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How to Use the Capital Adjustment Section of the Trade Management Calculator When Executing Multiple Exit Strategies in the Same Contract Cycle

Exit strategies for covered call writing and selling cash-secured parts are integral aspects of our trading system. It is critical to learn how to enter, calculate and archive these position management trades. This article will detail one example of this process using a real-life example with Etsy, Inc. (Nasdaq: ETSY) using 2 rolling-up put trades in the same contract week.

 

What is the Trade Management Calculator (TMC)? 

The TMC is a unique spreadsheet developed by BCI that allows us to enter, generate initial calculations, adjust trades with over 20 selections and receive final individual trade as well as total portfolio results. To our knowledge, the TMC is the only spreadsheet of its kind anywhere.

 

What is the capital adjustment section of the TMC?

This feature of the TMC allows us to adjust our capital investments when multiple exit strategies are executed with the same contract expiration cycle. If we are using the same cash for 2 or more trades with the same contract expiration date, we can deduct the correct amount so that the total amount of cash invested is not inflated and is accurately reflected, resulting in a correct % returns.

 

Real-life example with ETSY (7/18/2022 – 7/22/2022)

  • 7/18/22: ETSY trading at $85.53 with ER due out 7/27/22. Will write a weekly put option and skip the following week of the ER
  • 7/18/22: The 10-Delta, deep OTM 7/22/22 put shows a strike of $76.00 (90% probability of no exercise)
  • 7/18/22: STO 1 x 7/22/22 $76.00 put at $0.37
  • 7/20/22: ETSY trading at $92.66
  • 7/20/22: BTC 1 x 7/22/22 $76.00 put at $0.05
  • 7/20/22: STO 1 x 7/22/22 $84.00 put at $0.27 (roll-up #1)
  • 7/21/22: ETSY trading at $96.87
  • 7/21/22: BTC 1 x 7/22/22 $84.00 put at $0.03
  • 7/21/22: STO 1 7/22/22 $88.00 put at $0.15 (roll-up #2)

As ETSY accelerated in price from $85.53 to $96.87 from Monday through Thursday, the put option was rolled-up 2 times and expired out-of-the-money.

 

How to enter and calculate 2 rolling-up trades

Before showing the TMC spreadsheet for these trades, here is an overview:

  • After rolling-up for the 1st time, the trade is considered closed with final results calculated in Section IV of the spreadsheet
  • The 2nd rolling-up trade is entered in a new line in the spreadsheet using current market value, the new put strike, and the net premium (new STO premium – the cost-to-close premium for the previous strike)
  • The spreadsheet will reflect an “exaggerated” amount of capital invested since all the cash used for the first trade is also used for the 2nd
  • To get an accurate representation of the total capital invested, the original capital invested must be deducted in the capital adjustment section

 

Initial trade with rolling-up #1

 

ETSY: Rolling-Up a Put Trade

The initial time-value return was 0.49%, 35.71% annualized. After rolling-up to the $84.00 strike, the final return is 0.78%, 56.94% annualized. This included an additional option credit of $0.22 per-share ($0.27 – $0.05).

 

Rolling-up trade #2

ETSY: 2nd Rolling-Up Trade with the Same Contract Expiration Date

The net option credit for roll-up #2 is $0.12 ($0.15 – $0.03). The green cells on the far right show 2 capital investments when the $8788.00 (2nd roll-up) includes the original $7563.00. The blue cells at the bottom of the screenshot shows how to compensate for this in the capital adjustment section of the spreadsheet.

 

Total portfolio calculations with and without the capital adjustment

ETSY Calculations With & Without Capital Adjustment

Notice that the 2-day return for the 2nd roll-up moved from 0.30% to the (now) accurate 0.56% after utilizing the capital adjustment section of the spreadsheet.

 

Discussion

When using multiple exit strategies with the same contract expirations, a capital adjustment must be made to allow the total invested stats to be accurate and allow for meaningful % returns. This is one of the unique features of the BCI Trade Management Calculator.

