Rolling-up in the same contract month is generally not a covered call writing exit strategy implemented in our BCI methodology. One of our members shared with me a series of trades he executed with F where a 6-month call was written in August 2021 for a 2/18/2022 expiration. This article will breakdown the mathematical components of the trade and offer considerations to elevate the returns to an even higher level.
Real-life rolling-up trade with F
- August 2021: Buy F at $12.00
- August 2021: STO the 2/18/2022 $14.00 call at $0.50 (initial 6-month time-value return = 4.17%)
- 11/19/2021: F trading at $19/39
- 11/19/2021: BTC the 2/18/2022 $14.00 call at $5.70
- 11/19/2022: STO the 2/18/2022 $17.00 call at $3.25 (rolling-up in the same contract month)
Entering the rolling-up information into the “What Now” tab of the Trade Management Calculator
F: Rolling-Up in the Same Contract Month
F: Final rolling-up calculations
F: Unrealized Final Calculations
***Note that the spreadsheet was developed for rolling-out-and-up in a later contract cycle, but the calculations will also be accurate for the same contract cycle.
Rolling-up resulted in an additional 3-month return of 3.93% with 12.30% downside protection of that time-value profit. This takes advantage of the fact that there is more time-value in a strike much less deep in-the-money as was the original $14.00 call.
How to improve this series of trades
- Using shorter-term expirations will result in greater annualized returns
- Using shorter-term expirations will allow us to re-evaluate our bullish assumption of the stock on a more frequent basis
- These trades took us through 2 earnings reports (10/27/2021 and 1/26/2022). The October report resulted in the exponential share appreciation which could have been realized to the investor had the call not been in place. In November, the 1/26/2022 report represented potential risk of a disappointing report
Discussion
In November 2021, this was a successful series of trades. However, greater returns and lower risk could have been accomplished by following our BCI rules and guidelines. Two positives resulted from these trades: money was made and lessons learned for future transactions.
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:
Dear Alan,
As a fellow dentist, I would like to compliment you on your accomplishments as founder and teacher of The Blue Collar Investor.
All the best,
Pete
Upcoming events
1. Mad Hedge Investor Summit
June 15th, 2022
12 PM ET – 1 PM ET
Covered Call Writing Dividend Stocks to Create a 3-Income Strategy
Dr. Alan Ellman, President of The Blue Collar Investor Corp.
Barry Bergman, BCI Managing Director
Covered call writing is a low-risk option-selling strategy that generates weekly or monthly cash-flow. By mastering the skill of strike price selection and adding dividend distributions, a potential 3-income strategy can be crafted with a goal of beating the market on a consistent basis.
Topics covered in this webinar include:
- Strategy analysis
- Option basics
- What is covered call writing?
- Dividend distribution
- Stock selection
- Option selection
- Trade management
Real-life examples will be highlighted with Dow 30 stocks using option-chains and calculation spreadsheets. Attendees will have the opportunity to participate in written Q&A during the entire webinar.
Registration link to follow
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
3. Money Show Orlando live event
October 30th – November 1st, 2022
OMNI ORLANDO RESORT AT CHAMPIONSGATE
Visit Alan, Barry and members of the BCI team at Booth # 415
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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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 05/27/22.
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]
Note: Sorry for the late posting…this post was placed in the Podcast posting by mistake instead of this blog posting.
Alan,
If shorter term option result in higher annualized returns, should we favor weekly rather then monthly options? If no, why?
Thanks,
Randy
Randy,
We can be quite successful using either (or both) weekly and monthly expirations. I use both (about 80% monthlys).
There are pros and cons to both. For weeklys, we should achieve higher annualized returns, as you stated. They are also quite useful in circumnavigating earnings reports and ex-dividend dates.
Monthly expirations offer a greater pool of securities compared to weekly expirations and, therefore, tighter bid-ask spreads resulting in more favorable trade executions (there are some exceptions). They also allow for more opportunities for exit strategy implementation and less frequency for rolling decisions.
I separate my option portfolios based on strategy and expiration time frames. This facilitates ease of management and makes trading more time efficient.
This does not mean that all traders must follow my blueprint but I’m happy to share what has worked well for me in over 2 decades of option trading.
Alan
Hi Alan,
Last month I purchased a stock and set the Strike at Near the Money.
The stock dropped in price considerably so the Option was not exercised. This month I set the Strike on the same strike as High as I could (which was still below my initial purchase price).
I set my 20% Limit order in place so that if it came close to the Strike I could buy back the bid and redo at higher Strike.
The stock has jumped considerably and the Limit Order was never triggered.
Does this happen a lot?
Or should I have does purchased the ASK when it reached my strike, irrespective of the cost?
