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Rolling-Down to an ITM Strike in the Last Week of a Monthly Contract

When we roll-down our covered call trades, we generally do so to an out-of-the-money (OTM) strike to allow for share price recovery. However, in the final week of a monthly contract, if we hold a security, we will not use in the following contract month, it frequently makes sense to roll-down to an ITM strike. This will have 2 positive impacts on our trade: First, we will benefit from the time-value premium component of the ITM strike. Second, we will generate additional downside protection via the intrinsic-value component of the option without the disadvantage of risk since we have decided to eliminate this security from our portfolio for the upcoming contracts.

 

A real-life example with Materials Fund (NYSE: XLB)

  • 5/24/2021: Buy 300 x XLB at $87.18
  • 5/24/2021: STO 3 $88.00 calls at $1.44
  • 6/11/2021: BTC the $88.00 calls at $0.15 (10% guideline)
  • 6/11/2021: STO the $87.50 calls at $0.20 (roll-down #1 to an OTM strike for a small credit)
  • 6/15/2021: BTC the $87.50 calls at $0.02 (10% guideline)
  • 6/15/2021: XLB trading at $84.30
  • 6/15/2021: STO the $84.00 calls at $0.75 (roll-down #2 to an ITM strike)

 

Pros & cons of rolling-down to the ITM strike

Pros: We are generating an additional time-value profit of $0.45 per-share ($0.75 – $0.30) as well as an additional downside protection of $0.30 per-share (84.30 – $84.00).

Con: We are locking in a share loss of $3.18 ($87.18 – $84.00)

 

Broker statement showing rolling-down to the $84.00 ITM strike

 

XLB: Rolling-Down to an ITM Strike

 

How did covered call writing plus position management maneuvers mitigate the loss of $3.18 per-share?

The 3 option sales totaled a net premium of $2.39 per-share. The option debits (BTC) totaled $0.17 resulting in a net option credit of $2.22 per-share. The net loss of the XLB trades were mitigated from $3.18 per-share to $0.96 per-share.

 

Discussion

Not all our trades will be profitable. Exit strategy execution will mitigate losing trades and enhance returns on our winners. Position management is the 3rd critical required skill for successful option trading. When we roll-down in the final week of a monthly contract on shares we will not be considering for the next contract period, we can roll-down to ITM strikes which generate both time-value and intrinsic-value without the concern of risk.

 

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI 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:

Hi Alan,

First of all thank you so much for the fantastic service you provide.  After signing up for your premium service prior to the September expirations, I realized a $2800 profit in September. I had an $1100 profit in October in spite of a significant loss in CROX.  Your exit strategies make all the difference!  After trading options for over 10 years, the is a game changer; not a life changer yet but I certainly hope it will become one down the road!

Looking forward to another successful month in November!

Thanks,

Bruce

 

Upcoming event

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December 8th – 10th

Time, date, topic and registration link to follow

 

Alan speaking at a Money Show event

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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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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.

14 Responses to “Rolling-Down to an ITM Strike in the Last Week of a Monthly Contract”

  1. Calvin November 6, 2021 2:14 am #

    Dear Alan,

    Can I ask you to comment:

    8/5/21 Buy 100 NVDA @ 206.1047 Sell 1 NVDA 8/13/21 210 Call @ 2.69 1.9% ROO

    8/9/21 BTC 1 NVDA 8/13/21 210 Call @ 0.60 Sell 1 NVDA 8/20/21 206.25 Call @ 5.05 Roll out and down Credit 4.45

    8/19/21 BTC 1 NVDA 8/20/21 206.25 Call @ 0.42 Sell 1 NVDA 9/17/21 206.25 @ 5.20 Roll out Credit 4.78

    9/17/21 BTC 1 NVDA 9/17/21 206.25 Call @ 14.05 Sell 1 NVDA 10/15/21 210 @ 14.60 Roll out and up Credit 0.55

    9/23/21 NVDA Dividend $4

    10/15/21 BTC 1 NVDA 10/15/21 210 Call @ 7.55 Sell 1 NVDA 11/19/21 210 @ 13.75 Roll out Credit 6.20

    11/4/21 NVDA 298.01 NVDA 11/19/21 210 Call @ 88.85

    ?

    Thanks,
    Calvin

    • Alan Ellman November 6, 2021 7:58 am #

      Calvin,

      Let’s start with this: You have a hugely successful series of trades at this point and you should be commended for your focus on exit strategy applications. Even when we enjoy positive results, we should always ask ourselves if we could have done better.

      Despite not having share price at the time of the position management maneuvers, there are some observations and accurate calculation results we can glean from these trades.

      If share price remains above the $210.00 strike at expiration and we add all the credits and deduct the debits, a 12.89%, 107 day series of trades will be realized and this annualizes to approximately 44%… not bad.

      The one BCI rule I would encourage you to incorporate into your methodology is the earnings report rule to never have a covered call in place if there is an ER due out prior to contract expiration. That was the case on 8/18 when a positive report resulted in a share appreciation of nearly $30.00 (see the screenshot below).