 

Coming soon

 

Book, Spreadsheets & Streamlined Strategy Approach Coming Soon

 

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:

Alan,

Just wanted to say thank you again for your everything you do for the average investor. Specifically, I want to thank you for teaching me the mid contract unwind. I don’t think I would have seen it as an if you had not laid it out for me… thank you. and thank you for your professionalism and your calmness of mind over this year of market turbulence. I wish you and your family the happiest of holidays and a very merry Christmas.

Your humble apprentice,

Tony

 

Upcoming

To request a private webinar for your investment club, hosted by Alan & Barry: [email protected]

 

1.Wealth365 Investors Summit

January 17, 2023

4 PM ET – 5 PM ET

The Put-Call-Put (PCP or wheel) Strategy 

Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow – Investing with Stock Options

Selling stock options is a proven way to lower our cost- and beat the market on a consistent basis. Two such low-risk strategies are covered call writing and . 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 Trade Management Calculator (TMC). This seminar is appropriate for those who look to generate modest, but consistent, returns which will enable us to beat the market on a consistent while focusing in on capital preservation.

Register free here

 

2.Long Island Stock Traders Meetup Group 

Analyzing a 1-Month Covered Call Writing Portfolio from Start to Finish

A real-life example with a $100k ETF Select Sector SPDR portfolio

Thursday February 16,2023

7:30 PM ET- 9 PM ET

Covered call writing is a low-risk option-selling strategy that generates weekly or
monthly cash flow. This presentation will demonstrate how to implement this
strategy using a database of only 11 exchange-traded funds for a 1-month option
contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s
portfolios with screenshots verifying each trade. A final monthly contract result
compared to the performance of the S&P 500 will be calculated.

Topics included in this webinar:

 What are the Select Sector SPDRs?
 How to establish a covered call writing portfolio
 What is the role of diversification?
 What is the role of cash allocation?
 Calculating initial returns
 Analyzing each trade in the monthly contract
 Final results
 Next steps

Go to www.meetup.com/listmg

Click on join to become a member (Free membership)

Then click on RSVP (meeting is free) to obtain the ZOOM link.

 

3.NYC & Long Island Stock Traders Investment Groups

Thursday March 16th, 2023

7:30 – 9 PM ET

Topic related to selling cash-secured puts.

Details 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.

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

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.

14 Responses to “How to Use the Capital Adjustment Section of the Trade Management Calculator When Executing Multiple Exit Strategies in the Same Contract Cycle”

  1. Barry Bergman January 15, 2023 1:39 am #

    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 01/13/23.

    We were successful in implementing our system backup and recovery procedures to address our earlier systems issues.

    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 the membership remains active.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  2. Lou January 15, 2023 1:55 am #

    Alan,

    How should I enter a collar trade where I have a put with a 3 week expiration and a call with a 1-week expiration? I want to get accurate calculation and returns.

    Thanks,
    Lou

    • Alan Ellman January 15, 2023 6:52 am #

      Lou,

      Let’s set up a simple hypothetical example:

      Sell a 1-week covered call for $2.00.

      Buy a 3-week protective put for $3.60.

      Week #1 of the covered call trade: Enter a put debit of $1.20 (1/3 of $3.60) and therefore, a net credit of $0.80.

      Continue for weeks 2 and 3 using the call credit and the 1/3 of the put cost.

      If we sell a 2-week covered call, use a put debit of $2.40.

      Alan

  3. Eileen January 15, 2023 3:12 am #

    Alan,

    When will your new book about streamlined covered calls be available? Are you taking early orders?

    Thanks,
    Eileen

    • Alan Ellman January 16, 2023 7:22 am #

      Eileen,

      The book is being formatted at the publisher and a proof will be sent to me. Once I approve, the printing presses start. The spreadsheets are ready to go.

      I will be hosting a live webinar for premium members in the near future to introduce our streamlined approach to covered call writing when all related products are available. At a later date, I will be sharing with the entire BCI community.

