When we roll-out a cash-secured put trade, we are spanning 2 contract cycles. This article will detail how to enter and close our trades into our trading logs to best reflect the results over multiple time frames.
What is rolling-out an ITM put strike?
This is where we buy back (buy-to-close or BTC) the short put as expiration approaches and immediately sell the same strike put option in the next contract cycle.
When to consider rolling-out an ITM strike?
If a strike is in-the-money as expiration approaches, we may opt to roll the trade rather than close and exit the current option position. Reasons to take this approach include:
- There is no upcoming earnings report in the next contract cycle
- The underlying security still meets our system requirements (fundamental, technical and common-sense screens)
- The rolling calculations do meet our stated initial time-value return goal range
Difference between rolling and existing an ITM put strike as expiration approaches
When we roll the option, we BTC (buy-to-close) the near-term strike and STO (sell-to-open) the next contract same put strike. If we decide to close the ITM strike and simply exit the trade, we only close the current put trade and look to establish a new cash-secured put trade (usually) with a different security at the start of the next contract cycle. Let’s use a real-life example with NVDA to demonstrate a rolling example.
How to enter our rolling trades into our trading log
Our current contract month trade is completed as initially structured. The initial time-value return is the same as the final time-value return. The current value of the underlying security is entered into our spreadsheet (trading log) as the only adjustment entry. The rolling-out trade is then continued in the next contract cycle where the current market value (ending value at expiration of the expiring contract) is entered, and the net option credit is also entered with the next expiration date. The net option credit consists of the new premium less the cost-to-close debit from the previous contract. This is shown in the upcoming screenshots.
Real-life example with NVIDIA Corp. (Nasdaq: NVDA)
- 8/20/2021: NVDA trading at $208.16
- 8/20/2021: STO the 9/24/2021 $200.00 put at $5.65
- On expiration Friday, 9/24/2021, NVDA is trading at $199.00, leaving the original short put strike ($200.00) in-the-money.
- BTC cost is $1.10
- STO the next month $200.00 put is trading at $5.00
- A decision is made to roll rather than close the trade
Initial trade return on option (ROO)
The Trade Management Calculator shows an initial return on the option of 2.91%, 29.48% annualized based on a 36-day trade. If exercise is allowed, shares would be purchased at a 6.63% discount from the price of NVDA when the put sales was initiated.
How is rolling-out the ITM strike managed with our BCI Trade Management Calculator?
The original put trade is considered closed by entering only the current price of the stock on expiration Friday ($199.00).
Final calculations prior to rolling the ITM strike
The spreadsheet will reflect the final time-value return to be the same as the initial time-value return (2.91%) as well as the same total net income of $565.00 for the 1 contract.
Entering the rolled-out trade in the next contract cycle
We enter the following stats into the next contract cycle:
- Stock price: $199.00
- Strike price: $200.00
- Net premium: $3.90 ($5.00 – $1.10)
The spreadsheet will reflect the following initial calculations:
The calculator shows the following stats:
- A 22-day return of 1.99% (brown cell)
- An annualized return of 33.00% (green cell)
- A breakeven price point of $196.10 (yellow cell)
- A purchase discount of 1.46%, if exercised (pink cell)
Discussion
We consider rolling an ITM put strike when the security still meets all system criteria, and the calculations align with our stated initial time-value return goal range. The initial trade is closed reflecting the initial time-value return and the current security price and net option credit is entered into the next contract cycle.
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Covered Call Writing: Multiple Applications Based on Current Market Conditions
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Selling Cash-Secured Puts: Detailed Start-to-Finish Six-Part Program*
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This presentation will provide all the information, with real-life examples, necessary to master the strategy of selling cash-secured puts. The program is divided into 6 sections:
- Section I:
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- Section III
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- Section V
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Covered Call Writing: Multiple Applications Based on Current Market Conditions
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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:
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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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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 07/22/22.
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[email protected]
Hello Alan,
Is it true that an investor can get a premium every week when doing covered calls? I’ve read that one can also get many thousand of dollars every week doing so.
Also, what are your thoughts about dividend growth strategies compare to covered calls?
Regards,
Alexandre
Alexandre,
Covered call writing is a low-risk (not a no-risk) option-selling strategy that can generate cash flow on a weekly or monthly basis (other time frames, as well).
The amount of cash generated is directly related to the amount of cash invested. As a reasonable example, one would have to invest $200,000.00 to generate $1000.00 per-week.
Since we own the stock (or exchange-traded fund) prior to selling these cash-generating options, we are at risk of share depreciation. As with all strategies that seek to generate higher than a risk-free return (like Treasuries etc.), there is risk inherent in covered call writing. In addition to selling the option, we must master stock selection and position management after entering our trades. This is what we teach.
Regarding dividend capture strategies, we can actually combine covered call writing + dividend capture.
Here is a link to 1 of the articles I have published on this topic:
https://www.thebluecollarinvestor.com/combining-dividend-capture-with-covered-call-writing-pros-and-cons/
Alan
Good afternoon Alan,
Thanks for the quick reply. $200,000.00 to generate $1000.00 per-week. I’ve read on YouTube that one investor was generating $500.00 per-week when he started covered calls, six months later, he’s generating $6000.00 per-week. Could that be true without adding a certain amount of capitals along the way?
By the way, I like the idea of having one separate account for each strategy.
Regards,
Alexandre
Alexandre,
The dollar return is irrelevant because it must be compared to the amount of money invested. A $6k weekly return on an investment of $10 million is extremely disappointing. That same return on an investment of $100k is reason to celebrate.
Covered call writing is a low-risk option-selling strategy. Our returns are directly related to the amount of risk we are willing to take. These strategies give us the opportunity to generate solid consistent returns and to beat the market on a consistent basis. We will not win the lottery with covered call writing.
Please be careful of promises of huge returns with little risk and minimal investment of time & money. Such a strategy does not exist.
Alan
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