings reports (July 25th next), a risky approach.
5. The ex-dividend date is 8/16, the most reason for early exercise.
6. Longer-dated option generate lower annualized returns.
7. Selling a put after exercise is fine as long as the goal is to add additional shares to the portfolio. It is an excellent way to buy a stock at a discount or get paid not to buy the stock.
Alan
Hi Alan,
I had SPY PMCC trade on one of my accounts, 2 contracts total. LEAPS were 280 Jan 24 and short calls were 420 and 421, one expiring 06/16 and another 06/23, both deep ITM after the recent rally.
I completely forgot that most ETF’s, including SPY, goes ex-dividend on the 3rd Friday of the June. My both short calls were exercised and short position of 200 shares was created.
On Friday I received margin maintenance call and, as I didn’t had enough cash, I liquidated both positions. Few hours later I got another margin call (Regulation T Federal margin call) that required to deposit almost $20K to this account to meet the margin requirements (this was because I covered 200 short shares). As I didn’t had enough cash I had to sell part of my long term holdings in my other account and transfer cash to meet the requirements of margin call.
My question is, does exercising LEAPS would be a better option? I was not aware of Regulation T margin call, but what could be done in this situation to avoid it?
Also, don’t know if you can answer this, but when I can transfer cash back to my other account, as I hope to buy back the shares I was forced to sold.
Thank you.
Sunny,
Implicit in this poor man’s covered call (PMCC) strategy, is that the long LEAPS positions cover the short calls, if exercised. If the short call is exercised, the LEAPS positions is the exercised to provide the shares and meet our short call contractual obligations.
You may want to contact a rep at your brokerage and explain how you want to implement the strategy and ask the broker protocol for following your instructions. Exercising the LEAPS to provide short call contractual obligations would avoid margin call and sale of the unrelated securities.
Inherent in our BCI methodology, as it relates to PMCC, we have a required trade initialization formula that must be met before establishing our PMCC trades:
[(Difference between the 2 strikes) + (short call premium)] > Cost of LEAPS option
The purpose of this required formula is to allow us to close our PMCC trades if share price accelerates exponentially, and we are forced to close both legs of the trade.
Here is a link to a related article I recently published that also provides additional resources at the end of the publication:
https://www.thebluecollarinvestor.com/the-poor-mans-covered-call-how-to-re-structure-a-potentially-losing-trade-into-a-winning-one/
Alan
If instructions to broker is given and LEAPS are auto exercised, can we still lose money in this PMCC trade? As I understand short stock position will be created, but all price fluctuations will be covered by long position, so no matter where the stock will move P/L will be 0. But when liquidating both stock positions, can it be done simultaneously? And if not what position must be closed first?
Good Afternoon Alan,
A question for you….do you advocate selling covered calls on stocks that you plan to buy and hold long term?
Bill
Bill,
This is certainly a viable approach to covered call writing which allows us to leverage shares we already own to generate additional income above the cash already being generated by share appreciation and, perhaps, dividends as well. In my books, articles and videos, I refer to this as “portfolio overwriting”.
As with all strategies, there are pros & cons to consider and specific ways to enter and manage these trades. The main concern is that if we are trading in non-sheltered accounts, there could be negative capital gains tax consequences if the short calls are exercised, and shares are sold.
Here are a few BCI Portfolio Overwriting resources:
https://thebluecollarinvestor.com/minimembership/covered-call-writing-alernative-strategies/
https://thebluecollarinvestor.com/minimembership/video-portfolio-overwriting/
https://thebluecollarinvestor.com/minimembership/bci-trade-management-system/
Here is a link to an article I published on this topic:
https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/
Alan
Dear Allan,
Wishing you are doing well.
I like to ask you what are your thoughts on the current market, although you mentioned on the weekly ETFS report that you are bullish.
The stochastics indicator on SPY is in overbought territory at above 96 on Wednesday, June 14 and start heading down.
I am not sure if it is convenient to enter a new portfolio of CCW’s for Jul21’23 in these conditions, because all my 5 candidate are in the same SPY situation.
Thank you kindly
Martin
Martin,
The market (S&P 500) is certainly performing well, so far, in 2023 and chart technicals, like the stochastic oscillator, are bullish.
I have seen securities and benchmarks remain in the “overbought” area for months and would not want to “hang my hat” on just one of the many technical (and other) parameters we use to analyze stocks, ETFs and the overall market.
In our weekly stock reports, I share with our premium members my overall market assessment and the approach I am taking as I set up my current portfolios. I base my position on a myriad of factors including an evaluation of the economic reports each week (summarized in our weekly stock reports), Market technical analysis and earnings reports and guidance.
This is not a call to action, but rather simply sharing information. BCI also publishes the market assessment from IBD and Dr. Eric Wish’s’ GMI index (both also bullish at this point in time). Each member can then make an overall market assessment and place trades (or not) based on that decision plus personal risk-tolerance and strategy goals.
As I stated in that recent report, at this point in time, I lean bullish and my portfolios for the July contracts will reflect that position.
Alan
This week’s stock report includes the stock DV. Looking at DV’s chart, the MACD shows a decrease in the positive histogram bars (shorter bars, though still above zero) and the MACD line falling towards its trigger line.
1. Does the trend of the histogram bars getting shorter (less positive) indicate a mixed MACD?
2. Would a MACD line trending towards a crossover of its trigger line be of any concern or do you only consider an actual crossover in your evaluation?
