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Mid-Contract Unwind Exit Strategy: A Real Life Example

To maximize our covered call writing profits it is critical to take advantage of our exit strategy opportunities. Last week I posted a few comments regarding the mid-contract unwind exit strategy and received several emails asking for more information about the trade I alluded to. In this week’s article I will walk through the steps of this trade and exit strategy execution as well as the thought processes behind them.

The original trade:

Buy 300 TPX @ $73.73

Sell 3 x March $70 ITM (in-the-money) calls @ $5.82

ROO (initial profit/contract) = $5.82 – $3.73 (intrinsic value) x 100 shares / $70 (“bought down” cost basis) x 100 = 3%

We use ITM strikes when we want to secure downside protection of the initial option profit. It is a conservative approach to covered call writing. 

Preparation for the “mid-contract unwind” exit strategy opportunity:

Like a good boyscout  BCIs are always prepared to take advantage of a cash-generating opportunity. In this case we are looking for share appreciation to the point where the option premium is trading near parity or almost all intrinsic value. Whatever time value component is still remaining for this option premium will be a debit in our account if we close the short call position. If we close with a small debit and can generate a much larger credit, it’s time to act.

 The end of week 1 for the March contracts:

February 23rd: I noticed that many of our premium watch list stocks had been strong with significant price appreciation including TPX.  I posted on this blog to keep an eye out for these exit strategy opportunities.

February 24th: TPX was up another $1 in early trading to $78.05. I pulled up the options chain and found the $70 call trading @ $8.40, $0.35 above parity ($8.40 – $8.05). This represented a debit of 0.5% or one half of one percent. With more than 3 weeks remaining until expiration Friday I knew that generating a credit significantly more than 0.5% would be an easy task. Here’s what unwinding this covered call position looked like (if not using a buy-write combination form, always close the short call first):

BTC  (buy to close) 3 x March $70 calls @ $8.40

Sell 300 x TPX @ $78.05

The true value of our shares was $70 due to our option obligation. By removing the obligation, we sold for $78.05 cancelling out all but $0.35 of the cost to close. Now my account had $21,000 to open a new covered call position in the SAME month with the SAME cash. 

Selecting a new covered call position- The Premium Watch List:

I will oftentimes get the question as to why our team screens stocks each week when we are selling 1-month options. This is a great example as to why. It is essential for our members to  have the most up-to-date information when executing these mid-contract trades. General members must also update your watch lists on a weekly basis to maximize the cash returns building up in your accounts. Based on our portfolio needs (diversification etc.) and our risk tolerance (beta of stock) as well as our income return goals for the 3-week period we make several selections and gather the information needed to enter into the Ellman Calculator. I have selected three stocks that would meet my return goals for consideration:


The Ellman Calculator- Multiple Tab:

I filled in the ” blue cells” with information obtained from the option chains and the resulting calculations are in the “white cells ” (now colorized) on the right side of the spreadsheet:

Ellman Calculator- Multiple Tab


The three stocks I alluded to are located in the red rectangle. Please note the following:

Yellow column: ROO:  Initial returns are all well above the 0.5% debit I incurred closing my position.

Green column: Upside potential for out-of-the-money strikes. If you are bullish you can select the $40 call for EXXI (for example) where you will generate a 2.3% initial return with another possible 3.3% for share appreciation creating a potential 5.6%, 3-week return. This does not include the initial 3% return (less the 0.5% to close the original position) that this same cash generated with TPX.

Purple column: Downside protection of the option premium (time value only). If you are cautious in your approach or have a low risk-tolerance you may opt for the $37 call for EXXI or the $37.50 call for SWI both of which offer > 2%, 3-week return with > 4% protection of those profits. 

How many shares should I buy?

The cash generated into my account was $21,000 which will allow me to buy 500 shares of SWI or EXXI and just under 400 shares of RAX ( I would have to add about $500 to buy 400 shares). 

Which stock and strike price should I select?

It is up to each individual to decide which stock and strike is best for your portfolio. I am a conservative investor and would lean to  an ITM strike to garner the additional protection. Keep in mind that the cash invested in this 1-month has already generated a 3% return for the first covered call position (TPX) and now another > 2% return (you will see an ADDITIONAL $400 + in your brokerage accounts for your effort) for a 1-month total of  > 5%. A 10-year treasury bond generates 2% annually. 

As an aside:

I also sold several March $75 calls for TPX but as I am writing this article the $75 call has $1.35 of time value or 1.8%. This is far from “parity” and I am not willing to unwind at that cost. 


