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Rolling Out and Up to ITM and OTM strikes: A Real-Life Example with Invesco QQQ Trust (Nasdaq: QQQ) + Trade Management Calculator Coupon Expires 5/15/2022

When our covered call writing strikes are expiring in-the-money (ITM), and we want to retain the underlying shares for the next contract period, we can roll the option forward. This involves buying back the current short call(s) and selling the next month (or week etc.) strike. If we roll-out, we always roll-out to an ITM strike because if a strike is ITM at the time of the roll, it will still be ITM for the next contract, as well, at the time of the exit strategy execution. However, if we roll out-and-up, the later-date strike can be ITM, ATM or OTM. This article will highlight such scenarios using QQQ.

 

Real-life trade with QQQ as of 11/20/2021

  • 10/19/2021: Buy 100 x QQQ at $374.92
  • 10/19/2021: Sell-to-open (STO) the 11/19/2021 $380.00 call at $3.74
  • 11/18/2021: QQQ trading at $397.15
  • 11/18/2021: Cost-to-close (CTC) the 11/19/2021 $380.00 call is $17.31
  • 11/18/2021: Evaluating rolling-out and rolling-out-and-up

 

Option-chain information on 11/18/2021

  • CTC the near-month $380.00 call: $17.31
  • STO the 12/17/2021 $380.00 call: $20.82 (rolling-out)
  • STO the 12/17/2021 $395.00 call: $9.83 (rolling out-and-up to an ITM strike)
  • STO the 12/17/2021 $400.00 call: $7.10 (rolling out-and-up to an OTM strike)

 

Entering the information into the “What Now” tab of the Trade Management Calculator

 

QQQ Rolling Calculations Information Entered

Information is entered for rolling out to the same $380.00 strike and out-and-up to the ITM $395.00 strike.

 

Rolling final calculations for the $380.00 and $395.00 strikes

 

QQQ: Final Calculations for the $380.00 and $395.00 Strikes

 

Rolling-out generated a 1-month initial time-value return of 0.92% with a 4.30% downside protection of that time-value profit; while rolling out-and-up to the ITM $395.00 strike generated an initial 1-month time-value return of 1.98% with 0.50% downside protection of that time-value profit.

 

Rolling final calculations for the $400.00 OTM strike

QQQ: Rolling Out-And-Up to an OTM Strike

 

Rolling out-and-up to the $400.00 OTM strike generated a 1-month initial time-value profit of 1.83% with the possibility of a maximum 1-month return of 2.58% if share price rises to the OTM $400.00 strike by expiration.

 

Discussion

Rolling our ITM covered call strikes presents several opportunities. We can roll-out to the same strike or roll-out-and-up to ITM, ATM or OTM strikes. We can use the “What Now” tab of the BCI Calculators to facilitate these calculations and, therefore, our trading decisions. In our new Trade Management Calculator, this tab is located as a worksheet on the bottom of the spreadsheet.

 

The BCI Trade Management Calculator Package is now available/ Discount expires Sunday 5/15/2022 midnight

After a year and a half of development and -testing our 1-of-a-kind Trade Management Calculator is here. We have packaged it with our new book, The Blue Collar Investor’s Guide to Exit Strategies for Covered Call Writing and Selling .

We are also offering the opportunity to combine this package with our BCI Package and offering early-order discount coupons for both:

Information on the TMC Package:

https://thebluecollarinvestor.com/minimembership/bci-trade-management-system/

 

Information on the BCI Package:

https://thebluecollarinvestor.com/minimembership/bci-investor-program/

 

Early-order discount coupons (expires 5/15/2022):

TMC Package: tmc50 ($50.00 off)

Combined TMC/BCI: superdeal100 ($100.00 off)

We hope you enjoy, and most importantly, benefit from our new products.

 

Your generous testimonials

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

I came across your videos on YouTube a few days ago and, through your teachings, started my covered call education and journey. Let me say that this is, by far, the best content I’ve come across in my quest to understand this strategy. Thank you for your work and content.

Tanya

 

Upcoming events

1.Money Show Canada Virtual Event

Analyzing a 1-Month Covered Call Writing Portfolio from Start-To-Finish

A real-life example with a $100k Select Sector SPDR portfolio 

May 24, 2022

10:40 AM ET – 11:10 AM ET

Covered call writing is a low-risk strategy that generates weekly or monthly cash flow. This presentation will demonstrate how to implement this strategy using a database of only 11 for a 1-month option contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s portfolios with screenshots verifying each trade. A final monthly contract result compared to the performance of the will be calculated.

