When our covered call writing trades move deep in-the-money (ITM), the time-value cost-to-close approaches (but does not reach) $0.00. In these scenarios, it may make sense to close both legs of the trade (mid-contract unwind or MCU exit strategy). In this article, a real-life trade with Schwab U.S. Large-Cap Growth ETF (NYSE: SCHG) will be analyzed, where the strike is at-the-money (ATM) and there is still 2 1/2 months remaining until contract expiration.
SCHG covered call writing trade
- 9/18/2023: Buy 100 x SCHG at 75.48
- 9/18/2023: STO 1 x 4/19/2024 $90.00 call at $0.45 (215-day trade)
- 2/11/2024: SCHG trading at $90.45
- 2/11/2024: The cost-to-close (“ask” price) the $90.00 call is $2.20
SCHG: Initial trade calculations using the BCI Trade Management Calculator (TMC)
- The initial trade as structured, resulted in a 215-day initial time-value return of 0.60%, 1.01% annualized (brown cells)
- This return will not meet the goals of most covered call writers, even the most conservative investors
- There is substantial upside potential of 19.24% (purple cell)
- The stock leg of the trade is doing quite well, slightly above the $90.00 strike which was initially deep OTM, now near-the-money
- Writing shorter-dated options will result in greater annualized returns
Should we initiate the MCU exit strategy? The “Unwind Now” worksheet tab of the TMC: Entries
Should we initiate the MCU exit strategy? The “Unwind Now” worksheet tab of the TMC: Calculations
- If the trade is closed on 2/11/2024, it will cost (in time-value), $175.00 per contract, or 1.94%
- If closed on 2/11/2024, the final result would be a realized profit of $1322.00 per contract (almost all share appreciation)
- This is a 147-day return of 17.50%, 44.00% annualized. Not bad
- We ask ourselves if we can generate at least 1% more than 1.94%, with the cash from closing both legs of the trade, by 4/19/2024? Probably, yes
Discussion
Closing both legs of a covered call writing trade is contingent on the time-value cost-to-close. We evaluate if we can generate at least 1% more than this debit by contract expiration to move forward with this exit strategy. The “Unwind Now” worksheet tab of the TMC will provide these calculations.
The Poor Man’s Covered Call Online Video Course with Downloadable Workbook
Covered call writing is a cash-generating strategy that lowers our cost basis thereby improving our opportunities for successful investments. It involves a long stock position (we buy the stock) and a short option position (we sell the call option). The PMCC strategy replaces the long stock positions with long call positions, typically deep in-the-money long-term expiration options known as LEAPS. Because long options cost less than stocks, we are investing less money and the return on our capital increases. As with all strategies, there are pros and cons that must be mastered to determine if this is a proper strategy for our personal risk-tolerance and return goals. This program will highlight in detail:
- PMCC definition
- Pros and Cons
- Risk/reward profile
- Best stocks and ETFs to consider
- How to construct a PMCC trade
- Hypothetical example
- Multiple real-life examples
- The BCI PMCC Calculator
- Option Greeks
- Position management
- Rolling LEAPS
Click here for more information and a video.
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On September 1, 2024, BCI will be raising membership rates for new members only. This will not apply to current members. It has been 3 years since we had a rate increase. In that period, we have added dozens of training videos, additional downloads and resources and more quality data to our stock and ETF reports. We are fortunate to have such a robust and expanding membership and strive to provide the best high-quality information and tools at the lowest industry prices.
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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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:
Alan,
The primary reasons I signed onto BCI includes BCI’s corporate philosophy of providing solid training, regularly updated information on screened securities, hands on tools for subscribers to use and direct access to both you and Barry. Almost unheard of to receive email replies after 5:00PM let alone after 10:00PM.
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Upcoming events
1. BCI-Only Webinar (Zoom)
July 18, 2024
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
- Holding the stock in our long-term buy-and-hold portfolio
- Write a covered call (PCP or “wheel” strategy)
- Implement the Stock Repair Strategy
In addition to these strategies, the following topics will also be included in the webinar:
- Option basics for selling cash-secured puts
- Option basics for covered call writing
- Real-life examples
- Calculations using the BCI Trade Management Calculator (TMC)
- Event super discount offer
There will be information offered to all levels of options trades, from beginners to advanced.
A live Q&A will follow the presentation. Attendees can ask any questions related to covered call writing or selling cash-secured puts.
2. Investment Masters Symposium (live, in person event)
August 1, 2024
Presentation #1: 8:45 AM – 10:45 AM
Paris Hotel, Las Vegas
Covered Call Writing & Selling Cash-Secured Puts to Generate Consistent Cash Flow
Basic & advanced principles for trading low-risk stock options with capital preservation in mind
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.
Detailed analysis will be provided regarding how to craft our trades to the current market environment, personal risk-tolerance and strategy return goals.