      Alan

  4. Brian January 18, 2023 7:06 am #

    Alan,

    I just purchased the BCI and TMC packages and I’m ready to start with covered calls. I’ve been selling covered calls for over 5 years but never had the structure and exit strategies that you have.

    I found several stocks that I like from your latest stock list (like DHI, JBL, Crox etc.). My question is when is the best time to enter my trades for the Feb. contracts. If I start today, won’t I be getting the most time value?

    Thanks for providing retail investors all these tools.

    Brian

    • Alan Ellman January 18, 2023 5:47 pm #

      Brian,

      Once the 3 required skills are mastered and we made a decision to use monthly expirations, the best time to enter the trades is the Monday or Tuesday after expiration Friday. The time-value lost on the premiums from Thursday and Friday will be extremely minimal and we would be incurring an additional weekend of risk.

      It will also allow us to take advantage of the updated BCI Stock Reports.

      I also prefer to enter new trades between the hours of 11 AM ET and 3 PM ET to avoid early morning and late afternoon computerized institutional trading which can result in increased volatility.

      Alan

  5. Ted January 18, 2023 12:05 pm #

    Alan,

    Please explain how to calculate static annualized returns for the following 30 day trade:

    Buy XYZ at $39

    STO $40 call at $2

    At expiration stock still at $39

    Specifically, which figure should be used in the denominator, $39 or $37?

    Thanks a lot,
    Ted

    • Alan Ellman January 19, 2023 5:29 am #

      Ted,

      The formula is:

      [$2/$39) / 30] x 365 = 62.39%

      I use $39 in the denominator. If we used $37 in the denominator, the $2 premium would be used 2 times, once as the premium profit and second time to decrease the cost basis.

      I know there are some covered call calculators that use premium twice and I understand that perspective, but I’m simply not on board with that approach.

      Alan

  6. Alan Ellman January 18, 2023 2:00 pm #

    FEBRUARY 2023 Blue Chip Report:

    Premium members,

    The latest Blue Chip Report of the best-performing Dow 30 stocks has been uploaded to your member site.

    Look on the right side in the “resources/downloads” section and scroll down to “B”

    Alan & the BCI team

  7. Alan Ellman January 18, 2023 5:03 pm #

    Premium members:

    This week’s 5-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.

    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.

    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

  8. Paul January 18, 2023 5:35 pm #

    Hi Alan:

    I have a question about basic Stock Market operating procedures, as follows:

    If an investor has an existing In The Money Call or Put position & subsequently enters a Roll-Out & Up ( or Down ) order, which is currently open, is it possible for a third party to exercise the original option, & if so, at what strike price?

    As always, I thank you in advance for any advice you may offer.

    Regards,

    Paul

    • Alan Ellman January 19, 2023 5:40 am #

      Paul,

      Let’s start with this: Early exercise of any option is extremely rare and typically associated with an ex-dividend date.

      That said, we are trading American style options (for the most part) and these can be exercised at any time through 4 PM ET on expiration Friday.

      When we roll-out ITM options, we are closing the current short position and opening a new one at a later date. Until that initial short position is closed, technically it is susceptible to exercise at the current strike price. With the current speed of our trading platforms, we are talking seconds or less to close that original position when rolling.

      Now, once we open a new, later date, short position, that contract obligation can be exercised at any time but, again, is almost never exercised prior to contract expiration. There are rare exceptions. That later-date option, if exercised, would be at the 2nd strike.

      Bottom line: When rolling our options, the probability of the 1st strike to be exercised during that process is miniscule and not a concern. I’ve been trading options for over 2 decades and it’s never happened to me.

      Alan

      • Paul January 19, 2023 11:21 am #

        Alan:

        Thanks again for your most helpful insight on this question. I have personally experienced several early exercise episodes, all of which involved near-pending ex-div dates, as you mentioned.

        In retrospect, I should have been more vigilant & acted to prevent it, as my trading strategy seeks to avoid option exercise.

        Regards,
        Paul

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