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How to Manage a 5.3% Mid-Contract Unrealized Gain: A Real-Life Example with BHP Group Limited (NYSE: BHP) + Alan’s Wealth365 Webinar Registration Link

When we have a maximum mid-contract unrealized gain on a trade, there are opportunities when we can generate additional income streams and, thereby, enjoy higher than initial maximum returns. There are also scenarios when we should take no action and continue to monitor these trades. On 1/19/2022, Patrick shared with me such a trade he was managing.

 

Patrick’s trade

  • 1/11/2022: Buy 100 x BHP at $63.08
  • 1/11/2022: STO 1 x 2/28/2022 $65.00 call at $1.46
  • 1/19/2022: BHP trading at $67.99
  • 1/19/2022: 2/18/2022 $65.00 call at $4.40

 

Exit strategy opportunity to evaluate

When share price accelerates substantially, we evaluate the mid-contract unwind (MCU) exit strategy. If we can generate at least 1% more than the time-value cost-to-close the original covered call trade by contract expiration, we take action. Let’s run the numbers on this BHP trade.

 

BHP initial trade calculations with the BCI Trade Management Calculator (TMC)

BHP: Initial Calculations

The red arrows show an initial time-value return (ROO) of 2.31%, 17.24% annualized based on a 49-day trade, and the blue arrow shows upside potential of 3.04%, for a total net maximum return of 5.35%.

 

Entering the data into the Unwind Now tab of the TMC Calculator and BCI spreadsheets  

BHP: Unwind Trade Entries

 

BHP Unwind Now calculations

 

BHP: Unwind Now Cost-To-Close Calculations

 

The brown cells (red arrow) reflect a time-value cost-to-close of 2.17% or $141.00 per-contract. This will initially reduce our 5.3% unrealized return to a current 3.13% unrealized return. We ourselves if we can generate at least 3.17% by 2/18/2022 with a different security after closing this trade.

 

Discussion

When we decide to close an unrealized 5.3% 1-month return, we must have a high degree of confidence that we can generate at least 1% more than the time-value cost-to-close. In the case of BHP, the return we would seek is 3.17% by contract expiration. Possible? Yes. High degree of confidence? Not so much. There are times when the best action to take is no action at all.

 

***Thanks to Patrick for sharing his trade with our BCI community.

 

Premium Member Benefits Video

This is a great time to join our premium member community with its stock screening and educational (over 200 videos) benefits. We offer more benefits than ever before. For information, click here.

For video explanation, click here.

 

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI teaemail 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:

Amazon testimonial for The Complete Encyclopedia for Covered Call Writing:

I would highly recommend Alan Ellman’s book. It is a bonanza of actionable information in the skill and art of writing covered calls under various market conditions. The author brilliantly describes and illustrates how wealth can slowly and steadily be amassed by this very simple to understand method of generating income on stocks that one already owns. His exit strategies (which I did not understand before reading) are plainly stated and demonstrated in actual examples of trades that were made. Essentially you are creating your own dividends in writing covered calls Alan shows the way.

Thomas

 

Upcoming events

1.Wealth365 Investor Summit

Thursday October 13, 2022

Register for free here

Using Both and Put-Selling to Generate Monthly Cash Flow

The PCP Strategy (Put-Call-Put or “wheel” strategy)

Hosted by:

Dr. Alan Ellman, President of The Blue Collar Investor Corp.

Barry Bergman, BCI managing Director

Selling stock options is a proven way to lower our cost-basis and beat the market on a consistent basis. Two such low-risk strategies are and selling cash-secured puts. This presentation will detail how to incorporate both strategies into one multi-tiered option-selling strategy where we either generate cash-flow or buy a stock at a discount. I refer to this as the Put-Call-Put (PCP) Strategy, also referred to as the wheel strategy.

The basics and pros and cons are discussed as well as a real-life example and introduction into the BCI PCP Calculator. This seminar is appropriate for those who look to generate modest, but consistent, returns which will enable us to beat the market on a steady basis while focusing in on capital preservation.

