When our covered call trades are expiring in-the-money (ITM), we have an unrealized (shares are not yet sold) maximum return. This consists of option premium + any unrealized share appreciation from purchase price to the strike, if an out-of-the-money (OTM) strike was utilized.
In this article, a real-life example with Crocs, Inc. (Nasdaq: CROX) will be analyzed as how to roll-out such a successful trade using the BCI Trade Management Calculator. This will represent a 4-day, holiday-shortened weekly trade.
CROX data from our BCI Premium Member Stock Report on 5/28/2024
- CROX: $153.33(Apparel industry)
- Industry
- Segment rank “A”
- Implied volatility (IV): 30.5%%
- Weekly options are available
- Next ER: 8/6/2024
- No dividend
- $155.00 weekly (4-day) call strike has a bid price of $0.90
Initial trade calculations using the BCI Trade Management Calculator (TMC)
- 5/28/2024: CROX purchased at $153.33
- 5/28/2024: The 5/31/2024 $155.00 call is sold at $0.90
- The breakeven (BE) price point is $152,43 (yellow cell)
- The initial 4-day return is 0.59%, 53.56% annualized (brown cells)
- Upside potential is 1.09% (purple cell)
- 5/31/2024: On expiration Friday, CROX was trading at $155.64, leaving the $155.00 strike ITM (not shown in image)
- 5/31/2024: The cost-to-close the $155.00 strike was $0.70 ($064 of intrinsic-value + $0.06 of time-value)
Final initial contract results, incorporating the $0.70 BTC
- The final 4-day option return is 0.13% (top red arrow)
- The unrealized stock return is 1.09% (bottom red arrow)
- The total 4-day unrealized (shares not sold) is 1.22% (blue oval)
CROX option-chain on 5/31/2024 for the 6/7/2024 weekly expirations- for rolling-out considerations
- The rolling-out $155.00 strike offers a bid price of $3.10 per share (yellow cells)
- The share value at the time of the roll is $155.00, not $155.64, due to our initial contractual obligation to sell at $155.00
Initial calculations for the 6/7/2024 contract
- Stock price of $155.00 is entered (red arrow)
- The BE price point is $151.90 (yellow cell)
- The initial 5-day return is 2.00%, 146.00% annualized (brown cells)
- There is no upside potential because the $155.00 strike is ITM at the time of the roll
Discussion
A top-performing stock can generate significant annualized returns and upside potential using weekly call (and put) options, even in a holiday-shortened week. When the strike is expiring ITM and we decide to use the same security in the next option cycle, we can roll the option, assuming the initial calculations meet our pre-stated initial time-value return goal range.
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Good morning Allan,
I am a new subscriber to BCI and have spent many hours watching your videos, listing to your Podcast and reviewing your weekly reports. I am very excited about implementing these strategies in my own portfolio.
The one question I can’t seem to find an answer for, is what to do when a position continues to decrease in value month after month, for example in an extended bear market.
I do not want to get assigned if I am loosing 5,10 or 20 percent on a position especially if I am expecting a rebound. This is a long term buy and hold stock.
I’m sure you have a video that addresses this situation but I can not seem to find it. Can you give me some direction?
Thanks
Emory
Emory,
Welcome to our BCI community and family of premium members.
Given that this is a stock that is declining in value, but you are bullish regarding share price recovery, and you want to retain the shares for the long term, we will be employing a form of covered call writing known as “portfolio overwriting”.
Our initial time value return goal range is lower than that for traditional covered call writing, because the strikes are deeper out-of-the-money, as we want to avoid exercise. A reasonable annualized range would be 4% – 10%.
If, after entering our trade, share price continues to decline, we can roll-down to an out-of-the-money strike, which allows us to capture additional premium credits, while still allowing for share price recovery.
Here are links to 2 articles and a podcast on this topic:
https://www.thebluecollarinvestor.com/portfolio-overwriting-weekly-covered-calls-with-chipotle-mexican-grill/
https://www.thebluecollarinvestor.com/3-approaches-to-strike-selection-when-portfolio-overwriting-existing-stocks-a-real-life-example-with-dow-inc-nyse-dow-july-11th-webinar-registration-link/
https://www.thebluecollarinvestor.com/bci-podcast-91-portfolio-overwriting-analyzed/
Alan
Thanks Allan,
I will review the articles and Podcast, again, I appreciate your quick responce.
-Emory
Hi Alan,
I’m reading your terrific book on exit strategies for calls and puts.
Question if you ever use the MCU strategy in the second half of a monthly contract? If no, why not?
Thanks for your answer.
Jay
Jay,
In the latter half of a monthly contract when share price is declining, we are running out of time to mitigate a losing trade. In these scenarios, I opt to roll-down or close both legs of the trade, when the 10% BTC GTC threshold is reached.
There are some situations when I will invoke MCU later in the contract and that’s typically in a high implied volatility market.
Here is a link to an article I published on this topic:
https://www.thebluecollarinvestor.com/mid-contract-unwind-exit-strategy-at-the-end-of-a-contract/
Alan
Alan,
How often would you say you have been exercised as a result of a dividend? I was listening to one of your podcasts and never thought of this as a concern.
Thank you.
Steve (member since 2020)
Steve,
It’s extremely rare but does occur.
If it is critical to our strategy approach not to have shares assigned as a result of exercise, we must avoid ex-dividend dates.
We can write the call on or after the ex-date. If an option is in place, expiring after that date, the mostly time of exercise would be the day prior to that ex-date. If the underlying security has weekly options, circumventing the ex-date is easy.
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 11/01/24.
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:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium Member’s pricing is locked into your current rate and you will never see a rate increase as long as the membership remains active.
Barry and The Blue Collar Investor Team
New look to the Dow 30:
Prior to market open this Friday, INTC and DOW will be removed from the DOW 30.
NVDA and SHW will be added to replace them.
Our upcoming Premium Member Blue Chip (Dow 30) Report, due out next week, will reflect these changes.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs, along with our sample trade of the week, has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
We have also included a sample trade taken from one of our BCI watchlists.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
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Alan and the BCI team
Morning Alan,
I guess this is the first time I have come to the end of the contract cycle on weekly cash secured puts. I am currently sitting on $300+ option premium income for these weekly options, and an unrealized gain of $250+.
My question is if I let these expire tomorrow, I won’t capture any of the unrealized gain, correct? They will just expire worthless.
If that is right, why couldn’t I buy these back and pocket the gain plus the option income, and reload for next week’s cycle?
As always, I appreciate the input (not a recommendation)…
—
Thanks,
Dave
Dave,
When we sell, OTM CSPs and share prices rise, leaving the put strikes even deeper OTM, they will expire worthless and we have realized the entire premium initially generated. Rolling-up may have generated additional premium.
Not sure what you mean by “unrealized gain” in the sense that we don’t own the shares.
Alan
IMPORTANT…
Premium Members,
The ER date for JD has been updated. It was changed from 11/24/24 to 11/14/24.
Best,
Barry and The Blue Collar Team
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