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Setting Our 20%/10% Guidelines After Rolling an Option Out or Out-And-Up

Rolling-out is a exit strategy we frequently use when a strike is expiring in-the-money (ITM) and we want to retain the underlying shares for the next contract cycle. After closing the short call in the current month prior to rolling, a new trade with the same security is set up in our trading log for the next contract. This article will demonstrate how to set up our 20%/10% guidelines for the rolled-out trade. Since the concept is a bit complex, I will create a hypothetical example with nice even numbers.

 

Proposed BCI trade

  • 3/21/2022: Buy 100 x BCI at $48.00
  • 3/21/2022: STO 1 x 4/15/2022 $50.00 call at $1.50
  • 4/15/2022: BCI trading at $52.00 on expiration Friday
  • 4/15/2022: BTC the 4/15/2022 $50.00 call at $2.10
  • 4/15/2022: STO 1 x 5/20/2022 $55.00 call at $1.75

 

Results of the 4/15/2022 contract before rolling

  • Option profit: $1.50 per-share
  • Stock unrealized profit: $2.00 per-share ($50.00 – $48.00)
  • Total profit %: $3.50/$48.00 = 7.29%

 

Rolling entries into the next contract cycle

  • Value of stock at rolling (ITM strike): $50.00
  • Net option credit or debit (debit in this hypothetical): -$2.10 + $1.75 = -$0.35
  • Investment per-contract: $5000.00 (value of stock x 100)

 

BCI pre-rolling final results

 

BCI: Final Initial Contract results

The final result for the current contract cycle is a cash (partially unrealized) profit of $350.00 or 7.29%. This result is partially unrealized because the shares have not been sold.

 

BCI rolled-out-and-up trade as a standalone trade (if there was no trade the previous contract cycle)

 

BCI: Rolled-Out-And-Up Trade for the 2nd Contract Cycle Only

The $1.75 premium resulted in a 20% guideline of $0.35 and a 10% guideline of $0.18. This does not factor in the value of our shares pre-rolling ($50.00, the ITM strike) and the cost-to-close the current month contract ($2.10).

 

BCI combined roll-out-and-up trade

 

BCI: Rolled-Out-And-Up Trade Factoring in Both contracts

 

Notice that when factoring in the cost-to-close the previous contract short call, the net option premium is actually a negative number, rendering the 20%/10% guidelines not applicable.

 

Discussion

Establishing our 20%/10% guidelines after rolling an option requires 2 sets of calculations. The first has to do with initial time-value returns which factors in practical value of the underlying at the time of the roll ($50.00 in this hypothetical) and the net option credit or debit (-$0.35, in this hypothetical). The second data set reflects the actual time-value premium received for the rolled-out trade without factoring in the time-value cost-to-close. The post-rolling 20%/10% guidelines are based on the latter contract data, not the combined data ($1.75, in this hypothetical). In this hypothetical, the 20%/10% guidelines are $$0.35 and $0.18.

 

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1.Money Show Orlando live event

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OMNI ORLANDO RESORT AT CHAMPIONSGATE

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Sunday, October 30, 2022, at 5:00 pm – 5:45 pm EDT
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
  • Section V
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  • Section VI

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)

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
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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.

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November 10th -11th, 2022

Portfolio Overwriting

Increasing Profits in Our Buy-And-Hold Portfolios Using  

Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”.  Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk -like strategy.

Topics discussed

  • Brief review of
  • Option basics
  • What is an option-chain?
  • Option selection
  • Calculating covered call returns: Real-Life examples
  • Portfolio overwriting defined
  • Pros and cons of portfolio overwriting
  • Why early exercise is so rare
  • Rolling options
  • Role of dividends
  • Locating ex-dividend dates
  • How to avoid early exercise
  • Real-life examples with calculations
  • BCI
  • Summary

Date, time & registration link to follow

 

3. Long Island Stock Traders Meetup Group (Private webinar)

Thursday February 16,2023

7:30 PM ET- 9 PM ET

A real-life example with a $100k Select Sector SPDR portfolio
Covered call writing is a low-risk option-selling 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 S&P 500 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

 

Alan speaking at a Money Show event

***********************************************************************************************************************

Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

****************************************************************************************************************

 

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.

7 Responses to “Setting Our 20%/10% Guidelines After Rolling an Option Out or Out-And-Up”

  1. Barry B October 15, 2022 11:15 am
    #

    Premium Members,

    The Weekly Report for 10/14/22 will be delayed until Monday, 10/17/22. The IBD website is undergoing scheduled maintenance from 8:00 PM ET on Friday, 10/14/22 through 2:00 AM ET on Monday, 10/17/22. Our goal is to have the report out by mid-afternoon on Monday, 10/17/22…but we will make every effort to get it out sooner.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  2. Barry B October 16, 2022 9:07 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 10/14/22.

    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:

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

    Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as the membership remains active.

    Best,

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    [email protected]

  3. Barry B October 16, 2022 11:14 pm
    #

    Premium Members,

    There was a technical issue earlier. The Weekly Report is now up on the Premium Member site.

    Best,

    Barry
    [email protected]

  4. Ron October 18, 2022 11:40 am
    #

    Alan,

    Thanks for all your great information. I have read your book on Exit Strategies and really enjoyed it.

    Lately, I have been selling deep in the money covered calls as a way to protect myself from downside risks. I am having trouble with the logic for the 20%/10% buy back with regard to these deep ITM calls.

    Can you please confirm (or correct me) that the 20%/10% buy back rule applies to the full amount of premium? I think it would make much more sense if the rule applied only to the time value included in the premium.

    Please let me know your thoughts on this topic or point me to somewhere I might read more about it. Does your new exit strategies book touch on this topic?

    Thank you,

    Ron

    • Alan Ellman October 18, 2022 4:54 pm
      #

      Ron,

      The 20%/10% guidelines relate to the entire premium, including intrinsic-value for ITM call strikes.

      The rationale behind this guideline is that ITM strikes have higher Deltas and premiums will erode quicker as share price declines.

      Also, if we use time-value only, we will be closing short calls much too quickly in many ITM cases.

      Our new exit strategy book is the most comprehensive resource for exit strategies for both call and put selling ever produced by BCI. My goal was to write a book on exit strategies that is the “most informative anywhere”, but only the BCI community can determine if I was successful.

      Alan

  5. Alan Ellman October 18, 2022 8:49 pm
    #

    Premium members,

    The latest Blue Chip Report of the best-performing Dow 30 stocks has been uploaded to your member site.

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

    Alan & the BCI team

  6. Alan Ellman October 19, 2022 4:50 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.

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