Exit strategy implementation is a critical aspect of successful covered call writing and put-selling strategies. Over the years, we have discussed rolling options as an integral part of our position management arsenal. This article will detail a new rolling strategy… rolling-in.
Rolling definitions
- Rolling-up: Close out options at a lower strike and open options at a higher strike
- Rolling-down: Closing out options at one strike price and opening options at a lower strike price
- Rolling-out (forward): Closing out options at a near-term expiration and opening at the same strike at a later date. Can be combined with rolling-up or rolling-down.
- Rolling-in: Closing out options at a current-term expiration and opening at the same strike at an earlier date
When to consider rolling-in
Avoid risky corporate or market events
- Earnings reports
- Fed announcement
- FDA product announcement
- Corporate news conference
- Political events
Personal business commitments: unavailable to monitor trades
- Family vacation
- Business trip
- Hospital stays/medical reasons
Must liquidate position by a specific date
- Cash needed for other obligations
Real-life example with Etsy, Inc. (NASDAQ: ETSY)
- 2/15/2021: Buy 100 x ETSY at $233.86
- 2/15/2021: STO 1 x 3/19, 2021 $240.00 call at $16.90
- 2/22/2021: BTC 1 x 3/19/2021 $240.00 call at $17.60
- 2/22/2021: STO 1 x 3/12/2021 $240.00 call at $15.50
- 3/12/2021: ETSY trading at $242.11 and exercise is allowed as shares are sold at the $240.00 strike
Initial trade entries
ETSY: Initial Trade Entries
Initial trade returns
ETSY: Initial Trade Returns
The spreadsheet shows a 33-day initial return on the option (ROO) of 7.23% with an additional upside potential of 2.63%, should share price rise to the $240.00 OTM strike by expiration. The total potential maximum return is 9.86%.
Trade adjustment entries
ETSY: Trade Adjustment Entries
The 3/19/2021 expiration is rolled-in to the 3/12/2021 expiration at a net option debit of $$2.10 ($17.60 – $15.50).
Final calculations
ETSY: Final Adjusted Calculations
The spreadsheet shows a final combined stock and option return of 8.95%, slightly lower than the initial maximum return of 9.86%. Keep in mind that the cash involved the trade will have an additional week to re-invest to mitigate the minor decrease in the maximum return. However, the exit strategy avoided a potential risky event in the final week of the March contracts.
Discussion
Rolling-in is a new and additional position management technique that can be utilized to avoid risky evets as well as allow for better management and needs. The cost to roll-in will typically be low or may result in a higher annualized return but will always lower the overall risk inherent in our portfolio positions.
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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:
Hi Alan,
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Upcoming event
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Covered Call Writing: Multiple Applications Based on Current Market Conditions
Monday, October 31, 2022, at 4:30 pm – 6:30 pm EDT
Selling Cash-Secured Puts: Detailed Start-to-Finish Six-Part Program*
Masters Class
Comprehensive Course on Selling Cash-Secured Puts
Detailed start-to-finish 6-part program
This presentation will provide all the information, with real-life examples, necessary to master the strategy of selling cash-secured puts. The program is divided into 6 sections:
- Section I:
- Option basics
- Section II
- Traditional put-selling
- Section III
- PCP (wheel) strategy
- Section IV
- Buy a stock at a discount instead of a limit order
- Section V
- Ultra-low-risk put/Delta strategy
- Section VI
- Ultra-low-risk put/Implied volatility strategy
This presentation was developed to benefit both beginner and experienced option traders and will provide all the information needed to initiate the strategy and elevate returns to the highest possible levels.
45-minute presentation
Covered Call Writing: Multiple Applications Based on Current Market Conditions
Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)
Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:
- Normal to bull markets
- Bear and volatile markets
- Low interest-rate environments
A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.
Registration link and more details to follow.
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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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Good morning Alan.
I have a covered call question. What are some factors you consider when deciding weather to roll down or wait and try to hit a double?
It seems that I’m always rolling down on stocks I would have been better off waiting to hit a double and I’m often caught waiting to hit a double when I would have been more profitable had I rolled down.
Any advice?
Thanks,
Antonio
Antonio,
Yes, in the BCI methodology, we have specific guidelines for these situations. Note that we call these “guidelines” so that it gives the investor some flexibility to veer slightly. These guidelines are based on time to expiration.
