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Rolling-Up Covered Call Trades in the Same Contract Cycle

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We enter a covered call writing trade, and share price accelerates exponentially. What exit strategy opportunities are available, if any? This article will discuss the mid-contract unwind (MCU) and rolling-up exit strategies, with an emphasis on the latter. A real-life example with Citigroup Inc. (NYSE: C) will be analyzed.

What is the mid-contract unwind (MCU) exit strategy?

This is where we close both legs of the covered call trade (buy back the option and sell the shares). We then use the cash generated from the sale of the shares to enter a new covered call trade with a different underlying security. This protects us against profit-taking when there is a substantial price acceleration after entering the initial trade. In the BCI methodology, we favor this approach over rolling-up in the same contract cycle.

What is rolling-up?

This is where we buy back the original short call and sell a higher strike call with the same expiration date. This will, typically, result in a net option debit with an unrealized share appreciation. We would use this exit strategy when we feel that, despite the recent surge in share price, we are relatively confident that share escalation can continue.

Real-life example shared by premium member, Kalyan, using Citigroup Inc.

  • 12/5/2023: Buy 100 x C at $44.69
  • 12/5/2023: STO 1 x 1/19/2024 $47.00 call at $1.19
  • 12/18/2023: BTC the $47.00 call at $3.15
  • 12/18/2023: STO 1 x 1/19/2024 $50.00 call at $1.58 (roll-up #1)
  • 1/5/2024: BTC 1 x 1/19/2024 $50.00 call at $4.85
  • 1/5/2024: STO 1 x 1/19/2024 $55.00 call at $1.20 (roll-up #2)
  • 1/11/2024: BTC 1 x 1/19/2024 $55.00 call at $0.29
  • 1/11/2024: Retain shares with current market value of $51.32

The BCI Trade Management Calculator (TMC): Initial & Final Entries & Calculations

  • The top row in each section (1 -4) represents the initial trade
  • The 2nd row in each section represents the final trade entries and results
  • In section 1, -$4.32 represents the net option debit after executing all trades
  • In section 2, we see a maximum potential 46-day return of 7.83% (5.17% + 2.66%)- top row
  • In section 2, we see an option debit of -9.67%, with huge upside potential (to the $55.00 strike of 23.07%
  • In section 3, the TMC calculates an unrealized share gain of 14.84%
  • In section 4, the final (unrealized) result is 5.17%, which was less than the original maximum return of 7.83% ($47.00 strike)

Trade Journal entries in the TMC

Discussion

By rolling-up 2 times, the final (unrealized) result was lower than the initial maximum return which would have been realized without exit strategy intervention. The reason has to do with the time-value spent in closing the 2 rolling trades and buying back the last short call.

A better approach would have been to consider the MCU strategy or take no action at all, depending on the calculations. If our intention is to keep the shares moving forward, rolling-out or out-and-up considerations would come into play.



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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:

Hi Alan,

I think you are a good man. You have valuable experience that can help people. You teach people skills they can use, and you back it up.

Thank you.

John

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Covered Call Writing: Multiple Applications Based on Current

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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:

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Exit Strategy Choices After Exercise of Cash-Secured Puts

When we sell cash-secured puts, we are undertaking the contractual obligation to buy shares at the strike price by the expiration date. Typically, we only sell puts on elite-performers that we would be agreeable to own in our portfolio.

This presentation will analyze 4 potential exit strategy opportunities to consider should the put option be exercised. Information on the following strategies will be highlighted:

  • Selling the stock
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In addition to these strategies, the following topics will also be included in the webinar:

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This presentation will detail stock selection, option selection and position management, the 3 required skills to become elite covered call writers and put sellers. It will also include ultra-conservative approaches to these strategies using Delta and implied volatility to create statistically beneficial trades. Rules and guidelines will be discussed to take the emotions out of our trades resulting in high-probability positive outcomes.

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Alan speaking at a Money Show

10 Responses to “Rolling-Up Covered Call Trades in the Same Contract Cycle”

  1. John May 24, 2024 5:36 pm #

    Alan,

    I might be infused with too much German in me, but I read very carefully and try to follow things like rules and guidelines. And I’m conflicted about when to liquidate an underlying stock that has not performed well. I have on occasion watched a stock fall 7 % early in a cycle without the BTC reaching 20%. So which guideline takes precedent?

    I have on occasion ended a cycle with a position that has lost money. And let’s say it’s no longer on the running list. What does wisdom dictate? Sell the stock and reinvest? Or keep the stock and oversell it until the loss is mitigated? This later option almost insures that I will hold the stock thru the next earrings report. But overselling it reduces the basis and makes it easier to get even a 1 cent profit. What does wisdom say? Many if not most of the stocks on the running list are really good companies and the price will rise again.