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OMNI ORLANDO RESORT AT CHAMPIONSGATE

Visit Alan, Barry and members of the BCI at Booth # 415

Register here

 

Sunday, October 30, 2022, at 5:00 pm – 5:45 pm EDT
Covered Call Writing: Multiple Applications Based on Current Market Conditions

Monday, October 31, 2022, at 4:30 pm – 6:30 pm EDT
Selling Cash-Secured Puts: Detailed Start-to-Finish Six-Part Program*

 

Masters Class

Comprehensive Course on Selling Cash-Secured Puts

Detailed start-to-finish 6-part program

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:
    • Option basics
  • Section II
    • Traditional put-selling
  • Section III
    • PCP (wheel) strategy
  • Section IV
    • Buy a stock at a discount instead of a limit order
  • Section V
    • Ultra-low-risk put/Delta strategy
  • Section VI

This presentation was developed to benefit both beginner and experienced option traders and will provide all the information needed to initiate the strategy and elevate returns to the highest possible levels.

45-minute presentation

Covered Call Writing: Multiple Applications Based on Current Market Conditions

Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)

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
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  • Low interest-rate environments

A popular large-cap technology exchange-traded fund, , will be used to establish rules and guidelines to benefit in these market circumstances.

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3. Money Show’s Post-Election Strategies Virtual Expo

November 10th -11th, 2022

Information & registration link to follow

 

Alan speaking at a Money Show event

***********************************************************************************************************************

Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

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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.

15 Responses to “How to Manage a 5.3% Mid-Contract Unrealized Gain: A Real-Life Example with BHP Group Limited (NYSE: BHP) + Alan’s Wealth365 Webinar Registration Link”

  1. Jon September 17, 2022 3:28 am #

    Hi Alan – happy Saturday!

    I enjoyed reading this article of yours:

    https://www.thebluecollarinvestor.com/covered-call-writing-should-we-use-stop-loss-orders

    I agree with almost everything you said in principle.

    However, I was wondering what your take would be on this: Obviously, the last few weeks have included tremendous short-term falls in stock price.

    Let’s say an investor is writing covered calls on his positions and wants to ensure he can minimize events like 5-10% drawdown in one day.

    He is holding historically stable stocks and selling weekly or monthly calls.

    An OTO order would allow him to set the lowest stock sell price he can tolerate (and the call buyback) and then let the trade play out. If the trade wins, it’s a plus. If he gets stopped out, he’s happy because he didn’t lose anything except time.

    The concern I have in current times is that, even if you have notifications and can quickly execute manual trades, the market is moving so quickly you might lose a significant amount of dollar value in the time it takes you to receive a notification, login to a tool, locate the securities and execute a trade (against a rapidly falling market).
    Each moment matters in times like this.

    Overall, I agree that we people should be evaluating and tending our investments, and I prefer to not automate. But it seems like in the current conditions, automation provides an extra layer of security against flash crashes and quickly-moving markets.

    I would be very interested in your thoughts. If you still would not recommend automation, what would you suggest for someone who might not be able to manually respond to alerts quick enough to minimize losses during sharp drawdowns?


    Jon

    • Alan Ellman September 17, 2022 7:08 am #

      Jon,

      I believe there are 2 questions inherent in your inquiry:

      1. How do we manage our positions in normal market conditions, 90+% of the time?

      2. How do we manage our positions in extreme volatile market conditions?

      Normal market conditions:

      We partially automate our short call buybacks using our 20%/10% guidelines. Request email or text notifications for all trade executions. At that point we could look to “hit a double”, roll-down or sell the security depending on the BCI rules & guidelines. This would open doors to generate additional income streams and mitigate losses. We would not be married to always selling the stock when share price declines.

      Volatile market conditions:

      There are several defensive maneuvers we can take in addition to OTO orders (one triggers other). Here are some:

      – Use deep ITM calls where intrinsic-value lowers our breakeven price points.

      – Add protective puts to convert our covered call trades to collar trades.

      – Use Delta to establish low-risk, high probability of success trades in exchange for lower premiums.

      -Use implied volatility to establish 84% probability price movement ranges and focus in on the low end of the range when establishing our covered call trades.