To maximize our covered call returns we must be prepared to take advantage of our exit strategy opportunities. Don’t let them pass you by. Initially, members new to this strategy may be intimidated by the process. I know this because I was feeling these same sentiments when I started teaching myself this strategy. After a while it will become second nature and all that extra cash will make the learning curve time well spent. 

Seminar in Atlanta:

I was invited to speak before the American Association of Individual Investors Atlanta Chapter on Saturday April 14th from 10 AM to 1PM. This presentation is open to non-members as well . The venue is  Cobb Galleria Centre which is Atlanta’s premier Convention Centre. I will be providing a link to register once the event is posted on the AAII site.

Market tone:

This past week continued to re-enforce our positive market and economic outlook. Along with encouraging reports regarding Greek debt negotiations were the following reports:

  • New home sales in January were down 0.9% due to an upward revision of December stats. January sales were actually up an encouraging 3.5% compared to a year earlier
  • Existing-home sales rose by 4.3% in January
  • Inventory of unsold homes decreased to 6.1 months, the lowest level since 2006
  • Initial jobless claims came in at 351,000, lower than expected

For the week, the S&P 500 rose by 0.3% for a year-to-date return of 8.9% including dividends.


IBD: Confirmed uptrend.

BCI: Moderately bullish selling an equal number of ITM and OTM strikes. 

Thanks for all your support.

My best to all,

Alan ([email protected])


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.

48 Responses to “Mid-Contract Unwind Exit Strategy: A Real Life Example”

  1. Jorge February 25, 2012 10:30 am #


    Is there a maximum amount of time value you’re willing to spend to close your first position? I love these real-life examples.


  2. Frank Kaplan February 25, 2012 4:21 pm #

    More real life example – I agree.

  3. Alan Ellman February 25, 2012 7:49 pm #

    Jorge (#1),

    There is no specific guideline as to how much time value I’m willing to spend because it will depend on how much additional time value I can generate with the new position. As a rule of thumb, I would spend more time value earlier in ther contract cycle because of the greater time value a new position would generate. Of course, the closer to parity the better when using this strategy.


  4. Alan Ellman February 25, 2012 7:52 pm #

    Premium members:

    The BCI team is experiencing some technical difficulties (internet issues) in gathering information for this week’s report. A process that normally takes about 10 hours has already taken more than that and we still have more to go. We will work through the night and make every effort to get the report to you as soon as possible. Thanks for your understanding.


  5. Barbara February 25, 2012 9:13 pm #


    What is the charge to attend your seminar in Atlanta?


    • Alan Ellman February 26, 2012 2:35 pm #


      My understanding is that AAII charges $10 for pre-registration and $15 at the door. Once the event is posted on the AAII site, I’ll publish the link on this site so BCI members interested in attending can pre-register.


  6. Barry B February 26, 2012 12:54 am #

    Premium Members,

    The Weekly Report for 02-24-12 has been uploaded to the Premium Member website and is available for download.


    Barry and The BCI Team

  7. Ted February 26, 2012 12:36 pm #


    Can I ask why you sold both 70 and 75 options. Knowing the thinking behind these decisions is really helpful. Keep up the good work.


    • Alan Ellman February 26, 2012 4:02 pm #


      When selling multiple contracts for the same underlying I will oftentimes “ladder” my strikes or sell some ITM and some OTM. This is another form of diversification. When I am more bullish as I am now I will favor or sell more OTM strikes as I did in this case. Note that the $75 call was OTM when I first sold it but is now ITM as the share price accelerated past the higher strike. If the price continues to rise, it too, may become a candidate for the mid-contract unwind exit strategy.


  8. Alan Ellman February 26, 2012 1:56 pm #

    1-week return on this trade:

    I had an off-site request to show the math calculating the 1-week return from this trade prior to establishing the second cash-generating income stream. Here we go:

    Buy 300 x TPX @ $73.73

    Sell 3 March $70 calls @ $5.82

    Initial ROO = $5.82 – $3.73/ $70 x 100 = 3%

    Buy-to-close 3 x March $70 calls @ $ 8.40

    Sell 300 x TPX @ $78.05

    Debit = $8.40 – $8.05 x 100 = $35/contract = $35/$7000 = 0.5%

    1-week return prior to establishing a new cash flow position = 3% – 0.5% = 2.5%

    Now any profit above 0.5% will have maximized our monthly returns (above the 3% max the origianl trade offered) and as you can see from the examples above there ARE several great opportunities.


    • Arnold Cohn February 26, 2012 2:43 pm #

      Here is my understanding of your trade:

      Buy the stock for $73.73 and sell the 70 call for $5.82 leaving $2.09 net premium ($5.82 –
      3.73 = 2.09). Your profit is $1.74 times 300 or $522. $8.40 less $5.82 = $2.58 loss on
      buying back the option. $78.05 – 73.73 gives $4.32 profit on the stock. $4.32 – 2.58
      gives $1.74. You made $522 for one week in place for $627 for four weeks.