    Regards,

    John

    • Alan Ellman May 25, 2024 4:23 pm #

      John,

      Let’s start with the guidelines for stock liquidation:

      1. The 20%/10% guidelines are for closing our short, covered call options. At that point, we may or may not sell the shares based on our system criteria.

      2. The 7% guideline does, in fact, represent a threshold to sell our shares, even when the 20% or 10% option thresholds are not met. IBD uses 7% – 8%, as another example. It’s another layer of protection from share price decline.

      Notice that these are framed as “guidelines”, not hard and fast rules, so we have some leeway.

      Next, a losing trade where the stock drops off our watch list:

      If we have retained the shares through the end of the current contract, trying to mitigate losses with a losing stock is typically not the best path to take.

      Let’s say we had $5k worth of shares to start and we now have $4k worth of shares. The question we ask ourselves for the upcoming contract is “where is that $4k best placed”? In the under-performer or a new better-performer. I opt for plan B. Although both approaches have the potential to succeed, using a better performer will work out for us more frequently.

      Alan

      • John May 26, 2024 8:27 am #

        Alan,

        Thank you for the inputs. I’ve made all of those approaches work at times.

        I may have been just lucky with holding the stock thru one more cycle and it recovered in that 2nd cycle.

        But I do understand your POV. A stock that is off the list has less potential than one that’s currently on it.

        John

  2. Barry B May 25, 2024 10:56 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 05/24/24.

    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:

    https://www.youtube.com/user/BlueCollarInvestor

    Reminder: Premium Member’s pricing is locked into your current rate and you will never see a rate increase as long as the membership remains active.

    Important: The Weekly Stock Report for Friday, June 7th will be published on Monday, June 10th.

    Barry and The Blue Collar Investor Team

  3. James May 27, 2024 3:54 pm #

    Hi Alan.

    I’m a premium subscriber.

    I have a question on the CEO Strategy using SPY SPDRs. Has this strategy been backtested against SPY returns over say 10+ years of data?

    In other words, would selling covered calls on monthly SPY contracts perform better over time?

    Most importantly, what does the data indicate? I would be very interested to see any backtesting data on the BCI website.

    I did not see backtesting discussed in the book but might have missed it.

    Thank you,
    James

    • Alan Ellman May 28, 2024 6:50 am #

      James,

      We did not back test covered call writing the entire benchmark.

      However, there have been several such studies undertaken in the past. One of the most well-known is the 16-year study (1988 – 2004) done by Ibbotson Associates. The conclusion was that covered call writing the entire S&P 500 slightly outperformed the S&P 500 (12.39% versus 12.20%) and with much less portfolio volatility.

      These results included no stock selection (just the entire index), no strike selection (only slightly out-of-the-money strikes) and no position management). In my humble opinion, these inclusions in the CEO Strategy are the reasons why I was able to beat the S&P 500 in 2022 by > 15%.

      My hypothesis, as I tested the strategy in real-time (and archived every trade I executed in 2022), was based on sector rotation (movement of money from industry-to-industry based on the economic cycle).

      Alan

      • James May 28, 2024 12:43 pm #

        Alan,

        Thanks so much for this detailed answer.

        Much appreciated.

        James

  4. Mark May 28, 2024 2:00 pm #

    Hi Alan

    I am trying to put the CEO strategy into action in a portfolio.

    I looked at the Select SPDRs today in the tracker and I saw only 2 had outperformed in the last month. Last week’s premium member ETF sheet shows 6 suitable ETFs. What should I do? Just buy the 2 that outperformed? Buy the 4 best performers even though 2 did not outperform the S&P?

    Your thoughts would be appreciated.

    Regards

    Mark

    • Alan Ellman May 29, 2024 6:04 am #

      Mark,

      Here’s how I crafted the trades in my book, “Covered Call Writing: A Streamlined approach” and continue to do so in my personal CEO portfolios:

      I purchase(d) the top-performing Select Sector SPDRs (4 or 5) each week or month (depending on the contract expirations we are using). Selections are based on 1-month price performance and not necessarily on outperforming the S&P 500.

      This criterion is slightly different from the process we use in our monthly Blue Chip (Dow 30) Reports where we require all eligible securities to have outperformed the S&P 500 in both 1- and 3-month time frames.

      Alan

  5. Alan Ellman May 29, 2024 4:39 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.

    Premium member video link:

    https://youtu.be/EXMO-KwZuJs

    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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