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Rolling-Down with a Few Hours to Expiration: A Real-Life Example with Energy Select Sector SPDR (NYSE: XLE)

The 20%/10% guidelines are essential to our covered call writing exit strategies. They represent parameters as when to buy back our short calls. A frequent inquiry I receive related to these parameters is whether to remove the 10% BTC limit orders in the last few days of a contract. The thinking is that the cost-to-close is not justified by the time-value that can be generated after the call is closed. This article will show a trade executed from one of my portfolios where I was able to roll-down with XLE (an exchange-traded fund- ETF) with only a few hours remaining until contract expiration.

 

Can we remove the 10% BTC limit order in the final day or two of a contract?

Yes, as long as we are capable of carefully monitoring our trades through expiration. If that is not possible or desirable, leave the BTC limit orders in place. We can arrange to have email or text notification if and when the short calls are closed.

 

Trade Notification Example When BTC Limit Orders are Executed

 

A real-life example with XLE

On 4/16/21, the 10% BTC threshold was automatically executed for 4 contracts of XLE $49.50 strike at $0.03. These contracts were rolled-down to the $48.50 strike at $0.14 for a net credit of $44.00. This was the 2nd roll-down for XLE in the April contract month. No BTC limit order was set as the contracts expired in a few hours and I was able to monitor through 4 PM ET.

 

Rolling-Down with XLE

 

Discussion

Exit strategy opportunities decline but still exist as we approach contract expiration. The 10% BTC limit orders should be left in place unless we can carefully monitor our trades through expiration. Preparation and taking advantage of all exit strategy opportunities are major factors in becoming elite option-sellers and maximizing our returns to the highest possible levels.

 

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:

 

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11 AM ET – 12 PM ET

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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.

24 Responses to “Rolling-Down with a Few Hours to Expiration: A Real-Life Example with Energy Select Sector SPDR (NYSE: XLE)”

  1. Ted August 28, 2021 2:11 am #

    Hi Alan,

    I realize you can’t give financial advice, but can you please share some general points or protocols we can follow to protect the downside in the event of a crash? I’m starting to get worried about market valuations in general.

    Is there a way to set stop losses on the underlying securities for which we are writing covered calls?

    – Ted

    • Alan Ellman August 28, 2021 7:40 am #

      Ted,

      Since we are in 2 positions (short call and long stock) with our covered call trades, the initial stop must be the short call. In the BCI methodology, we use the 20%/10% guidelines to set BTC limit orders after entering our covered call trades. As far as when to sell the stock we have 2 guidelines that are reasonable approaches:

      1. 7% price decline from when the trade was initially executed.

      2. Significant under-performance compared to S&P 500.

      Ideas for defensive positions if and when there is market
      concern :

      1. Use deep ITM call options.

      2. Use protective put (collar).

      3. Use deep OTM puts to enter a covered call trade (PCP or wheel strategy).

      4. Use low volatility underlying securities.

      5. Use implied volatility to determine low end of trading range for strike selection.

      6. Use the 10-Delta put strategy to create high-probability successful trades.

      Alan

      • Ted August 28, 2021 9:19 am #

        Wow. Truly appreciated!

        – Ted

  2. Dave August 28, 2021 2:56 am #

    Alan & Barry,

    I loved the recent webinar on VOLQ and Delta Put Selling. I have a couple of questions if you would consider entertaining them.
    1. Given that stock selection, I would imagine, is still critical, how do you screen for stocks that are high quality and have the 10 delta parameter?
    a. I can run a stock screen in Etrade that gives me a list of these types of Put options but it still producing 100+ stocks to select from.
    b. I was considering utilizing the various lists that you all provide (ETF, Weekly selections, DOW, and High Div Yields) to see it can narrow the field on which I would be searching.
    2. How large of a portfolio can one invest in these strategies? If one had a small 7 figure portfolio to invest in these methods does it require a lot of additional trade management? Or does one simply need to find the high volume stocks/etf’s so a 30 – 50 contract trade wouldn’t get scrutinized?
    a. I’m not sure if I’m asking my question clearly. I guess I’m trying to say if a particular contract is typically trading 100 or 200 of volume per day, and one made a transaction for 30 – 50 contracts would that create pricing issue?
    b. Put another way, if one were to put $100K into 15 to 20 trades does that feel manageable?

    Thanks in advance if you can answer. I enjoy your service.

    Dave

    • Alan Ellman August 28, 2021 7:50 am #

      Dave,

      I use the same watch lists we provide to our premium members in all my option portfolios… no other resources.