Topics included in this webinar:

  • What are the Select Sector SPDRs?
  • How to establish a covered call writing portfolio
  • What is the role of diversification?
  • What is the role of cash allocation?
  • Calculating initial returns
  • Analyzing each trade in the monthly contract
  • Final results
  • Next steps

Register for free here

 

2. Mad Hedge Investor Summit

June 15th, 2022

12 PM ET – 1 PM ET

Topic & registration link to follow

 

3.American Association of Individual Investors: Greensboro North Carolina Chapter

Saturday June 18, 2022

10 AM – 12 PM ET

The PCP (put-call-put or wheel) Strategy

Using both covered call writing and selling cash-secured in a multi-tiered low-risk strategy where we either generate cash-flow or buy a stock at a discount.

Zoom webinar for Chapter members

 

4. Money Show Orlando live event

October 30th – November 1st, 2022

OMNI ORLANDO RESORT AT CHAMPIONSGATE

Visit Alan, Barry and members of the BCI at Booth # 415

Details 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.

13 Responses to “Rolling Out and Up to ITM and OTM strikes: A Real-Life Example with Invesco QQQ Trust (Nasdaq: QQQ) + Trade Management Calculator Coupon Expires 5/15/2022”

  1. Barry B May 14, 2022 11:08 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 05/13/22.

    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

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  2. Michelle May 15, 2022 1:26 am
    #

    Alan,

    Just loving the new TMC calculator.

    Quick question. If we roll out to the next month, do we need to enter anything in the capital adjustment section? I think no because it is a new month and a new calculation but wanted to check with you.

    Thanks for this new tool.

    Michelle

    • Alan Ellman May 15, 2022 7:03 am
      #

      Michelle,

      Thanks for generous comments.

      You are correct. No entry in the capital adjustment section when rolling-out. The near month results are finalized and now we are starting a new contract cycle. We enter our cost-basis as the in-the-money strike as this is the value of our shares at the time of the roll.

      The protocol is discussed in all our rolling-out chapters of my new book as well as in Appendix IV, pages 164 – 167.

      Alan

  3. Butch May 16, 2022 9:07 am
    #

    Hi Alan! Another great post, thank you. However, you are assuming that QQQ does in fact reach your new strike. What if it doesn’t? That 395 strike only has “bought-up” value if QQQ goes above 395. If it doesn’t, the trade is down the 748 paid to roll. In this market, that is what has been happening for six weeks now. In my experience (20 plus years), you cannot continue to roll out indefinitely when underwater on calls. That only works if the stock recovers quickly enough. This is the only circumstance that I don’t know how to manage my way out of. Would love to know what to do when the stock remains underwater for weeks and weeks. Sell at the money to maximize premium or sell far out to minimize assignment? In fact, I just posted you a letter with more details about this very question. Thanks for your time!

    • Alan Ellman May 16, 2022 12:01 pm
      #

      Butch,

      This article exemplifies a scenario where the underlying (QQQ) is over-performing. At the time of the potential “roll”, QQQ is trading at $397.15, above the new $395.00 strike.

      You correctly point out that there is an option debit when rolling out-and-up in this case. However, most of that debit is due to the intrinsic-value cost-to-close (amount the old strike is lower than current market value). Let’s break that down:

      CTC = $17.31 = $17.15 (intrinsic-value) + $0.16 (time-value)

      Our time-value cost-to-close is only $0.16 per-share. Our share value moves from our contract obligation to sell at $380.00 to the now ITM $395.00 strike or an unrealized appreciation of $15.00 per-share.

      This unrealized share credit along with the option premium results in the calculations stated in the article.

      This article is based on the premise stated in the first sentence: The strike is expiring ITM and we want to retain the shares for the next contract cycle.

      Your inquiry seems more focused on a declining security. In these cases, we close the short calls using our 20%/10% guidelines and the focus on the exit strategy arsenal available for these scenarios (rolling-down as 1 example).

      Alan

  4. Manjit May 17, 2022 12:21 am
    #

    Hi Alan..

    I have often :heard you say that one of the strategies to work around upcoming Ex Div date is to ” Selling 2-month options to avoid the contract month of the ex-date” .

    Say I am looking at a stock BCI that has an ex div date June 15th (2 days before June cycle). And there is no weekly on this stock.

    So per your suggestion I look for july and say the Premium is $50/contract (july expiry) but the Dividend is $70.. How will my skipping June and going to July help in this case??

