Covered call writing trades, when structured and managed properly, can result in impressive short-term and annualized returns. Such was the case with Art who shared with me a series of trades he executed with RVLV in August – September 2021. The returns were outstanding and enhanced via exit strategy execution. This article will analyze the final returns after closing both legs of the trade.
Art’s trades with RVLV
- 8/24/2021: Buy 500 x RVLV at $57.06
- 8/24/2021: STO 5 x 9/10/2021 $58.00 calls at 2.16
- 8/27/2021: Buy 200 x RVLV at $57.02
- 8/27/2021: STO 2 x 9/10/2021 $58.00 calls at $1.45
- Average cost/share = $57.05
- 9/10/2021: RVLV trading at $62.08
- 9/10/2021: BTC 7 x RVLV 9/10/2021 $58.00 calls at $4.20
- 9/10/2021: STO 7 $9/17/2021 $63.00 calls at $1.74
Art questioned what the final trade results would calculate to, should the 7 contracts be exercised at the $63.00 strike.
What was the impact of rolling out-and-up to the 9/17/2021 strike?
Using the “What Now” tab of the BCI Calculators, we see a positive initial return, when factoring in “bought-up” value of the shares, of 2.79% for the week and 4.38% if shares price moves up the new $63.00 strike, an assumption Art asked me to make.
Final trade calculations if RVLV is sold at the new $63.00 strike
- Stock side: [($63.00 – $57.05) x 700] = $4165.00
- Option side: [($1080.00) + ($290.00) – ($2940.00) + $1218.00)] = -$352.00
- Total net profit: [($4165.00) – ($352.00)] = $3813.00
- 24-day % return: $3813.00/$39,935.00 = 9.5%
- Annualized % return: [(9.5%/24) x 365] = 145%
Art hit a grand slam homerun with this one. An elite-performing security was selected and OTM (bullish) strikes were sold allowing for additional share appreciation income. Rolling-out-and-up resulted in a favorable (to say the least) profit enhancement trade execution. It looks like Art doesn’t need me anymore.
Webinar recording/New Exit Strategy/New Trade Management Calculator:
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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:
Good morning Dr. Ellman,
First, I’d like to express my gratitude and appreciation for everything you have taught me. It has been a great experience for me these past few months. I’ve learned as I went along every step of the way, Now, my mind is full of strategies and how-to’s. I feel in control of my investing.
I can’t thank you enough for the book and knowledge you have shared with me and, likely, countless others.
1.Mad Hedge Summit: Free Zoom presentation
Tuesday March 15th at 11 AM ET
Selling Cash-Secured Puts: 4 Practical Applications
Selling cash-secured puts is a low-risk option-selling strategy which generates weekly or monthly cash-flow. This presentation will detail how to craft the strategy to multiple applications which will align with various goals and personal risk-tolerances. Topics included in the webinar include:
- Option basics
- The 3-required skills
- 4-practical applications
- Traditional put-selling
- PCP (Put-Call-Put or wheel) Strategy
- Buy a stock at a discount instead of setting a limit order
- Ultra-low-risk put/Delta strategy
Real-life examples along with rules, guidelines and calculations are included in this presentation.
Registration link to follow.
2.Long Island Stock Investors Meetup Group
Stock Options: How to Use Implied Volatility to Determine Strike Selection
Creating 84% probability successful trades for covered call writing and selling cash-secured puts
Wednesday April 13, 2022
7:30 PM ET – 9:30 PM ET
3. LIVE at The Money Show Las Vegas
May 9th – 11th
Details and registration link to follow.
Portfolio Overwriting (free)
Increasing Profits in Our Buy-And-Hold Portfolios Using Covered Call Writing
A Comprehensive Analysis of Covered Call Writing: 2-hour Master’s Class (paid event to The Money Show)
How to master all aspects of this low-risk option-selling strategy
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 your low risk put delta strategy…
So a good target for delta is less than .10 ??
So if I look at MRNA , and I go to Feb 25 expiration, a delta of .10 puts me at around a strike price of about 116. Have I read this correctly?
thanks for all your help.
Yes, that is correct. The next step is to check the initial time-value return to ensure it meets our stated goal range.
Being prepared with exit strategy implementation is always a critical part of the process even when the chance for success is approximately 90% based on Delta.
Thanks, Alan. What exactly do you mean by “initial time value return” ? Everything I am writing is a week long.
Prior to executing any trade of any time frame, we must identify our initial time-value premium return. This is the time-value of the premium divided by our cost-basis.
If we write an ATM or OTM put, it is the [time-value of the premium divided by the (put strike – put premium)].
This week is a 4-day week because Monday is a market recognized holiday. Because of this, we would expect a lower-than-typical return. Let’s see…
With MRNA trading at $145.00. the 10-Delta $118.00 strike generates a bid premium of $1.23. This results in a 4-day return of 1.05% or 54.8% over 52 weeks (higher if we used 4 days instead of 1 week). Yikes! Why so high?
So, we check the most common reason for such a high implied volatility/ premium return and, sure enough, MRNA reports on 2/24/2022.
Following the BCI methodology, we don’t write the put until the report passes and post-report volatility (if any) subsides. Usually, we skip this week and start the following week.