Hi Brian,
To answer your questions:
(1) The reading that we look for is whether the “MACD” line is over its’ “Signal” line (Histogram above the zero line). Based on the price action over the option period, the MACD will change as well. If it falls below the zero line (MACD line drops below the signal line) and everything else is OK, the stock will be considered to have mixed technicals. in any given week, the MACD direction is less important due to a stock’s movement.
Net/net, we don’t look at the direction of the MACD unless it falls below the histogram zero line.
(2) If the MACD line crosses below the signal line, we would begin to watch the stock’s other indicators. If the stock has mixed indicators, it is still considered a stock that has passed our screening process and acceptable to trade. As with all of the stocks you trade, once you enter the trade, you need to manage the position using the BCI guidelines. Stocks move between the white section and the pink section regularly. The stock is only removed from our lists when it has failed (remained in the pink section) for 3 consecutive weeks.
Best,
Barry
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 06/16/23.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as the membership remains active.
Best,
Barry and The Blue Collar Investor Team
barry@thebluecollarinvestor.com
Hello Alan.
I have gotten fairly comfortable with the process. I generally purchase stocks with volatility about 1 The sold options are usually fairly close to at the money. In today’s environment I am averaging about 1.5-2% profit per month.
This will include about 20 positions and usually 2 or 3 represent losses even with strategies.
You state you generally get 2-4%. Obviously as overall economy and markets become more bullish I will become a little more aggressive. Any other thoughts how I can increase profits?
Thank you,
Barry R.
Barry,
Congratulations on your recent success. Although you are relatively new to options, I admire the fact that you are willing to do your due diligence to learn the process and find your comfort level of managing 20 positions per month.
That learning process never ends. This applies to everyone, including me. For now, I would say good advice is “stay the course” You are generating > quadruple the returns of risk-free investments (CDs, Treasuries, money markets etc.). The expression that comes to mind is “if it ain’t broke, don’t fix it”.
It’s true that, moving forward, you may take more aggressive positions, but there is no rush for that.
Finally, when I state that my goal is 2% – 4% per-month, I am alluding to the initial structuring of my trades. Final results can be more or less than these initial returns.
Keep up the good work.
Alan
Alan,
Thank you, as always.
Barry
Hi Alan,
I am a big fan of your work. I’ve read and re-read your book Cashing in on Covered Calls several times. Thank you for all you do.
I’m working on a long-term investing strategy that involves investing in good, dividend-paying companies and then writing covered calls on them to generate additional income. In your book, you mention that we should look for stocks trading above their 20-day MA while in an uptrend. If they drop below this, then you prefer to move on to another equity.
However, my overall goal is to hold on to these stocks forever if possible (barring fundamental business changes). If I’m writing calls on stocks in an uptrend doesn’t that increase the risk that my shares will get called away? This is a point that I have been struggling to understand. I’m sure I’m missing something. If you are able to help me with this question I would greatly appreciate it.
Thanks so much!
Dave
Dave,
Thank you for your generous comments.
In my books, articles and videos, the strategy you are describing is titled “portfolio overwriting”. We use deep out-of-the-money (OTM)call strikes to decrease the possibility of exercise (or the need for exit strategy implementation) to generate additional income over and above share appreciation and dividend income.
Whether the chart is bullish, neutral or bearish, the strike selection is always deep OTM, since share retention is part of the strategy protocol.
Here is a link to one of the many articles I have published on this topic:
https://www.thebluecollarinvestor.com/strike-selection-for-portfolio-overwriting-low-cost-basis-stocks/
Additional books to consider:
https://www.thebluecollarinvestor.com/alan-ellmans-complete-encyclopedia-for-covered-call-writing-scover/
https://thebluecollarinvestor.com/minimembership/softcover-exit-strategies-for-covered-call-writing-and-selling-cash-secured-puts/
Alan
Thank you so much Alan. This is great advice as usual! 👍
Dave
Alan,
I have read both of your books on Covered Call Options and Exit Strategies and found them to very, very helpful in providing me with knowledge & discipline to be more successful with Covered Call Options writing than in the past.
Your books are outstanding and I really appreciate them.
I have just one question,very basic and almost silly, but important to me and I am sure others. I cannot seem to decide on a good or best premium to Sell to Open call options.
Of course we are given the Buy & Ask prices, and the trend of the stock is quite important. Do you simply do a limit sell on the ASK price if trend upward, or a limit sell on the Bid price when trend going down?
Most of the time, the price usually is about halfway in-between and you are guessing. Also, I want to eliminate “greed” as best I can, and it seems to enter into my thinking when deciding on the premium, always thinking to make it higher than the Ask price and expect it will fill.
Thank you for your books and your response to my inquiry.
Richard
Richard,
There are 2 aspects to your inquiry: Strike selection and li9mit order to be placed for that strike.
1. Strike selection: Determine your initial time-value return goal range. For me, it’s 2% – 4% for monthly expirations. Then decide on the “moneyness” of the strike (OTM for normal to bull markets and ITM for defensive positions). From there, go to the option-chain and the strike selection will become apparent.
2. Limit order instructions to broker: For bid-ask spreads > %0.10, leverage the Show or Fill Rule:
https://www.thebluecollarinvestor.com/playing-the-bid-ask-spread-when-selling-covered-call-options/
Alan
Premium members:
This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
NOT A PREMIUM MEMBER? Check out this link:
https://www.thebluecollarinvestor.com/membership.shtml
Alan and the BCI team