    Manjit

    • Alan Ellman May 17, 2022 6:36 am
      #

      Manjit,

      The most likely day for early exercise due to an ex-date, in this case, is June 14th. The July contracts expire on July 15th. Let’s say the time-value component of the option premium drops to $0.30 by June 14th. The net benefit is $0.40 per-share.

      I have always stated that early exercise is possible but rare. It is usually the result of investor error and that applies here as well. Here are the reasons why early exercise is unlikely in this situation:

      1. The call buyer is controlling the shares for another month and will then have to give up that control to generate an additional $40.00 per-contract.

      2. The call buyer will have to buy the shares at the strike price and take on additional capital risk.

      3. Share value will decline by the dividend amount on the ex-date. Investors feel that share value will come back and that may or may not be true.

      4. Call buyers want to be directionally correct and become call sellers and generate a profit. They, generally, do not want to be share owners.

      5. If the strike is out-of-the-money, there will be an unrealized loss on the stock side.

      6. The cash used to buy the shares can be left in an interest-bearing account until the July contracts are expiring, if exercise is part of the plan.

      Early exercise is extremely rare. When it occurs, it will be on the day prior to the ex-date when the strike is ITM, the time-value component of the option is less than the future dividend distribution and the ex-date is close to expiration Friday. Even with these conditions early exercise remains rare but possible.

      Alan

  5. JP May 17, 2022 5:08 am
    #

    Hello, Alan.

    In selling Puts you advocate using a Delta of around (-) 10 and this seems to work out well for safety w/ some return.

    Can I also use Delta (probably a +) in selling a covered call and what would the comparable figure to the -10 on the put so as to have the same opportunity of not getting it assigned while generating some $$$ on a stock I own?

    Thanks as always,

    JP

    • Alan Ellman May 18, 2022 5:49 am
      #

      JP,

      Absolutely. Using a call with a Delta of 10 is quite reasonable when portfolio overwriting, and our goals are to generate modest premium while having a high probability of retaining the shares without the need for exit strategy intervention.

      We can also use implied volatility to determine an 84% probability expected trading range for a specific contract expiration:

      [(Stock price) x (IV of a near-the-money strike) x Square root of (Days to expiration/365)]

      This will result in an IV for that specific contract and the trading range is that % higher and lower than current market value.

      See the Expected Trading Range Calculator we developed in the “resources/downloads” section of the premium member site (right side- scroll down to “E”).

      Excellent observation.

      Alan

  6. Alan Ellman May 17, 2022 9:25 am
    #

    Premium members,

    The new Blue Chip (Dow 30) Report for the June 2022 contracts has been uploaded to your member site.

    Look in the “resources/downloads” section (right side) and scroll down to “B”

    Alan & the BCI team

  7. Jeff May 17, 2022 1:00 pm
    #

    Hi Alan,

    See trades for WBA for the new calculator:

    On the calculator, I selected Buy Back Option, Keep Stock on 4/29 entries in red.

    After the next buy of 100 shares, do I change the exit strategy to incorporate the new trades after 4/29.

    How would you make the next entries and are you supposed to ever change trade adjustment reasons?

    Could you also make capital adjustment entries?

    Thanks for you insight

    Jeff

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

    • Alan Ellman May 18, 2022 6:24 am
      #

      Jeff,

      There is quite a bit of educational value inherent in your questions. I will be creating a future article or video (or both) to provide a detailed analysis but I’m happy to furnish an overview in this venue (see screenshot below):

      1. The 4/29 covered call trade (let’s call this CC2) is separate from the 4/25 – 4/27 covered call trade (CC1) and entered on a separate line of the TMC spreadsheet. That 2nd trade has no adjustments at this time and the final outcome is yet to be determined.

      2. The exit strategy employed for CC1 is “hitting a double” and entered as such. Note that the cost-to-close was 46%, way too high, and actually resulted in a small debit ($0.01). Consider adhering to our 20%/120% guidelines.

      3. I set up a hypothetical 2nd CC1 trade (after “hitting a double” on row 3 of the top image where we rolled-down to the $45.00 strike using actual option-chain data. The BTC was $0.52 and the STO was $1.25, resulting in a net credit of $0.73. For this 3rd trade, we will need a capital adjustment because the capital invested in this 3rd trade is the same as the capital invested in CC1.

      4. Check the bottom of the screenshot where the calculator will pick up a duplicate $8,860.00 for capital invested. In our capital adjustment section, place a -$8,860.00 and the spreadsheet will then reflect an accurate total capital invested and allow for accurate % returns.

      I have made a note on my to-do list to create a detailed article or video regarding your trades.

      Thanks for sharing.

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

      Alan

  8. Alan Ellman May 18, 2022 5:04 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