      • Alan Ellman February 26, 2012 8:48 pm #


        Your math is superb! (members: Arnold came to the profit result by deducting the $0.35 cost to close the original position from the $2.09 initial option return and multiplying by 300 shares). If we can generate more than $105 or 0.5% in the second position, we have generated an additional income stream. For example, if we purchased 500 shares of EXXI ($19,360) and sold 5 x March $38 calls @ $1.95 our profit would be $1.23 per share after deducting the $0.72 of intrinsic value. That computes to $615 (less commissions) additional profit. That’s an additional $500 profit (after deducting the $105) pending final share price at the end of the contract cycle ( as long as the stock price does not decline more than $0.72).

        Nice work Arnold.


  9. Dave Swett February 26, 2012 2:26 pm #

    DJ’s Newbie report

    Buon Giorno,

    Wait, what did he say? Yes, that is Italian for Good Day. The dust has settled on last month’s CC splurge and I have been able to figure out my pluses and minuses. That Italy trip is a lot closer than I had ever figured. One of the reasons that I am doing BCI is to generate disposable cash flow that I can spend on travel and charity. I thot I would go to Italy on coach, but after this month, I think I will get at least one luxury deluxe air ticket and stay in a four star hotel. March expiration should get me another ticket.

    You are probably thinking that I used a whole boatload of funds to generate this CF, but that is one of things that I have learned (and want to share today); I was not organized (to say the least) and as long as the trading page told me that I had buying power, I kept doing CC. Guess what was happening: cuz of the unspoken generosity of my broker, he was loaning me money on margin and, literally, doubling my account funds. I was spending someone else’s money.

    There was no warning of my using this high leverage source of funds because they expected your trading experience to note this money advance. Thankfully, the Bull is controlling the market trend and I was somewhat protected in my foolishness, but I learned something this month.

    Maybe after I do this trading for another two months, I will trade on margin and be smart about it—but until then, I want to stay within my cash limits.


    • Steve Z February 26, 2012 4:34 pm #

      Dave, you’re a riot. I laughed out loud so much my wife came over and I had to read this to her too. Keep posting.

      FYI, ho abitato a Roma per tre anni per lavoro. È grande. Buon viaggio.


    • owencpa February 27, 2012 4:51 pm #


      This reply is more for the other readers than for you.

      Yes, margin can double your bang for the buck. It can also double your losses if you are wrong. The broker’s generosity does not extend to sharing your loss. Most of the BCI should NOT trade on margin.

  10. Sam February 27, 2012 6:39 am #


    Why would you lean to an in the money strike price in your second position when you are currently “moderately bullish”? Thanks for a really informative article.


    • Alan Ellman February 27, 2012 4:47 pm #


      Unless we are in a strong bull market I will normally opt for an ITM strike for my second position. This is because there is less time for exit strategy execution should the trade turn negative. So my conservbative nature guides me to an option with an “insurance policy”.


  11. Frank February 27, 2012 11:34 am #

    Alan or BCI members,

    Can you recommend an ETF that gives exposure to the S&P 500 aside from spy which is a bit too expensive for me? I’m just getting started with covered calls and want to start as conservatively as possible. Thanks for your help.


    • Steve Z February 27, 2012 12:05 pm #

      Frank, if you’re just getting started, I’d highly recommend that you start with a paper money account and learn the strategy as Alan writes it and do lots and lots and lots of trades each month, do all the early/mid/late contract moves Alan teaches, and keep track of them in terms of what worked and why and what didn’t work and why. You’ll have a much faster learning curve than starting with a little bit of real money in a low volatility ticker. Steve

    • Alan Ellman February 27, 2012 4:54 pm #


      Great comments from Steve and Benny! Take a look at RSP. It is an ETF that holds ALL S&P 500 stocks but does not weight them by market cap but rather uses an equal weighting methodology.This tilts the fund more to mid and small caps. Like SPY it will provide fantastic diversification but at a much lower price/share (about $51 compared to $137 for SPY). Of course , it does have associated options.


  12. Benny February 27, 2012 12:11 pm #

    Frank, I have been doing covered calls only a few months but have traded stocks for a while. If you want to be conservative sell in the money calls that give good down side protection. I have been doing well but the market has been going up. Good luck.

    • Frank February 27, 2012 3:16 pm #

      Steve and Benny,

      Thanks for the advice. Its reassuring to know that I have a support group here to bounce ideas off of. Good luck and thanks again.


