One of our available cash-secured put trade exit strategies is rolling-up to generate an additional income stream (or multiple income streams). The disadvantage of this position management approach is that we are bringing the strike closer to current market value, enhancing the possibility of exercise. If avoiding exercise of our short puts is inherent in our strategy approach, we must understand the risk involved and compare that to the potential reward. In this article, a real-life 4-day trade with NVIDIA Corp. (Nasdaq: NVDA) will be highlighted.
- 6/20/2023: NVDA trading at $429.44
- /20/2023: Sell-to-open (STO) 1 x 6/23/2023 $410.00 put at $1.54
- 6/20/2023: Buy-to-close 1 x 6/23/2023 $410.00 put at $0.82
- 6/20/2023: STO 1 x 6/23/2023 $41500 put (roll-up) at $137.00
- 6/23/2023: The 6/23/2023 $415.00 put expires out-of-the-money and worthless
Broker screenshot of NVDA trades
Note that the $415.00 rolled-up strike showed a Delta of 13 when viewing the option-chain. This means that there is an approximate 87% probability that the strike will expire out-of-the-money and worthless at expiration. This would be a desirable result for most put-sellers who do not want to take possession of the underlying security or initiate exit strategies to avoid exercise.
Pre- and post-adjustment calculations with the BCI TMC spreadsheet
- Brown cells show a pre-adjustment return of 0.38%, 34.40% annualized
- Purple cell shows a post-adjusted 4-day return of 0.51%, 46.54% annualized. This represents an improvement of 34.2%, due to rolling-up
- The Trade Journal entry archives the steps taken to achieve the final results
When adjusting our option trades, we must understand the pros & cons or the risk-reward components of our trade adjustments. In this NVDA example, there was an approximate 13% risk of the option moving in-the-money and subject to exercise, while providing the opportunity of enhancing returns by 34.2%. Once these potential outcomes are understood, we can make an informed decision as whether we want to move forward with this exit strategy.
Covered Call Writing Alternative Strategies
Portfolio Overwriting– using stocks in buy-and-hold portfolios.
The Collar Strategy– using protective puts.
The Poor Man’s Covered Call– using LEAPS options.
Covered call writing is a cash-generating strategy that lowers our cost basis thereby improving our opportunities for successful investments. One of the many benefits of incorporating this strategy into our investment portfolios is that the system can be crafted to meet our trading style, market assessment, portfolio net worth and personal risk tolerance. This book details three such covered call writing-like strategies.
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:
I have great appreciation for all you do for sharing your wisdom with us!! I have enjoyed much success to trading options with your methods I read in your calls and puts books as well as being a Premium Member.Thanks again,
1. Mad Hedge Investor Summit
December 5 at 11 AM ET – 12 PM ET
Tuesday December 5, 2023
11 AM ET – 12 PM ET
Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow
Investing with Stock Options
Hosted by Dr. Alan Ellman, President of The Blue Collar Investor Corp.
Barry Bergman, BCI Managing Director
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 on capital preservation.
Registration link to follow.
2. BCI-Only Webinar: Portfolio Overwriting
Portfolio Overwriting: Covered Call Writing Our Buy-And-Hold Stocks
Increasing profits and avoiding tax issues
Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”. Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk covered call writing-like strategy.
- Brief review of covered call writing
- Option basics
- What is an option-chain?
- Option selection
- Calculating covered call returns: Real-Life examples
- Portfolio overwriting defined
- Pros and cons of portfolio overwriting
- Why early exercise is so rare
- Rolling options
- Role of dividends
- Locating ex-dividend dates
- How to avoid early exercise
- Real-life examples with calculations
- BCI Portfolio Overwriting Calculator
- BCI Trade Management Calculator
Details & registration link to follow.
3. Long Island Stock Traders Meetup Group (private investment club- Part I)
Thursday February 15, 2024
7:30 PM ET – 9:00 PM ET.
Club members only.
4. Las Vegas Money Show & Stock Traders Live In-Person Event
February 21 – 23, 2024
Details to follow.
5. Long Island Stock Traders Meetup Group (private investment club- Part II)
Thursday March 14, 2024
7:30 PM ET – 9 PM ET
Club members only