Exit strategies for covered call writing will elevate returns and mitigate losses. When share price accelerates dramatically, we can take advantage of these opportunities by rolling our options out or out-and-up. In November of 2021, Calvin shared with me a series of trades he executed with NVDA which demonstrated several rules and guidelines that will enhance our portfolio returns.
NVDA trades from 8/23/2021 to 11/12/2021 as of 11/4/2021
- 8/23/2021: Buy 100 x NVDA at $217.60 (#1 in graph)
- 8/23/2021: Sell 1 x NVDA 8/27/21 $217.50 call at $3.90 (#1 in graph)
- 8/27/2021: BTC 1 x NVDA 8/27/21 $217.50 call at $9.00 (#2 in graph)
- 8/27/2021: Sell 1 x NVDA 9/17/21 $217.50 call at $12.40 (roll-out- #2 in graph)
- 9/17/2021: BTC 1 x NVDA 9/17/21 $217.50 call at $2.80 (#3 in graph)
- 9/17/2021: Sell 1 x NVDA 10/15/21 $222.50 call at $7.00 (roll-out-and-up: #3 in graph))
- 9/23/2021: NVDA Dividend $4.00 (#4 in graph)
- 10/18/2021: 1 x NVDA 10/15/21 $222.50 call expired worthless (out-of-the-money: #5 in graph))
- 10/18/2021: Sell 1 x NVDA 11/12/21 $220 call at $6.40 (#5 in graph)
- 11/4/2021: NVDA trading at $298.01 (#6 in graph)
- 11/4/2021: NVDA 11/12/21 $220 call at $77.88 (#6 in graph)
- All trades occurred between (not including) earnings reports dates (8/18/2021 and 11/17/2021… nice going!)
Graphic representation of NVDA trades
Initial trade structuring and calculations
The multiple tab of the BCI Elite Call calculator shows an initial 1-week time-value return of 1.7%.
Stock and option credits and debits if the $220.00 call is exercised on 11/20/2021
- Stock credit: $240.00
- Total option credits: $3370.00
- Total option debits: $1180.00
- Net stock & option credit: $2430.00
- Initial cost basis: $21,760.00
Final returns if the 11/20/2021 $220.00 call is exercised
$2340.00/$21,760.00 = 11.17%, 50-day return = 81.5% annualized return
Although NVDA “went to the moon” during these trades, by rolling the options and following the earnings report rule, an outstanding return was generated during this series of trades.
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:
Amazon testimonial for “Selling Cash-Secured Puts”
5 out of 5 stars:
Dr. Ellman has demonstrated a vast knowledge and experience in this strategy of cash-secured puts. His explanations were easy to understand and I am looking forward to put them in action. Thank you for a well-written book.
1.LIVE at The Money Show Las Vegas
May 10th – 11th
Portfolio Overwriting (free)
Tuesday May 10th at 1:30 PM – 2:15 PM
Increasing Profits in Our Buy-And-Hold Portfolios Using Covered Call Writing
A Comprehensive Analysis of Covered Call Writing: 2-hour Masters Class (paid event to The Money Show)
Wednesday May 11th at 1:30 PM – 3:30 PM
How to master all aspects of this low-risk option-selling strategy
2.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 option-selling strategy where we either generate cash-flow or buy a stock at a discount.
Zoom webinar for Chapter members
Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
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 04/14/22.
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:
Please note that the Weekly Report for 04/29/22 will be uploaded late on Sunday, 05/01/22.
Barry and The Blue Collar Investor Team
You often mention that you make investments in your mother’s account in a very safe and conservative manner helping her get between $300 to 800 per month.
You also mention that you do this with a small part her holdings. I was wondering, why limit it to a small part of the holdings if it is such a successful strategy. Why not use it on a larger part of the portfolio?
Covered call writing and selling cash-secured puts are low-risk option-selling strategies. I set aside an amount of her portfolio that will generate the cash that will make her life more comfortable (including trips to the casino … not my recommendation!).
I factor in cash generation and capital preservation and trade more conservatively in her account than I do in mine.
New video just produced today:
“Analyzing a 1-Month Covered Call Writing Portfolio from Start-To-Finish”
A real-life example with a $100k ETF Select Sector SPDR portfolio
Alan & the BCI team
I really enjoyed this video. Watched it 3 times already.
Are there situations when you might select 3 ETFs? 5 ETFs?
Can you share how you decide?
Thanks a lot.
Yes. For a $100k portfolio, I would consider 5 Select Sectors when a 5th ETF has a similar price performance as the 4th. In this case, we would allocate $20k per-position.
I would reluctantly consider 3 positions when there are only 3 performing positively. This is rare but it does come up from time to time. In this scenario, we allocate $33k per position. This still gives us exposure to > 25% of the S&P 500 stocks.
Would it be more realistic to calculate annualized % return based on 8 months rather than 12 months since we skip trading options for a stock 4 times per year when earnings are announced?
Or you do sell shares of the traded company utilizing cash on another company (opportunity) that does not have earnings that month?
I assume most call writers would be holding companies long-term collecting dividends and share price annual rise…?
You are 100% correct that we must avoid using stocks when earnings are about to be reported. However, there are always solutions to challenging scenarios.
My portfolios turn over 20% to 80% due to earnings and screening results. We have no loyalty to stocks or ETFs if they no longer serve our best interests.
In the case where we are using low cost-basis, dividend-bearing stocks in non-sheltered accounts and we want to retain these securities for the long-term, there is usually a solution here, as well.
Most of these stocks have weekly options associated with them. If an earnings report is due in the 3rd week of a 4-week contract, we write weekly in weeks 1 and 2, skip week 3 and write another weekly in week 4. Then we return to monthlys for the next contract cycle.
Investing is not a perfect world but there are always best solutions.