  13. Phil February 28, 2012 3:10 pm #

    Hi BCIers,

    How did I do?

    Just bought back 3 contracts of the march 55s for CSTR @ 6.65. Stock sold for 61.42 for a debit of 23/contract or 0.4%. Then I bought 400 exxi for 38.49 and sold 3 march 38s for 1.60 for a credit of 1.11 or 2.9%. Net credit if exxi stays above 38 = 2.5% above original profit. My first exit strategy!


    • Fred February 28, 2012 5:30 pm #


      2.5% in 13 days. Can’t beat that. Congratulations on your first…many more.


  14. Carol February 28, 2012 7:28 pm #


    How are you handling your 75 call options on tpx? The stock was up again today. thank you.


    • Alan Ellman February 28, 2012 8:47 pm #


      No action is indicated at this time. The share price is currently $78.72 and the “ask” for the $75 call is $4.90. The time value of this premium is $1.18 ($4.90 – $3.72) or 1.6% ($1.18/$75.00). With only 12 trading days remaining until expiration Friday I am not willing to sacrifice 1.6%. I have, to this point, maximized my monthly profit on these positions and have sigificant protection (down to $75) of that profit.


  15. Homer E. Kirby, III February 28, 2012 8:11 pm #

    Alan, I have bought 2 of your books on Amazon and downloaded to my IPAD. I am a military physician and am leaving for 3 months to Afghanistan. Planned to read them there but could not wait, already read both. Plan on ordering your latest book before leaving and then joining your Premium Membership when I return home. Wish you and all the BCI family the best. Keep up the good work and thanks for your military service as well. Trade Well.

    MAJ Kirby

    • Alan Ellman February 28, 2012 8:53 pm #


      I am honored to have you as a member of our BCI community. On behalf of my team and all of our members I want to thank you for helping to keep us secure.

      Stay safe and keep in touch.


  16. Jessica February 29, 2012 8:15 am #

    Can someone explain the term “pin risk”. I heard it talked about on a radio program but don’t fully understand it. Thanks.


    • Steve Z February 29, 2012 8:59 am #

      Jessica, read Alan’s 2/19/11 Blog post.

      • Jessica February 29, 2012 10:11 am #

        Wow. Had to read the article a few times but it sure does explain it. Thanks Steve.

  17. Nick February 29, 2012 2:48 pm #


    I read the article that Steve referred to where you discuss delta and gamma. Do you check the “greeks” when making your option decisions? Thanks.


    • Alan Ellman February 29, 2012 6:45 pm #


      In my view, when it comes to covered call writing it is NOT necessary to access the specific greek statistics for our option premiums. However, it IS critical to understand the general concepts that the greeks teach us about the factors that influence our option premiums. For example, when it comes to theta our cc decisions can be influenced by the fact that our premium value declines logarithmically and not linearly where most time value erosion occurs in the second half of the option cycle. This will influence the timing of our investments and guide us to appropriate exit strategy execution where indicated. The same applies to delta and vega. For more information on this topic see pages 156 – 166 in “Encyclopedia….”.


  18. Alan Ellman March 1, 2012 6:52 am #

    Running list stocks in the news: ADS

    On February 2nd this stock beat estimates and raised guidance for 2012. Annual sales rose 12% compared to fiscal year 2010 and earnings increased from $3.69 to $6.22. Operating income increased by 29% year-to-year.Analyst consensus is for earnings growth of 11% in 2012 and 13.5% in 2013. ADS has surpassed the performance of the S&P 500 by 50% in the past year and by 8% in the past 3 months showing continued momentum. Our premium watch list shows an industry segment rank of “B” and a beta of 0.94. The company continues to positively surprise when it reports earnings. See the chart below (click on chart to enlarge and use the back arrow to return to this blog).


  19. Steve Z March 1, 2012 11:22 am #

    When a stock starts moving down in price, I know the right thing to do is to try and determine if it is an expected and normal pullback or did something happen that affects the stock/company mid-to-long term. Here’s an “interesting” one.

    I did a buy-write on INVN on 2/21 at $16.10. They came out with this announcement on 2/27 before the market opened:

    Invensense (INVN) Files $110M Common Shelf
    February 27, 2012 8:14 AM EST
    INVN Hot Sheet
    Overall Analyst Rating: BUY (= Flat)
    Invensense, Inc. (NYSE: INVN), filed a registration with the U.S. Securities and Exchange Commission to sell, from time to time, up to $100 million of its Common Stock by itself and Selling Shareholders.

