Rolling-down is one of our frequently used covered call writing exit strategies. During the January 2022 contracts, there was a 5% market decline due to COVD-19, inflation and interest rate concerns. This article will highlight a rolling-down strategy I implemented with Healthcare Select Sector SPDR (NYSE: XLV) in one of my portfolios where a 4.68% share loss was mitigated down to a 2.8% loss. The BCI Trade Management Calculator will show trade entry, initial calculations, trade adjustments and final results.
Rolling-down trade overview
- 12/20/2021: Buy 200 x XLV at $135.83
- 12/20/2021: STO 2 x $137.50 1/21/2022 calls at $2.20
- 1/7/2022: BTC 2 x 1/21/2022 $137.50 calls at $0.44 (20% guideline)
- 1/11/2022: STO 2 x 1/21/2022 $136.50 calls (rolling-down) at $0.80
- 1/21/2022: XLV shares worth $129.47 (a loss of 4.68%)
BCI Trade Management Calculator: XLV trade entry
XLV: Covered Call Trade Executed
BCI Trade Management Calculator: XLV initial calculations
XLV: Initial Covered Call Writing Calculations
Rolling down with XLV (broker screenshots)
XLV Roll-Down Trade
BCI Trade Management Calculator: XLV adjustment entries
XLV: Rolling-Down Trade Entries
BCI Trade Management Calculator: XLV final results
XLV: Rolling-Down Final Calculations
Discussion
Writing covered calls and then mitigating losses by rolling-down decreased a 4.68% loss in share value down to an unrealized loss of 2.80% due to an option net credit of $512.00 or 1.88%. Position management is the 3rd of the 3 required skills (along with stock and option selection) that must be mastered before risking even one penny of our hard-earned money.
New Rolling-Out with the Trade Management Calculator video
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:
Dear Alan,
I just wanted to thank you for all your practical lessons, videos and books. I have used much of your information as a reference many times. It is clear, concise, and put in a way I can comprehend! And best of all profitable advice for me. No other Investing Guru has explained investing the way you and your team have! Thank you! I look forward to learning more!
Sincerely;
Kevin
Upcoming events
1. Wealth365 Summit
Tuesday July 12th, 2022
4 PM ET – 5 PM ET
Selling Cash-Secured Puts
Exit Strategy Choices After Exercise of Cash-Secured Puts
Selling cash-secured puts is a low-risk option-selling strategy which generates weekly or monthly cash flow by agreeing to buy shares at a price we determine, by a date we determine. In return for undertaking this obligation, we are paid a cash premium. We only sell puts on shares we would otherwise want to own and, if exercised, and shares are put to us, they are purchased at a discount from the price when the put trade was initiated.
This presentation includes an introduction to option basics, defines selling cash-secured puts and provides real-life examples. The focus of the webinar details the steps available to put sellers should the put be exercised, and we now own the discounted stock or ETF shares. The seminar includes a discussion of the PCP (put-call-put or wheel) Strategy and the Stock Repair Strategy among other exit strategy opportunities.
2. Money Show Orlando live event
October 30th – November 1st, 2022
OMNI ORLANDO RESORT AT CHAMPIONSGATE
Visit Alan, Barry and members of the BCI team at Booth # 415
Masters Class
Comprehensive Course on Selling Cash-Secured Puts
Detailed start-to-finish 6-part program
This presentation will provide all the information, with real-life examples, necessary to master the strategy of selling cash-secured puts. The program is divided into 6 sections:
- Section I:
- Option basics
- Section II
- Traditional put-selling
- Section III
- PCP (wheel) strategy
- Section IV
- Buy a stock at a discount instead of a limit order
- Section V
- Ultra-low-risk put/Delta strategy
- Section VI
- Ultra-low-risk put/Implied volatility strategy
This presentation was developed to benefit both beginner and experienced option traders and will provide all the information needed to initiate the strategy and elevate returns to the highest possible levels.