      – Use low implied volatility stocks and ETFs which are less likely to mirror those 5% – 10% drawdown aberrations.

      – Use inverse ETFs in our portfolios to offset potential losses when market volatility is high. I rarely use these but when I do, they have had a positive impact on my portfolios during substantial market declines.

      These are some of the additional approaches we can take during extreme market conditions. I hope you find this information helpful.

      Alan

  2. Art September 17, 2022 12:04 pm #

    Hello Alan,

    With yesterday being expiration Friday, how do you handle the Trade Management Log.

    Do you simply print out the current month (which seems to require multiple pages, each with parts of the data because of the font size), and then clear the contents of the cells and enter the next month ?

    Thanks,
    Art

    • Alan Ellman September 17, 2022 3:08 pm #

      Art,

      Glad to help.

      Here’s how I do it and feel this is the best way to manage and save these spreadsheets:

      •I always have 1 TMC saved on my desktop. I name it “TMC_BLANK
      •I create a new TMC spreadsheet per contract expiration. For example: “TMC_9-17-22”
      •When that contract is over, I create a new one titled the next expiration: “TMC_10-21-22”
      •Trades still open in the current expired contract are manually entered into the next spreadsheet. The current price is entered as any price gain or loss for the expired contract is calculated into that expired contract spreadsheet
      •See appendix IV of my new exit strategy book as how to enter rolled trades. The short protocol is to use the previous strike as stock value and the net option debit or credit for the BTC and STO as the option premium
      •I print out the spreadsheet for each contract expiration and place in a binder
      •I have a folder on my desktop titled “TMC_SPREADSHEETS” and place each completed spreadsheet into this folder

      Alan

  3. Barry B September 17, 2022 10:46 pm #

    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 09/16/22.

    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:

    http://www.youtube.com/user/BlueCollarInvestor

    Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  4. Joy September 18, 2022 2:49 am #

    Hi Alan –

    In looking over the ETFs that are on the top performing ETFs list, I noticed that XLE has not been included for a while.

    Can you share why XLE is not included on the ETFs list?

    I assume that it could be related to its RSI but maybe that’s not the case.

    I’d like to hear from you as I’m long 220 shares of XLE and have sold options against it.

    Should I buy back my options and close out my XLE position?

    Thanks for your help.

    Joy

    • Alan Ellman September 18, 2022 7:37 am #

      Joy,

      The criteria we use for the Select Sector SPDRs to be “eligible” are those that outperform the S&P 500, as a whole, in the past 1- and 3- month time frames.

      XLE has outperformed in the past 1-month but underperformed in the past 3-months.

      In our BCI methodology, we do not sell a stock or ETF based on its removal from our premium member reports. If we have existing trades in our portfolios, we manage those trades as indicated by our system exit strategy arsenal. We always keep our 20%/10% BTC guideline limit orders in place to protect against significant share price decline

      Now, if we do sell an underlying security based on our system criteria (significantly underperforming the S&P 500 over the past month, as 1 example), we do use our most recent reports to locate a replacement security.

      Energy has done well over the past month and analysts are expecting strong earnings moving forward.

      Alan

  5. Jeff September 20, 2022 1:11 am #

    Alan,

    I am interested in portfolio overwriting to yield an extra 5% from stocks I want to hold I am looking at the option chain for MRK.
    I am looking for about a 5% yield.

    Do I try for a 1 month option, 2 month option or a 3 month option.

    The 1 month (October) for 5.84% annualized has a strike of 92 The 2 month (November) for 4.41% annualized has a strike of 95 The 3 month (December) for 4.78% annualized has a strike of 95 Or should I go further out?

    I am inclined to use the 2 month out to get the extra room.
    What if your opinion?

    Do you only use the yield or do you have other criteria such as probability to touch or IV?

    Thank you

    Jeff

    • Alan Ellman September 20, 2022 9:23 am #

      Jeff,

      There are 3 ways to determine appropriate strikes for portfolio overwriting:

      1. Based on our annualized initial time-value return goal range. If our goal is 6% annually, we use 0.5% per-month or 0.1% per-week.