      The strategies I discussed during the recent webinar are ultra-conservative defensive approaches to option-selling and each investor must make personal determinations as to what percentage of their portfolio(s) should be dedicated to defensive strategies. I am currently favoring more bullish strategies but do have smaller portfolios dedicated specifically to these ultra- low-risk approaches.

      For a portfolio of $100k, 5-7 underlyings are reasonable and manageable for most retail investors. For portfolios > $300k, 15 – 20 underlyings are reasonable as long as the investor can manage that amount. Start smaller and work up until we find the amount appropriate for ourselves. For me, it’s 20 – 25 positions and about 100 options active at any point in time. This will vary from investor to investor.

      Alan

  3. Saadi August 28, 2021 3:05 am #

    Hi Alan,

    I trust you are keeping well. I had a question in relation to “collar” strategy for “LABU” (Direxion Daily S&P Biotech Bull 3X Shares ETF). I occasionally swing trade with Labu, however with its aggressive volatility on daily basis I want to sell weekly calls but would like to incorporate collar based on below set up. I prefer to sell weekly calls but purchase a monthly put expiring on major monthly expiry, ofcourse the put is for protection incase of major correction or crash.

    Buy: Labu @ $60.50
    Sell Sept 3rd Call @ $63.50: Premium $1.85
    Buy Sept 17th Put @ $59.00: Premium $4.85

    The goal is to be able to sell weekly calls atleast 3 times during the life of the monthly put. I understand the put has a higher cost but gives me the protection until Sept 17th and the ability to sell calls multiple times unless it runs up. In that case I still make minimal profit of approximately 0.05 cents plus any $ value left in the put. I understand if the put goes down I have limited loss but unsure of what that loss may look like.

    I wanted your thoughts on this set up and what you would do differently?

    Thank You,

    Saadi,CPA

  4. Alan Ellman August 28, 2021 8:01 am #

    Saadi,

    When using longer-term put options for our collar trades, we must convert the premium to the call contract time-frame in order to run the calculations.

    In the proposed trade, we have a 1-week call and a 3-week put, so we divided the put premium by 3, resulting in a put debit of $1.62 per-share-per-week.

    Next we enter the stats into the BCI Collar Calculator (see screenshot). This will show us:

    1. Initial and annualized time-value return percentiles.

    2. Maximum return percentiles.

    3. Maximum loss percentiles

    In our BCI methodology we avoid leveraged ETFs but by having a protective put in place, we are mitigating potential substantial losses.

    Alan

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

    • Saadi August 28, 2021 4:16 pm #

      Thank you for your input Alan. The calculator is a great tool.

      Regards,

      Saadi

  5. Roni August 28, 2021 11:58 am #

    Alan,

    I watched the webinar yesterday evening and was amazed at the content.

    Your profound knowledge, ingenuity to discover and develop strategies, ability to explain them clearly, kindness, and willingness to share them with us simple mortals, set you apart from any other person in the business.

    Thank you again and again – Roni

    • Alan Ellman August 28, 2021 4:18 pm #

      Roni,

      You made my day… much appreciated.

      Alan

  6. Barry B August 28, 2021 11:38 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 08/27/21.

    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

  7. Saadi August 29, 2021 8:54 am #

    Quick questions Alan. Even in a case of collar or married out when should one exercise the “put” option vs outright selling the put option in open market.

    Is there a calculator that can help with this?

    Thanks,

    Saadi

    • Alan Ellman August 29, 2021 11:26 am #

      Saadi,

      In our collar trades, the short call is the active management leg. The long put is there as an insurance policy if share price drops substantially.

      Determining whether the long put should be exercised or sold will depend on our decision to sell or retain the underlying security.

      Here is a link to our BCI Collar Calculator:

      https://thebluecollarinvestor.com/minimembership/collar-calculator/

      Alan

  8. William Miller August 29, 2021 5:52 pm #

    Alan,

    When using the ultra-low-risk Weekly 10-Delta Put-Selling strategy do you adjust the 3% guideline exit strategy?

    Thank you.

    William

    • Alan Ellman August 30, 2021 7:30 am #

      William,

      Yes. The 3% guideline is based on a situation where our initial time-value return goal range is 2% – 4% per month. Using the Weekly 10-Delta Put-Selling strategy would move the guideline to slightly below the put strike.

      I manage these slightly differently. I only sell these ultra low-risk puts on securities I wouldn’t mind owning in my portfolios. If exercised, I will either retain those shares for the longer term, write covered calls on them or sell the shares if share price accelerates substantially the following contract week.