Relating to your question, once we calculate the initial time-value return, we see if it meets our stated initial return goal range (0.5%/week, as an example).
Glad you asked as this is a good learning scenario.
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 02/18/22.
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:
On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Barry and The Blue Collar Investor Team
From the reports, I was playing around with stock selection from the example.
Do you prefer ROOs that provide more actual income-strikes sort of randomly selected or ROOs utilizing the 6% annual target goal- less income more total return.
Is it more of a personal preference? somewhere in between?
Thanks, looking forward to the new Trade Management system!
There is no right or wrong with these choices. Each investor must identify his or her goals for initial time-value return goal range and select strikes accordingly.
If we are bullish on overall market conditions and have a bullish technical chart, we would favor deeper out-of-the-money call strikes within that range. If we wanted more defensive positions, we would favor in-the-money call strikes within that range.
If our goal was to avoid exercise (portfolio overwriting), our target would be more in the range of 0.5% per-month or 6% annualized using extremely deep out-of-the-money call strikes.
Once we have identified our goals, there will be clarity relating to strike selection.
Thanks for the example of how a “Rolling Out and Rolling Up” strategy can work. I’ve been on both ends of this approach. I’ve had stocks continue to add gains after I’ve “bought back” the expiring option and I got an even bigger gain. I also been stung when the stock got clobbered, like dropping from 63 to 54 clobbered (to use the sample stock you used).
As a rule I don’t do that anymore. If the stock is flat, be it flat because it traded flat the whole time or it’s flat because it ran up and pulled back within range THEN I’ll consider rolling out. To guard against “greed” [those tempting “potentially juicy”: returns], if I’m paying MORE of a premium to buy it back than I received when I opened the position- PASS. Let it get called and bank another winning trade. It’s confirmation that I got that one right. If it still has merits or more potential upside, open another BUY WRITE.
Thanks for the insight you provide and thanks for sending the link to watch the replay of the webinar that I couldn’t log in on.
Our decision whether to roll-out-an-up is based on the following:
1. Does the security still meet our system requirements from fundamental, technical and common-sense perspectives?
2. Do the calculations meet our initial time-value return goal range?
Another way to analyze this decision is to ask ourselves if we would buy this stock or ETF today given the current price and information at hand.
Will the calculators handle multiple months? Or do they only calculate for 1 month?
All expiration dates can be used with our calculator spreadsheets.
If we wanted to dedicate one spreadsheet per expiration month, we rename the spreadsheet for that specific expiration and save.
Where can I get industry and sector information to enter into the calculator spreadsheets?
We have a file of sector/industry listings in the “resources/downloads” section of the premium member site (right side).
Another way to access this information, is to go to http://www.finviz.com, enter the ticker symbol, click the search magnifier and check the industry/sector info under the chart (see screenshot below).
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
I have purchased the PMCC calculator and accompanying Covered Call Writing Alternative Strategies book and have one question (so far…….)
What happens when stock price goes below the LEAP strike? Is there a risk of assignment?
Thanks for your time!
We are long the LEAPS (we own it) and short the near-term call option (we sold it). The option buyer of the short call controls exercise. We control exercise of the LEAPS.
Exercise of the short call will only occur (with rare exceptions) when the strike moves in-the-money at expiration. This relates to scenarios when share price moves higher than the (originally) out-of-the-money strike.
In the hypothetical presented in your question, share price moves down, leaving the short call even deeper out-of-the-money where exercise is extremely unlikely barring investor error.
In the PMCC strategy, the LEAPS purchased is typically deep in-the-money. If share price declines dramatically below the LEAPS strike, we can assume implementation of our exit strategy arsenal which includes rolling-down and perhaps even closing both legs of the trade.
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.
The main list contains 22 ETFs that have increased in value over the past 1- and 3-month time frames despite the overall market’s significant decline in both time frames.
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.
For your convenience, here is the link to login to the premium site:
NOT A PREMIUM MEMBER? Check out this link:
Alan and the BCI team
Good morning! Thank you for taking the time to read my email.
I just have one question about selling in the money calls. Do the 80%-20% guidelines apply to the entire premium received or just the time value component?
I recently purchased Chevron for 136. 43 and I immediately sold the $135 call option for 4.67. If the stock goes down and I’m using the 80% guideline for the first half of the contract do i btc at .94 or .64?
The 20%/10% guidelines apply to the entire premium, including the intrinsic-value components of in-the-money strikes.
In this example, we set our 20% BTC (buy-to-close) GTC (good until cancelled) at $0.94 after executing the trade and change to $0.47 prior to the last 2 weeks of the March contracts.
Please log into the Premium Member site and download The “Emergency Management Report”. The actions that Alan describes are very useful in the current market.
Once you have logged in, you can scroll down the Resource Section to find the report. The items in the Resource Section are arranged in alphabetical order.
Barry and The Blue Collar Investor Team
This post on RVLV does not appear to include in the final calculations the (now) realized upside potential of 7 x $92 = $644.
Am I right or have I misunderstood something in your example?
The share appreciation from $62.08 to $63.00 is accounted for under “Final trade calculations”:
Stock side: [($63.00 – $57.05) x 700] = $4165.00
Let me know if you need additional clarification.
Yes, you are absolutely right. I have missed this part. Thanks for the clarification.