45-minute presentation
Covered Call Writing: Multiple Applications Based on Current Market Conditions
Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)
Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:
- Normal to bull markets
- Bear and volatile markets
- Low interest-rate environments
A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.
Registration link and more 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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Alan,
I have a question about selling OTM cash-secured puts in bear markets.
I agree that selling deep OTM cash-secured puts may be a good choice when the market is in the bearish territory. This strategy is conservative and time-tested. My only concern with this strategy is that in the event of a constant and severe decline of the stock markets which we currently see, this conservative strategy will not save us from losses. This is because the market price of the shares which we will receive at a discounted price as the result of the assignment may potentially be significantly below our OTM put option strike (in this case our unrealized losses will be great).
If I may ask you – which approach would you recommend considering to minimize the losses or even make profits in this case?
Do you write in this case ATM/OTM calls on the shares received as the result of assignment of your put options, trying to achieve some upside potential, OR you prefer selling ITM calls in this case on such shares?
I appreciate that the answer to this question is likely to depend on (a) the magnitude of the unrealized losses sustained as the result of the share price drop on a case-by-case basis, (b) our thinking on the subsequent behavior of the markets (ATM/OTM calls if we think that markets will rebound, OR ITM calls if the markets will continue to decline), and (c) behavior of a particular stock (incl ETF) we selected for our initial put option. I would be very thankful if you could share some general recommendations based on your approach of dealing with such situations in bearish markets?
It is a great honor for me to keep in touch with you, Alan.
All the best
Ilya
Ilya,
You make an excellent point. Selling cash-secured puts and covered call writing are low-risk strategies. They are not no-risk strategies. We must craft our trades and portfolios to current market conditions, personal risk-tolerance and our initial time-value return range goals.
In bear and volatile market environments, we favor deep OTM cash-secured put strikes. We can use our (previously determined) initial time-value return goal range to select the put strike or we can turn to our ultra-low-risk 10-Delta or implied volatility determination of expected trading range for the strike selections. We have choices.
If a cash-secured put is exercised and shares purchased at a discount, we write the covered call based on the same criteria we would use had we entered this trade as a first-time trade with this security. The entry price is the breakeven price form the put trade and the strike selection would lean ITM in a bear and volatile market environment.
If we are mildly bearish on the market outlook, we can use a % of ITM and OTM call strikes. For example, if we are selling 5 call contracts (in this mildly bearish hypothetical), we can sell 3 ITM and 2 OTM.
Here is a link to an article I published on this topic:
https://www.thebluecollarinvestor.com/using-the-put-call-put-pcp-strategy-to-create-downside-protection-on-steroids/
It is truly my honor to have this type of dialogue with our BCI community.
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 06/24/22.
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:
http://www.youtube.com/user/BlueCollarInvestor
Best,
Barry and The Blue Collar Investor Team
barry@thebluecollarinvestor.com
NEW: Rolling-out video just produced:
https://youtu.be/NHOIgidAIpg
Enjoy,
Alan
Thanks for the video Alan.
You invested a lot of work to help keep our blue collar noses to the grindstone. The added feature of the Journal will be extremely helpful in recording important information.
Looking forward to the market eventually turning up again. With your system you don’t have to pick market ups or downs, tops or bottoms, except major bear runs. (Even in Major Bear runs your methods mostly reduce loses vs taking the full brunt decline.) Love your defensive position with deep in the money calls as IV is very high in declines and deep in the money calls get some benefit.
For now I am avoiding any chip related company in case China decides to invade Taiwan. Do you ever just avoid a sector that presents a chance at extreme draw downs in your opinion. (Semi conductor… major chip users like Apple etc.?) I know you avoid some stocks and publish a list of them, same store sales monthly reports etc…
I seem to even recall a caution around some stocks that trade in other countries. Do you ever buy deep in the money puts to help reduce the stress you feel of potential losses in case an extreme event happens?
I love the new calculator. Thanks again for bringing your Blue Collar methods of work to help manage our money..
Dale
Dale,
I appreciate your kind words.