      Here is a link to an article I published on this management topic:

      https://www.thebluecollarinvestor.com/selling-deep-otm-cash-secured-puts-with-exit-strategy-enhancements/

      Alan

  9. Robert Glenn August 30, 2021 5:34 pm #

    You wrote in the past about a diagonal collar strategy using long-term puts. At first glance it seems like a strategy that might conform well to my stubborn hold mentality.
    I regularly sell calls against my holdings, most of which are from last year. I’ve had to suffer numerous missed gap ups along with gap-downs along the way but have managed to significantly lower my cost-basis for all. Unfortunately, it does not protect my overall portfolio value when the stocks drop significantly from their rallies.

    Perhaps ‘putting a collar’ on the shares down the calendar if they gap up would be prudent. Selecting a low delta strike above my cost-basis would establish a ‘discounted’ floor from which I can be more aggressive with writing calls; I can sell short term ATM and OTM contracts and rebuy and possibly buy-write immediately if the trade is unwound or if the shares are assigned. To avoid significant theta decay, the puts can maybe get rolled at optimal time or price points.

    The caveats would appear to be the cost and premium decay of the put, potential gain misses from the call strikes along with potential wash-sale rule run-ins, but the brokerage appears to recalculate cost-basis continually so it *shouldn’t* be a problem.
    Can you see other pitfalls or considerations that I’m missing for such a strategy? Continuous gratitude for all that you do-Rob

    • Alan Ellman August 31, 2021 5:21 am #

      Rob,

      The key to this approach is the long-term commitment to the underlyings. Given that specific scenario, the strategy is reasonable. I would give strong consideration to:

      1. Basing the put strike on current market value and strategy return goal range.

      2. Avoid writing calls through earnings reports, leaving the protective put in place. Weeklys, if available, will be helpful here.

      3. Rolling put strikes up may be necessary for proper protection but this would add to cost-basis.

      Alan

  10. Wayne August 31, 2021 3:23 am #

    Hello Alan,

    I took the course the other day.

    When you gave the course, the volq was 22.50.
    Today, volq was only 14.52.

    My monthly strategy fell a little short of 10% annually. It was about .8% x 12 = 9.6%.

    While this might still pass muster, let’s assume it was short even more than that. Let’s assume it was only 9%.

    Would you just refuse the trade?

    Or would you try to tweak it and sell a call a little closer to the money to get a little more time premium? By a little closer I might mean one strike or 2 strikes closer.

    I understand you might be encroaching on the one standard deviation range, but not by much. How do you play it?

    Thanks,
    Wayne

    • Alan Ellman August 31, 2021 7:01 pm #

      Wayne,

      This is an ultra-low risk strategy where the main motivation is capital preservation even if it comes at the expense of returns in low volatility environments..

      We must also compare annualized returns of 8% – 9% (as an example) to alternatives like Treasuries, CDs and money markets (get the magnifying glasses!).

      The 9% annualized return you alluded to is still an enticing result given current circumstances and will align with personal low-risk tolerances. All systems go as far as I’m concerned.

      Alan

  11. Kevin August 31, 2021 3:20 pm #

    Hi Alan,

    Do you only write cover calls only in the beginning of the option contract month ? What do you do about the companies that make the list in the 2nd and 3rd week ? Do you wait until the next month to sell cover calls or do sell the cover calls with a shorter duration contract period?

    Regards,
    Kevin

    • Alan Ellman September 1, 2021 7:57 am #

      Kevin,

      My personal preference is for Monthlys. The bulk of my trades are initiated the Monday or Tuesday after expiration Friday (3rd Friday of the calendar month).

      I do use Weeklys in some of my smaller portfolios (10-Delta Weekly Put Strategy, for example). We also have a significant percentage of BCI members who prefer Weeklys… both will work once mastering the 3-required skills.

      Also, if closing a position mid-Monthly contract, we use our most recent report for stock replacements.

      Producing our reports on a weekly basis allows our members to have up-to-date information for all trading styles.

      Alan

      • Roni September 1, 2021 3:08 pm #

        Kevin,

        On Friday, 08/20, some of my CCs went worthless, and I retained the underlying securities. Then, last week I needed to sell them to avoid ERs.
        The market improved, and therefore, two trades had gains, and one had a loss, but the result was that I ended up with $75,000.00 to reinvest.

        So, I waited for the new watch list and, on Monday 08/30, I placed three 09/17 NTM CC trades with favorable ROOs.

        Therefore, as you can see, the weekly BCI reports are fundamental for our everyday trading strategy.

        Thank you, Barry, for your hard work.

        Roni

        • Barry B September 2, 2021 9:53 am #

          Roni,

          Thank you…I appreciate your support.

          Best,

          Barry

  12. Alan Ellman September 1, 2021 5:43 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

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