Exit strategies for both covered call writing and selling cash-secured puts is one of the three required skills for maximizing investment returns. Whether we are mitigating losses, turning losses into gains or enhancing winning positions to even higher levels, we must have the capability to take advantage of all position management opportunities. In this week’s article I will highlight a rolling down strategy I used in my personal portfolio for the November contracts for Cal-Maine Foods, Inc. (CALM).
- CALM trading at $60.02
- Sell-to-open the $60.00 at $3.75
2: 10/26/2015 and 10/27/2015
- Ex-dividend date captures a premium of $0.98 per share (10/26)
- Share price decline is partially due to ex-date
- Buy-to-close the $60.00 call at $0.80 adhering to our 20% guideline
- Initial goal is to “hit a double”
- Share price does not accelerate adequately to “hit a double” so we move to plan B…rolling down
- Roll down to the $57.50 strike generating a premium of $1.40
Price chart for the November $60.00 call
Note the following:
1: $60.00 call sold at $3.75
2: $60.00 closed at $0.80
3: Option price does not accelerate enough to justify “hitting a double”
Price chart for the November $57.50 call
Rolling down ten days prior to contract expiration allowed us to generate a higher premium than the cost-to-close ($1.40 versus $0.80) and afford us some downside protection. This is an excellent example of how we should always be prepared with a secondary exit strategy plan (rolling down) if our initial plan (“hitting a double”) cannot be implemented.
Final trade results (trade commissions omitted…use an online discount broker)
Unrealized share loss: $60.02 – $56.77 = (-)3.25
Option credits: $3.75 + $1.40 = $5.15
Option debit: (-) $0.80
Dividend capture: $0.98
Net position after contract expiration: + $2.08 per share or $208.00 per contract
After entering our option-selling trades we must immediately enter into “position management mode” Most of the time exit strategy execution will not be necessary but when it is, it is imperative we take advantage of these opportunities. In the case of CALM for the November contracts, we used covered call writing, our 20% guideline and then the rolling down strategy to turn a share loss of $3.25 per share into a net position gain of $2.08 per share. Mastering all three of the required skills (stock selection, option selection and position management) is what sets Blue Collar Investors apart from all the other option-sellers.
Blue Collar Scholar Competition: Great prizes and a worthy charity
HURRY: CONTEST DEADLINE IS NOVEMBER 30th
Contest results to date
% bearish: 12.8%
% neutral: 22.3%
% bullish: 64.9%
Sample Commentary from Vincent:
“The Fed will not raise interest rates in December. Retail sales will be flat or rise slightly. The dollar will rise in value relative to the Euro and other major global currencies”.
Thanks for the great response we’ve had to this event. Keep those entry forms coming. We allow two per email address and the deadline is November 30th.
Next live appearance
Saturday January 23rd, 2016: Kansas City, Missouri
Details to follow
I am in discussion with other investment groups throughout the country and expect my 2016 calendar to be fully booked in the very near future. Thanks to all of our members for making this possible.
Global financial markets rose surprisingly unaffected by the tragic events in Paris. Investors seem to be accepting signs of a Fed interest rate hike in December. US equity markets advanced strongly and the Chicago Board Options Exchange Volatility Index (VIX) fell below 16 from 20 last week. This week’s reports:
- US Federal Reserve officials focused on a possible December interest rate hike at their October policy meeting, according to minutes released Wednesday. Financial markets reacted favorably thus far
- The US Consumer Price Index (CPI) rose by 0.2% in October. Core prices, excluding food and energy, also gained 0.2%. Core prices were up 1.9% from a year ago
- Real average hourly earnings climbed 0.2% in October and were up 2.4% from October, 2014.
- US new-home construction declined by 11% in October
- However, permits for new construction, a leading indicator, rose 4.1% to a 1.15 million annual rate
- Permits for single-family homes increased 2.4% to their highest level since 2007
- Homebuilder confidence fell slightly in November after reaching a 10-year high in October
- US industrial production fell by 0.2% in October, according to the Fed, and capacity utilization fell slightly
- Factory output increased for the first time in three months, with a 0.4% increase
- Continuing claims fell 2,000 to 2.18 million for the week ending November 7th
For the week, the S&P 500 rose by 3.27% for a year to date return of 1.47%.
IBD: Confirmed uptrend
GMI: 5/6- Buy signal since market close of October 19, 2015
BCI: Cautiously bullish using an equal number of in-the-money and out-of-the-money strikes. I remain fully invested using 50% in-the-money strikes until the Fed makes its position on interest rates known and evaluating the ensuing market reaction. I believe that most institutional investors have factored in a 25 basis point rate hike with moderating guidance from the December Fed meeting.
Wishing you the best in investing,
Alan ([email protected])