    The stock gapped down on high volume and has been going down for the four days since then. Yesterday’s and today’s candles are signaling that it might be at support. Today’s wick almost made it down to the 50 DMA before bouncing. And depending on where you draw the fibs, it may also be at a Fib support line. Plus volume is declining post the announcement.

    So net, I see signals it may be at support. But I also see 5 days of red candles following a news announcement that the institutions obviously didn’t like.

    How should one think about something like this? My current plan is to wait and see if it holds support here but I thought it could be instructive to get other points-of-view. 🙂

    FYI, I sold half ITM ($15) & half OTM ($17.5) strikes.


  20. Fred March 1, 2012 2:26 pm #


    You look to be in decent shape with the 15s. How about rolling down the 17.50s to 15 for a credit of .85. Between that and your initial premium you should have a small profit with the 17.50s (now 15s) and hopefully retain your profit with the original 15s. Just my two cents.

    Good luck.


    • Steve Z March 2, 2012 2:59 pm #

      Fred, thanks. When I saw it going up today I bought the original call back and that’s all. I’m going to cross my fingers that it keeps going up and I’ll sell it again and get one of Alan’s doubles. Steve

  21. Alan Ellman March 1, 2012 3:00 pm #

    More on mid-contract unwind positions:

    Earlier today I unwound several of my positions where the option premiums where near parity:

    BWLD 80 calls
    COH 72.50 calls
    FFIV 120 calls
    CSTR 55 calls
    VCLK 19 calls

    These were all originally ITM strikes and share appreciation pushed these strikes further ITM approaching parity. That freed up over $100k which I will re-invest today and tomorrow. My 11-d goal is 1-2% over my original profits. “Singles and doubles”.


  22. Alan Ellman March 1, 2012 5:32 pm #

    Premium members:

    This week’s 6-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site.

    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

  23. Alan Ellman March 2, 2012 6:46 am #

    Running list stocks in the news: TAL:

    On February 13th, this stock from our premium watch list reported its 8th straight positive earnings surprise with a 5.2% “beat”. Earnings per share was $1.02 compared to consensus estimate of $0.97. Despite trading near multi-year highs, TAL is inexpensive trading at a forward PE of 9.2 compared to its industry peers 13.2. Our premium “running list” shows an industry segment rank of “A” a beta of 1.48 and a dividend yield of 5.6% which was increased in the 4th quarter by $0.55. The company also gave bullish guidance with the recent report and analysts have been raising consensus estimates for 2012. See the chart below that describes the bullish sentiment of analysts over the past 3 months. (Click on the chart to enlarge and use the back arrow to return to this blog).


  24. Susan March 2, 2012 3:56 pm #

    Bought 200 rax last week for 53.42 and sold 2 55 calls for 1.10 or 2%. Today rax is up 2 to close to 55. Could be a 5% 3 week return if the price holds. Fingers crossed. Good luck.


  25. Dave March 2, 2012 5:12 pm #

    Alan and co…

    Do you find that when the market is in a correction, it effects the status of many stocks IBD ‘smart select ratings’?

    For example, the accumulation/ distribution rating goes from a green to a yellow or a red…



  26. Alan Ellman March 2, 2012 6:15 pm #


    Absolutely. Excellent observation. This is precisely why we screen our stocks weekly. Members have the most up-to-date screens. If the overall market is in correction, the stocks on our “running list” have passed our demanding screens despite the bearish trend. On the first half of the Weekly Stock Screen and Watch List (usually pages 2 and 3) we show which screen eliminated a stock from the running list. This does not mean that the equity is a bad one to own but rather not amongst the “elite” performers at that moment in time. Should you already own a stock that previously made the running list but is knocked off for this reason, it’s okay to keep the stock but be alert to initiate an exit strategy if indicated.


  27. Dave March 3, 2012 1:07 am #

    Thanks Alan!

  28. Steve Z March 3, 2012 7:00 pm #

    Alan, have you ever considered the merits (or lack thereof) of doing a synthetic long stock position with a covered call, i.e., buy an ATM call a few months out & sell a put at the same strike and month, and then sell a one-month out call with your normal ITM/OTM selection criteria.

    In theory, this would have less impact on your account buying power and offers a lot of “options” for how to manage the three positions depending on which way the stock moves.


    • Alan Ellman March 4, 2012 4:59 pm #


      As the BCI community has grown and many of our members are exploring additional strategies we are getting more and more inquiries much like yours. Introducing puts into the BCI methodology is on the agenda for 2012. Now that we have re-configured our general member site we will concentrate on enhancing the premium member site and then move forward with additional options strategies. We will ALWAYS keep in mind that a majority of our members are new to options trading and will never abandon the basic strategy of covered call writing , my favorite options strategy, for me and the majority of our members.



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