There is nobody, and I mean nobody, who can accurately predict the short-term movement of a stock or the market with 100% accuracy. There too many factors impacting the global economy.
That said, we can create parameters that will dramatically throw the odds in our favor. This means that by adhering to these protocols, we will turn out many more winning trades than losing ones.
Once the initial short calls are closed using the 20%/10% guidelines, we favor a “hitting a double” approach in the 1st 2 weeks of a 4-week contract and in the first 3 weeks of a 5-week contract. We favor rolling-down in the last 2 weeks of a contract or with weekly contracts.
In the 1st half of a monthly contract, we are more aggressive because the time-value component of the premiums has declined minimally; whereas in the 2nd half of a contract, the opportunity to generate time-value premium has eroded due to Theta (time-value erosion).
These are sound foundational principles to adhere to in most market conditions.
Alan
HI ALAN,
I’M A SUBSCRIBER AND I HAVE A QUESTION.
ON JULY 22ND, I DID A PMCC ON GOOG. I BOUGHT THE 9/15/2023 60 CALL AS MY LEAP.
I SOLD THE 8/19/2022 115 CALL AS MY COVERED CALL FOR $2.35.
TODAY THE COVERED CALL IS IN THE MONEY, WITH THE STOCK BEING AT $116.2
IN MAKING AN ADJUSTMENT TODAY, WHAT WOULD YOU CONSIDER A GOOD MOVE?
THANKS,
SAM
Sam,
What was the price of GOOG when you entered the trade?
How much did you pay for the LEAPS?
I can give a preliminary assessment: With the $115.00 strike only slightly in-the-money and expiration 3 weeks away, there is a high probability that no action is needed at this time.
When I receive the additional information, I’ll follow up with educational guidance.
Alan
HI ALAN,
PRICE OF GOOG WHEN I ENTERED TRADE ; 110.80
PRICE OF LEAPS ; 52.60
STRIKE PRICE OF LEAPS ; 60
SOLD AUG(19) 15 COVERED CALL FOR ; 2.35
ENTRY DATE for TRADE ; 7/22
THANKS FOR ASSISTANCE,
SAM
Sam,
You set up a rational initial PMCC trade. Referring to the screenshot below, the purple circled areas show a net credit of $4.75 per-share should both legs of the trade be closed due to significant share appreciation. The “YES” represents a go-signal for the trade.
The red arrows reflect an initial time-value return of 4.47%, 156.73% annualized and the blue arrow shows an additional 7.98% of upside potential from current market value up to the $115.00 short call strike.
This brings us to your question of exit strategy implementation. The $115.00 strike is in-the-money by $1.60 with GOOG priced at $116.60. The “ask” price on the option is $3.90 (I looked it up) so the time-value cost-to-close is $2.30 ($3.90 – $1.60), almost the same as the initial $2.35 originally generated.
With expiration Friday 3 weeks away (8/19/2022), we can continue to monitor the trade without returning nearly all of the original premium.
There are times when the best action is no action at all. This could change as we continue to monitor our trades.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
THANKS,
SAM
Alan,
I purchased your “Exit Strategies” ebook and I am going through it now.
It appears to me in chapter 5, pg 23 that the numbers in the XBI example are incorrect/or have a typo error.
You started out with a credit of $1.50, then bought it back for $.15…(net $1.35) on the first trip. Then you sold another call for $.55. At expiration you would have had a net credit of $1.90. ($1.50 – $.15 + $.55) This is not what is reflected at the top of page 23. Am I missing something?
Please help me understand this.
R/ Brian
Brian,
Glad to help.
You are 100% correct that the net option credit after exit strategy implementation is $1.90 per-share. However, the stats in the book are correct. Here’s why …
The red arrows in the screenshot below reflect the net option credit you alluded to, $1.90 per-share or 2.11%. Note that the blue arrows show a net unrealized share price credit (after exit strategy execution) of an additional $1.44 per-share or 1.60%.
The purple circled area is then accurate reflecting a net (option + share) credit of $334.00 per-contract [($1.90 + $1.44) x 100].
I hope you’re enjoying and benefitting from my latest book.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
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 07/29/22.
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
Please note that the Weekly Report for next week will be using the closing prices for Thursday instead of the usual Friday closing prices.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Hi Alan,
I have a question for you.