I don’t tell our members to avoid specific industries but do provide the information inherent in our reports that allow members to make decisions based on their trading style, personal risk tolerance and strategy return goals.
Our reports of eligible candidates will only select the elite-performers at the time the reports are crafted. In the stock reports, this is based on fundamental, technical and common-sense parameters. It is extremely difficult for securities to pass all BCI rigorous screens.
Our ETF Reports lists liquid securities that have outperformed the S&P 500 in both 1- and 3-month time frames. Implied volatility stats are also provided.
Our substantial BCI community consists of a wide range of investors with a similar wide range of personal risk tolerances. The risk involved in these trades is directly related to the implied volatility (initial time-value returns) inherent in these securities.
We provide lists of elite-performers and members can select based on their personal risk tolerance.
We also have a note in our ETF Reports regarding the risk inherent in Chinese securities. These are appropriate for some and not for others. I have a lot of respect for our knowledgeable member base and have confidence in how these selections are ultimately determined.
In our BCI methodology, we use (mostly) OTM put strikes. This applies to both selling cash-secured puts and buying protective puts. If we purchase a protective put to change our covered call trades to collar trades, we use OTM put strikes that will result in a net option credit.
Alan
Chinese ETFs are surging:
Premium members:
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. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
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:
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
Alan,
I’ve been meaning to send you a short note. While I’m still studying the books and tools ( I have purchased most of your books already), I think they are exactly what I was hoping to find.
I’ve been selling calls for about a year before I found you on YouTube. During the year, I was looking for a better set of trading rules AND looking for help with how to account for the P/L. All the time I was learning, I knew I should be accounting for the profit or loss of the underlying. So I was always sketching notes on these two topics.
Now, I’ve found someone that’s been able to write on these subjects so I’m learning more useful ways to buy/sell options. So far, I’m very impressed with the books and vids.
I want to ask you if you have anything published on this topic. I have shares of stocks that my CFA’s analysts have placed in our accounts in an IRA. They believe those are going to grow at an average rate of 6-7% over a 15 years time span. Sometimes those positions have fallen from their purchase price and later they have recovered. Not all of them, of course. But they seem to be good at selecting stocks in a wide range of segments that make the grade. So I’m looking for information about trading positions that I want to hold for a long time, but are lower than their purchase price some of the time. So I might not use the 7% rule. In fact if those positions fall more than 7 %, I’d check with the analysts and if their thesis is still valid, I’d likely DCA to get more shares at reduced prices. Do you have this topic in any of your books by any chance.
Thank you so much for your great contribution to this area of finance.
John
John,
Thank you for your generous comments.
The strategy you are pursuing is “portfolio overwriting”, where calls are sold against securities we plan to hold for the long term. In these scenarios, we write OTM calls that generate our stated initial time-value return goal range.
Let’s say that goal is 5% – 6% annualized, thereby nearly doubling your projected share appreciation estimation. If we write monthlys, the goal would be 0.5%; for weeklys, 0.12%.
Here are links to some of the articles I have published on this topic:
https://www.thebluecollarinvestor.com/using-implied-volatility-to-determine-safe-strikes-for-portfolio-overwriting-a-real-life-example-with-paypal-holdings-inc-nasdaq-pypl/
https://www.thebluecollarinvestor.com/portfolio-overwriting-with-weekly-options/
https://www.thebluecollarinvestor.com/strike-selection-for-portfolio-overwriting-low-cost-basis-stocks/
https://www.thebluecollarinvestor.com/portfolio-overwriting-with-apple-computer-nasdaq-aapl/
Regarding dollar-cost-averaging: We should evaluate this question: If I add more cash to my portfolio, should it be with a losing or winning position or, perhaps, with a new stronger-performer? We live in a global economy where a myriad of factors impacts the price movement of our securities. We must constantly re-evaluate our bullish assumptions regarding our securities because the reasons we purchased them today may no longer exist months down the road.
Keep up the good work.
Alan