      2. Using Delta for probability of avoiding exercise (or need to roll the option). Delta will approximate the likelihood of the strike expiring in-the-money (with intrinsic-value). Check the corresponding Delta for the strike in consideration.

      3. Using implied volatility to determine the expected price range of the underlying security to attain an 84% probability of success trades. If you are a premium member, check our expected price range calculator on the member site to get specific price range stats and use the high end of the range as your strike.

      Regarding time frames, I prefer monthly or weekly options. The shorter the time frame, the greater the annualized returns and the easier it is to circumnavigate earnings reports and ex-dividend dates.

      Alan

  6. Art September 20, 2022 2:12 am #

    Hello Alan,

    I thought I knew the TMC fairly well but I think I’ve run into a conundrum.

    Real life example: I own YELP at $38.15. I have been selling calls slightly OTM for a number of months and have made decent returns.

    More recently, YELP took a downturn to $30.77. I did not sell (unfortunately, did not follow your 7% rule), because I thought, fundamentally, that YELP would be fine coming out of the recession.

    At $30.77, I sold 34 calls expiring 9/16/22 collecting a premium of $1.05. I wound up closing that position at a cost of $0.10. On 9/16/22, YELP was $34.00. I then STO calls expiring 10/21/22 with a premium of $.39. I’m hoping to creep closer to my original cost.

    So, in the TMC, Is my entry stock price $30.77 or $38.15 ? Makes a huge difference in calculating ROO as well as Combined final trade total profit/loss.

    Oy. Hope you can help. Thank you.

    Art

    • Alan Ellman September 20, 2022 9:40 am #

      Art,

      I sure can help.

      Use $30.77 because that what the shares were worth at the time of the trade. What if we buy a stock at $10.00 and it goes to $40.00 and then sell a covered call … we enter $40.00 as our cost-basis because that is the value of our shares at that point in time. We are investing $4000.00 per-contract.

      It is also important to define our strategy. Are we using portfolio overwriting where we don’t want our shares to be assigned? Are we leveraging the best performers at that point in time to generate cash flow? In the latter scenario, retaining YELP would not be critical.

      One final thought: At one time YELP was worth $38.15 and then dropped to $34.00. So, we have $3400.00 per 100 shares. We ask ourselves where that cash is best placed. In YELP? In another security? If portfolio overwriting, our plan is to stick with YELP for the long haul. This is why our strategy must be defined before entering all trades.

      Alan

      • Art September 20, 2022 9:55 am #

        Alan,

        As always, thank you so much for your insight and help in guiding me through this process. You are a godsend.

        So thankful I am a member.

        Art

  7. Alan Ellman September 21, 2022 5:43 pm #

    Premium members:

    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 performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.

    The mid-week market tone is located on page 1 of the report.

    New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.

    Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.

    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://youtu.be/EXMO-KwZuJs

    Alan and the BCI team

  8. Lovelle September 22, 2022 11:19 am #

    Hello Alan,

    I recently purchased the BCI and TMC package.

    I’m just trying to familiarize myself more with the TMC calculator and have a question re: entry stock price (column G).

    I understand that if I buy 100 shares of a stock for the first time and it expires worthless then this then gives me the opportunity to sell a covered call option again the following month.

    However, if the price goes down when I’m ready to sell again – do I use the original price I paid for the stock? Or the price of the stock at the time I’m selling again?

    I tried to play around with numbers and noticed the ROO was significantly lower (for obvious reasons) when I used the original price I paid for the stock…just want to be sure I’m using it correctly to plan for trades.

    I wonder if I should track stock price purchases so I can monitor my cost basis for the duration I hold on to the stock.

    Thanks
    Lovelle

    • Alan Ellman September 22, 2022 1:32 pm #

      Lovelle,

      The TMC will do all the calculations for us.

      If a strike is expiring OTM, we enter the share price at expiration and the spreadsheet will calculation and incorporate the unrealized gain or loss into that contract month’s stats.

      For the upcoming contract month, we enter that closing price (not the original older price) and new premium and manage our trades from that vantage point. If share price accelerates or depreciates, those changes will be calculated in that 2nd contract cycle.

      Alan

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