My difficulty is that I am in Sydney and am not watching the stock market all day, I see the days ends results only, the next morning for me.
Your guidance on how you would approach this is appreciated.
Cheers Todd
Todd,
We should avoid basing our trade decisions on old data, like the price we originally paid for the stock. Our decisions are based on current data. If we bought a stock for $48.00 and today it is $40.00, we have $40.00 invested in that security. Where should that $40.00m per-share be placed? In that same security or a new one?
In your example, the same stock was used. I will expand this hypothetical. Let’s say we bought BCI at $48.00 and sold the monthly $50.00 call at $2.00. We immediately set the 20% BTC limit order at $0.40. If it is triggered, we can seek to “hit a double”, roll-down or sell the stock.
Continuing this hypothetical: The stock is at $40.00 as the current month contracts expire worthless. A decision is made to retain the shares and write another call for the next contract month. We sell the $45.00 call at $1.50 and set our BTC limit order at $0.30.
Share price moves up to $46.00. This will result in option value accelerating (in most cases) and the 20%/10% thresholds will not be triggered. At night, in Sydney, we can check option chains and use the “Unwind Now” tabs of our calculators to check the time-value cost-to-close and, perhaps, use our “mid-contract unwind” (MCU) exit strategy:
https://www.thebluecollarinvestor.com/analyzing-the-cost-to-close-a-covered-call-trade-mid-contract-a-real-life-example-with-nvdia-corp-nasdaq-nvda/
If no action is indicated mid-contract and the strike is expiring in-the-money, we evaluate our rolling opportunities.
Bottom line: We base our current trade decision on current data only and not let old statistics cloud and complicate appropriate resolutions.
Alan
Hi Alan,
So it looks like my mistake was that I didn’t put in my Limit Order in straight away when I purchased my stocks. I waited and missed that opportunity – as I would have been asleep.
And now the stocks are rising, the 20% rule will not take effect as the option value will increase.
So the 20% Limit Order is also like an insurance policy in a downward trend?
Does that sound about right?
Regards,
Todd
Todd,
You are 100% correct on all fronts.
I strongly urge our members to immediately place our 20%/10% BTC GTC (good-until-cancelled) limit orders immediately after entering our covered call trades.
If I used a monthly contract and the 20% guideline, I then make a note on my calendar to change it to 10% the weekend prior to the last 2 weeks of the monthly contract. Implementing the 20%/10% guidelines takes seconds.
Alan
Good morning. Since we are experiencing a bear market what is the best options strategy during this time?
Thanks and have a great day.
Mike
Mike,
There are multiple opportunities to craft our trades to more defensive positions. Here are some:
1. Use deep ITM call options.
2. Use deep OTM puts options
3. Combine 1 & 2, using the PCP (put-call-put or wheel) Strategy:
https://www.thebluecollarinvestor.com/using-put-selling-to-enter-a-covered-call-trade-at-a-discount/
4. Use our ultra-low-risk 10-Delta strategy:
https://www.thebluecollarinvestor.com/using-delta-to-create-low-risk-high-return-put-selling-trades-a-real-life-example-with-etsy-inc-nasdaq-etsy/
5. Use our ultra-low-risk IV strategy:
https://www.thebluecollarinvestor.com/using-implied-volatility-to-establish-reliable-trading-ranges-for-our-option-contracts/
These would all be outstanding approaches in bear and volatile market conditions for those of us who are comfortable trading in these market environments.
Alan
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Alan and the BCI team
Hello alan
Have you posted about money management? I have a bad habit of going deep into margin in my trading activity which has resulted in both losses and gains. I know it’s a simple thing to avoid margin and hold a % of cash, but impatience and a cavalier attitude often takes over. I’m still working on being a more strategic investor and trader so any input might be useful. Thanks
Robert,
I believe that most retail investors should not trade on margin where we borrow money for our trades. For sophisticated, experienced investors with adequate income, net worth and liquid assets, it does create the opportunity for greater returns.
Other the other side of the coin, margin accounts can be complicated and create the risk of greater losses.
When we invest in the stock market, we are incurring risk. By definition, if we are seeking higher than a risk-free return (like Treasuries), we are agreeing to undertake a certain amount of risk. When we sell stock options, we are incurring low risk, but risk, nonetheless. Should we use margin to exacerbate that risk? For some, it is okay, for most of us, no, in my humble opinion.
Alan
Thanks for the response – it is a real challenge for me to ‘encode’ the concepts of prudence and risk management on an emotional level during market hours, especially on a rotating shift, but each mistake is a learning opportunity. i’ll aim for a minimal to zero margin balance in the future since it has mostly provided poor results