Today, I used 7% stock exit guideline but I found out that under “exit strategy selected “ you don’t have the option to bay back the CAL and sell the stock.
What I supposed to use as a strategy.
Thanks,
Nick
Nick,
From the exit strategy dropdown, use the “mid-contract unwind” (“MCU”) exit strategy.
This where we close the short call 1st and then sell the stock.
It is generally used when share price accelerates exponentially and the time-value cost-to-close approaches zero but can be applied to all scenarios when both legs of the trade are closed prior to contract expiration.
When I use it, I also enter a note in the “Trade Journal” section (far right), stating that I employed the 7% guideline. This entry is optional but does allow use to review our trades with the thought process and rules and guidelines utilized.
Alan
Alan,
Thanks for the quick response.
I got most of your books but I still have an unanswered question.
Considering that both cashed secure puts and covered calls are bullish strategies, when you choose one or another. As buying power there is not much difference. Or is about what the overall market is doing?
Thanks again for your help,
Nick
Nick,
I would agree that covered call writing and selling cash-secured puts are strategies that have the greatest success in bull markets. However, I would not classify them as bull-market-only strategies.
This is because we can craft the strategies to all market conditions by the way we set up our trades. This involves mastering the 3-required skills of stock selection, option selection and position management.
Now, let’s get to which one to favor. Both are wonderful cash-generating low-risk strategies. It’s like deciding between banana splits and 7-layer chocolate cake for dessert.
That said, I favor covered call writing in neutral to bull markets so I can take advantage of writing out-of-the-money calls and set up the potential for 2 income streams per trade. In bear and volatile markets, I favor selling deeper OTM puts and combining it with covered call writing for the PCP (put-call-put or wheel) strategy. I have absolutely no issue with BCI members who prefer cash-secured puts 100% of the time.
Bottom line: Both are wonderful strategies for most retail investors with covered call writing slightly more aggressive and selling cash-secured puts offering a more defensive posture. Here is a link to an article I published detailing PCP:
https://www.thebluecollarinvestor.com/using-the-put-call-put-pcp-strategy-to-create-downside-protection-on-steroids/
Alan
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.
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Alan and the BCI team
To our BCI community:
Thanks so much for your amazing support for my latest book, The Blue Collar Investor’s Guide to Exit Strategies for Covered Call Writing & Selling Cash-Secured Puts.
The 1st printing is nearly sold out and I have already ordered several hundred more copies. All orders except for those placed today, have been shipped.
I hope you enjoy and benefit from my 8th book.
Alan & the BCI Team
Hi Alan,
I was wondering if you point me to some good articles around strategies for PCP.
I like the idea of getting what you call getting downside protection with steroids, so with that in mind, I have a few questions, that maybe one of your articles/videos might answer.
1) When you sell a put, do you typically want to be assigned, so you can then turn around and sell an immediate call?
2) I think I read/heard you like to sell puts, one or 2 strikes away from near money strikes, is that correct?
3) Do you normally sell your puts near support (bollinger, trend line, etc), or does it matter?
4) After being assigned, do you wait for the stock to rise before selling a call?
Thanks,
Chris
Chris,
My responses:
1. PCP results in 2 possible outcomes: Generating cash-flow or buying a stock at a discount. The 1st outcome is preferable, but the 2nd is acceptable since we can continue to generate cash flow by writing covered call options.
2. The out-of-the-money put strike is based on our initial time-value return goal range. If our goal is 2% – 4% per-month, we select the OTM strike that will provide initial returns that fall into this range.
3. The underlyings we select must have sound technical charts. We use exponential moving averages, MACD histogram, the stochastic oscillator and volume. There is no single indicator that we hang our hats on when it comes to stock selection. I have no issue with members who use other indicators as long as they include trend and momentum.
4. After being assigned, we write the call or sell the put at the start of the next contract cycle. Waiting can result in share price appreciation (a positive), share price decline (a negative) or no change in share price (another negative because Theta is eroding the time-value of our premiums). 2 out of 3 scenarios work against us so waiting or attempting to time the market is not in our best interest.
Here is a link to 1 article I published on an ultra-low-risk approach to PCP:
https://www.thebluecollarinvestor.com/reversing-delta-with-the-pcp-strategy-a-real-life-example-with-etsy-inc-nasdaq-etsy/
Alan