      Holding the stock through the ER and then writing the call after the report passed would have been a sounder approach. There is also a report due out on 11/17 with the 11/19 call still in place.

      Keep up the great work.

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

      Alan

  2. Barry B November 6, 2021 9:54 pm #

    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 11/05/21.

    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

    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.

    Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.

    Best,

    Barry and The Blue Collar Investor Team

  3. Barry B November 7, 2021 8:48 am #

    Premium Members,

    The Weekly Report has been revised and updated. The “Weekly Column” has been updated. Look for the report dated 11/05/21-RevA.

    Best,

    Barry

  4. Donna November 7, 2021 3:53 pm #

    Dear Alan;

    In the example you gave of XLB I am unclear why “without the disadvantage of assignment” means. If XLB finishes higher or at $84 wouldn’t we be called away?.

    I would like to learn more about this exit strategy. Where can I find it?

    Thank you

    Donna

  5. Alan Ellman November 9, 2021 5:09 pm #

    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

  6. Joanna November 10, 2021 1:59 am #

    Alan,

    Can you please provide clarity on when to call it quits on the underlying? For example, when the call is automatically bought back at 10/20, exactly what criteria is used to determine if the underlying is something to retain?

    Thank you.

    Joanna

    • Alan Ellman November 10, 2021 7:33 am #

      Joanna,

      These are guidelines.

      First, a general response: When the factors that motivated us to use that security (fundamental, technical and common-sense screens) no longer exist.

      Now, more specific guidelines:

      1. The stock is significantly under-performing the S&P 500 since the trade was initiated.

      2. Impactful negative news came out after the trade was entered.

      3. A 7% or more price decline after the trade was initiated. This is the guideline we use in our BCI Calculators.

      4. For put trades, we close the short put if share price declines >3% below the out-of-the-money put strike.

      These are all guidelines.

      Alan

  7. Gidey November 11, 2021 1:59 am #

    Hi Alan,

    I am relatively a new subscriber and in the process of learning Options and enjoying it. I have a couple of questions for you regarding trade calculations I did with the Elite-Plus calculator on November 5th with NVDA.:

    On October 20th I bought NVDA for $221.47 and sold the November 19th 225 call for 7.25. On November 5th NVDA was at 311.91 and the cost to buy back the option was 87.35. I used the unwind now tab of the EP Calculator and it showed a negative time value return of -0.2%.

    Based on my understanding: The Net gain to unwind was $1034 / contract = $2072 for 2 contracts. My ROO with upside potential = $1450 + $706 = $2156 total. Hence, the total time value = $88. Based on the above, I decided to let go of my position and I was able to buy and STO another position within the month for more than $88.

    QNS:

    1. How did I do?
    2. Why is the time value shown as negative 44 per contract and negative -0.2% instead of positive 44 and (0.2%). Could you please explain?

    Thank you,

    Gidey

    • Alan Ellman November 11, 2021 6:50 am #

      Gidey,

      You did quite well… more on that soon.

      The initial time-value return (ROO) was $7.25 or 3.27% (1-month return if left through expiration). There was also 1.59% upside potential if share price moved up to the $225.00 strike and it went well past that ($311.91 on 11/5). At that point in time, the maximum 1-month return of 4.86% was looking good.

      Now, on 11/5, the cost-to-close was $87.35 per-share which breaks down to $86.91 of intrinsic-value (we get this back if we sell the shares) and $0.44 per-share of time-value.

      The “Unwind Now” tab of the Elite-Plus Calculator shows us the actual time-value cost-to-close which is $0.44 per-share or 0.2%. See the spreadsheet screenshot below.

      Okay, this explains the spreadsheet calculations now let’s get back to how you did. The initial maximum return was 3.27% + 1.59% = 4.86%. If we close on 11/5, the time-value cost-to-close is 0.2% leaving us a 16-day return of 4.66%. This annualizes to 106.3%. That’s how you did.

      Keep up the good work.

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

      Alan

      • Gidey November 11, 2021 3:13 pm #

        Thank you for your prompt response Sir! I appreciate it.

  8. Mehran November 12, 2021 3:06 am #

    Hi Alan,

    Thanks for your great teaching method. Your simple language makes it easier to understand options for this beginner.

    I made an order entry error by writing a 11/19 contract of naked put with $7.50 strike when BITF was at $5.25. Please help me with some protection.

    Thanks,
    Mehran

    • Alan Ellman November 12, 2021 7:32 am #

      Mehran,

      You’re in a winning position with this trade at this time.

      When you entered the trade, there was $2.25 intrinsic-value in the premium you received so I’m assuming a premium over $3.00. The cost-to-close the $7.50 strike today, with the stock price at $8.07, is about $1.00. The trade can be closed today (if you choose to) at a substantial profit.

      If no cation is taken and the strike remains out-of-the-money at expiration, the entire original premium will become realized profit.

      Alan

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