This week’s 5-page report (we had to add an additional page this week as there were an unusual # of eligible securities) 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.
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Alan and the BCI team
4/20/22 – Sharing Moment that brought a smile:
(See attached image)
Was I very pleased this morning when on opening bell a limit order at 9:30am filled on a price spike for ICLN that I set up to unwind a position near the Breakeven point. Stock is ICLN. That spike lasted only a second or so.
Kudos for taking the action to place that limit order.
** 4/21/22 zzmg
** How I Process a BCI Mid-Contract-Unwind (MCU) – Setting up a Limit Order to Unwind a position with a Guaranteed Percent Loss of the Strike **
Section 1 – Strategy and Formulas
When the stock in a covered call position rises up quickly during an expiration cycle, the goes deep in the money (ITM) and the time value of the option approaches zero or a low value.
The BCI methodology for this scenario is to perform a Mid-Contract-Unwind (MCU) which unwinds or closes the position at a certain cost to close (low loss) so you can use the released cash to buy a different stock and sell a covered call option for a second stream of income. You do not unwind the position unless you have open a new position that has at least a 1% additional gain above the loss of the closing trade. If you a 1% closing loss, then the new position should provide at least 2% Gain. For a 0.1% loss, your new position should have at least 1.1% gain.
You can use the Elite Calculator Unwind Now tab to calculate your loss and % loss, or as I will explain later calculate it and setup a limit order with a guaranteed percent loss.
My initial strategy is to setup a limit order to guarantee a 0.1% loss initially, then work on the trading plan as the position develops. On a $20,000 investment that is $20.00. On the opening bell or market surge during the day, the limit order may fill successfully..
When you set up a limit order for the MCU, you are setting your limit order at a value Stock Price – Option Premium. When order executes successfully your cash position in your portfolio is increasing by the surged stock price and decreasing by the Option Premium (Buy to Close order).
Since the stock price is greater than the option premium, the difference is always positive (credit order) and increases your Cash. No matter what price the stock goes to or the Time Value of the option decreases to, the best you can do is increase your cash position by the strike price. Your gain or profit/loss is limited or protected by the strike price, as I will show below.
See attached drawing.
For a stock and it’s stock option, the relationship between the Stock and the Option premium is:
(A) Stock price = Intrinsic Value + Strike
(B) Option Premium = Intrinsic Value + TV (Time Value)
Notice on the left side above the two variables are the Limit Order values. Subtracting formula B from A, you get
(C) Stock Price – Option Premium = Strike – TV
The left side is your limit order. The right side says if TV = 0, the best you can do is increase your cash position by the strike value. It also says if TV is not equal to zero, your cash is reduced by the Time Value or a percentage of the Strike, which is your cost to close. You can show this as follows:
If you let TV= Per * Strike where Per is the percent of the strike then:
(D) Stock Price – Option Premium = Strike – (Per * Strike) where Per = TV / Strike or the time value TV is a percentage of the strike.
Since the left is the limit order values, then
(E) Limit Order =Strike – (Per* Strike)
Section 2 – Setting up Limit orders
For a covered call position with strike 71:
** For a 0.1% closing loss, the limit order should be to.
Limit order = 71 – ((.001) * 71) = 71 – .071=70.929
** 1% closing loss:
71 – .71 = 70.29
Love your detailed analysis of MCU.
It appears you are using a net credit limit order placed a small % below the strike using a buy/write combination form. Can you share with the BCI community your experiences working with this formula over time?
I watched the great video and have a few questions for you:
1. If an ETF goes down 10-15%, you will exit the option at 20%, and then what do you do? If you sell another in the money option, you will lose if the market goes up
2. How about if all the ETFs had the same issues, do you wait until the market is up to sell options which may take a few months? assuming all 100k in the market, you have only 2-4% to be used for another strategy
3. When do you exit the ETF at a loss? Do you exit the market if an ETF is down 20,30%?
Thanks in advance!
If our 20%/10% thresholds are reached and the short calls are closed, our next steps are based on several factors:
1. Days to expiration (early/late in the monthly contract)
2. Security performance in relation to overall market
3. Opportunity to generate additional time-value premium
If early in a contract, we may wait to see if share price recovery allows us to re-sell the same option (“hit a double”)
If share price does not recover or if later in a contract, we may look to roll-down to an OTM strike to generate additional time-value premium + allow for some share price recovery.
If that entire sector is grossly under-performing the overall market within that 1-month timeframe (rare with Select Sector SPDRs), we sell the security and look to another better-performing ETF as a replacement through contract expiration.
One of the advantages of our 20%/10% guidelines is that it partially automates our exit strategy implementation and moves us into “next-step” considerations.
Hi Alan and Barry,
When I am looking at the possibility of say… “Roll Out and Up” of an existing opinion contract (looking at several different Strikes and several different Expiration Dates) … I among other factors, I consider “especially” the following two factors:
#1. The possible resulting Deltas.
#2. The possible resulting Thetas. Hopefully, the Theta amount is higher on the STO than on the BTC.
These 2 factors rate high on my considerations, do you agree?
The impact of Delta, Theta and Vega are certainly important factors to understand when selling options.
When rolling out-and-up, my focus is on the following factors and given top-priority:
1. Does the security still meet our system screening requirements (fundamental, technical and common-sense), including no upcoming earnings report in the next contract cycle?
2. Will the net option time-value returns fall into our stated goal range? Here, we must also factor in unrealized share price appreciation.
3. Should I roll out-and-up to an ITM, ATM or OTM strike? This is based on how aggressive or defensive I want to establish my position based on current market conditions and personal risk-tolerance.
The Greeks will play a role in all these determinations, but we must stay focused on our main goals of using securities that meet our rigorous system requirements and generating initial time-value returns that fall into our stated goal range.