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 exit strategy 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 cash-secured put 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.
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Book, Spreadsheets & Streamlined Strategy Approach Coming Soon
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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,
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 exit strategy 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 events
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-basis and beat the market on a consistent basis. Two such low-risk strategies are covered call writing 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 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 basis while focusing in on capital preservation.
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.
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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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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:
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Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as the membership remains active.
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[email protected]
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
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
Alan,
When will your new book about streamlined covered calls be available? Are you taking early orders?
Thanks,
Eileen
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
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
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
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
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
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
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:
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Alan and the BCI team
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
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
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