To properly analyze our covered call writing and put-selling trades, we must accurately record each step of the trades such that initial and final results are accurate. In this article, a hypothetical covered call trade which starts out in-the-money (ITM) but ends up out-of-the-money (OTM) at contract expiration will be analyzed. The BCI Trade Management Calculator will be used to demonstrate how to enter and generate final returns for the ITM aspect and how to enter the OTM segment for the ensuing contract cycle.
Hypothetical covered call trade
- Buy 100 x ABC at $100.00
- STO 1 x $95.00 ITM call at $7.00
- Breakeven price point is $93.00 ($100.00 – $7.00)
- At expiration, ABC is trading at $94.00, and the $95.00 (now OTM) call expires worthless
- What price do we enter for the next contract covered call, $100.00, $94.00 or $93.00?
Overview solution
In the 1st contract cycle, there is a $7.00 (7%) realized option gain and a $6.00 (6%) unrealized stock loss (from $100.00 to $94.00) at expiration. This share price decline is accounted for in the current expiration cycle and the price of ABC is entered at current market value ($94.00) in the next expiration cycle. Any change in share price moving forward will be recorded in this 2nd cycle. The BCI Trade Management Calculator will do all the legwork for us.
The Trade Management Calculator
Trade Management Calculations for ITM to OTM Strikes
Note the following:
- Blue arrows: Initial trade time-value returns of 2.11%, 29.55% annualized based on a 26-day trade
- Red arrow: Price of ABC at contract expiration
- Green arrow: Final option realized gain in cycle #1
- Purple arrow: Unrealized share loss accounted for in the initial contract cycle
- Brown arrow: Net realized/unrealized combined trade results in the first contract expiration cycle (7% – 6%)
Discussion
Properly entering our option trades in the appropriate expiration cycles will allow us to accurately calculate our investment results. The entries and calculations in this article are not meant for tax purposes.
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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:
Alan,
I have to say I’m very impressed with what I’ve reviewed thus far. I’m a technologist by trade and have previously developed an automated trading platform which leverages the Interactive Brokers API for market data, analysis, and trading. If my backtesting and paper trading looks promising, I’m hoping to adapt it to automate the various analyses and workflows you employ.
Cheers!
Chris
Upcoming events
To request a private webinar for your investment club, hosted by Alan & Barry: info@thebluecollarinvestor.com
1. Money, Markets, & Monetary Policy Virtual Expo
April 11th, 2023
2 PM – 4 PM ET
Master Class (paid event to The Money Show)
In depth presentation on selling cash-secured puts
Registration is free to the entire show but my event is considered a Master Class and The Money Show is charging for these 2-hour classes.
2. Wealth365 Summit
April 18th
10 AM – 11 AM ET
Covered Call Writing Dividend Stocks to Create a 3-Income Strategy
Covered call writing is a low-risk option-selling strategy that generates weekly or monthly cash-flow. By mastering the skill of strike price selection and adding dividend distributions, a potential 3-income strategy can be crafted with a goal of beating the market on a consistent basis.
Bonus topic: An introduction to the BCI streamlined approach to covered call writing creating a more user-friendly and time-efficient path to this low-risk option-selling program.
Topics covered in this webinar include:
- Strategy analysis
- Option basics
- What is covered call writing?
- Dividend distribution
- Stock selection
- Option selection
- Trade management
- Q&A
Real-life examples will be highlighted with Dow 30 stocks using option-chains and calculation spreadsheets.
Attendees will have the opportunity to participate in written Q&A during the entire webinar.
3.BCI total community webinar plus Q&A
Covered Call Writing: A Streamlined Approach (CEO Strategy introduction)
May 2023
Details to follow.
4. Your Mid-Year Portfolio Review Virtual Expo
June 27th – 29th, 2023
Specific time, date, topic & description and registration link to follow.
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Alan,
When we sell a csp, is it true that the best return we can get is the put premium?
I’ve been selling covered calls but also want to start with csp.
By the way … love the TMC.
Thanks a lot,
Glenn
Glenn,
If we enter a cash-secured put trade with no trade adjustments, then that statement is true. However, the implementation of exit strategies will create opportunities to generate returns higher, in some cases much higher, than the initial premium time-value returns.
In my 8th book, “Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts”, there are 27 chapters, 13 related to put-selling.
Thanks for the TMC comment.
Alan
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 04/06/23. We were able to upload this report earlier because the market was closed on Friday, 04/07/23.
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
Alan,
I attended one of your online classes recently and found it very informative. In my notes, there is one sentence I’d appreciate clarification on. You said “we can roll out and up to an itm, atm or otm strike” Please explain or give some examples.
Thank you very much.
Marsha
Marsha,
Let’s set up a hypothetical trade:
Buy 100 BCI at $78.00.
STO 1 x $80.00 call at $2.00.
On expiration Friday, BCI is trading at $85.00.
Next, let’s assume that we decide to keep BCI in our portfolio for the next contract cycle by rolling out-and-up. Here are examples the 3 scenarios you inquired about with the strike and “moneyness” of that strike:
$83.00 strike (in-the-money or below the current $85.00 price)
$85.00 strike (at-the-money or the same as current market value)
$86.00 strike (out-of-the-money or above the current market value)
In all cases, we rolled out to a later expiration date and up from the previous cycle’s strike price ($80.00).
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.
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Alan and the BCI team