A multi-tiered option-selling strategy which combines both covered call writing and selling cash-secured puts will also be examined. It is known as the PCP (put-call-put) or “wheel strategy.”
Attendees will be introduced to a one-of-a-kind trade management tool, the Trade Management Calculator, which is used to enter, manage and generate final realized and unrealized trade results.
The course is structured to benefit both beginner and advanced option traders, using real-life examples to enhance the learning process.
Presentation #2: All Stars of Option Trading Event
3. Mad Hedge Investor Summit
September 10, 2024
11 AM ET – 12 PM ET
Zoom webinar.
Tuesday September 10, 2024
11 AM ET – 12 PM ET
How to Generate Greater than Maximum Covered Call Writing Returns Using Exit Strategies
Incorporating the mid-contract unwind (MCU) exit strategy into a 12-day trade
More information & registration link to follow.
4. Stock Traders Expo- live event in Orlando Florida
October 17 -20
Details to follow.
5. American Association of Individual Investors/ Los Angeles Chapter
November 9, 2024
12 PM ET – 1:30 PM ET
Private webinar for members of this AAII investment club
Alan,
I have several covered calls in the money for the 7-19-2024 expirations.
Is it too early to roll my options to August? When is the best time to roll options?
Thanks for any advice.
Sue
Sue,
Glad your positions are in-the-money. You’re off to a good start for the July monthly expirations.
Now, it’s too early to consider rolling, but as share value appreciates, the time-value components of the premiums begin to approach (but never reach) $0.00. This may create an opportunity to close both legs of the covered call trades and use the cash generated from the sale of the underlying securities to enter a new covered call trade with a new underlying stock. This is known as the “Mid-Contract Unwind (MCU) Exit Strategy”.
Use the “Unwind Now” worksheet tab of our Trade Management Calculator (TMC) to calculate the time-value cost-to-close (CTC). If we can generate at least 1% > than this CTC by 7/19, MCU is an appropriate consideration.
Bottom line: It’s too early to consider rolling options for the 7/19 expirations. Wait as close as possible to 4 PM ET on expiration Friday, so the time-value cost-to-close is as low as possible.
Alan
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 07/05/24.
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.
Barry and The Blue Collar Investor Team
Alan,
Tomorrow I plan to start a portfolio using the CEO strategy with weekly options. Any difference in the approach from your book which used monthly options?
Thanks,
Les
Les,
Extremely similar, with these 2 exceptions:
1. XLRE does not have weekly options. It can only be used in a weekly portfolio in the last week of a monthly contract.
2. The BTC/GTC limit order set up after entering the covered call trades, is at 10%, not 20%.
Alan
Alan,
I know IV can be used to establish a trading range with high probability of accuracy. My question is about delta and if it can be used to establish a low end of a trading range with high probability of accuracy?
I appreciate any guidance.
Carol
Carol,
Yes, absolutely.
Let’s say we are writing an in-the-money covered call and don’t want the share price to drop below that ITM strike, with an approximate 90% probability of succeeding.
We can select an ITM strike with a Delta of 90, which means an approximate 90% probability of expiring ITM or with intrinsic-value.
For puts, if we don’t want share price to drop below the deep OTM put strike, we may select a put strike with a Delta of -10, which means an approximate 10% probability of expiring ITM or with intrinsic-value.
Alan
Afternoon Alan,
I think I haven’t seen this question before so I’m hoping you can spare a minute for your opinion.
On 6/24 purchased BSX at 76.68.
STO 2 July contracts, Strike of 77.50, for 1.07
Today, 7/8, BSX is 76.15. The trade hasn’t turned against me as of now.
However, all of the technical indicators are now bearish. The stock is s l o w l y dropping and it hasn’t reached either BTC thresholds.
It just does not seem like it’s going to rise and STOCHASTICS look like the buyers are losing interest.
So, last week I started thinking that the best thing would be to close this and move the cash to a new stock. I could also roll it down and maybe make a little more. Comments appreciated.
John
John,
Since I can’t give specific financial advice in this venue, I will respond from the vantage point of adhering to the BCI methodology.
Before I get into the specifics of this trade, let me offer that, in order to take emotion out of our trades, we must have a system in place that includes a game plan as how to manage positions where there is share price decline. Let’s see where BSX falls into our plan, again, as it relates to the BCI methodology.
Here is a series of points to consider:
1. You are quite astute in pointing out that there is a technical breakdown of BSX. If you look at our premium member stock lists, there are always a significant # of stocks in pink cells, which were previously on our “eligible” list and now beginning to break down technically. Many will reappear on our list in the future reports. If we are looking to enter a new trade today, we would not consider BSX because there is a myriad of better performers. So, do we continue to manage the BSX trade or bail?
2. BSX has not approached our 20%/10% or 7% guidelines, not even close.
3. Shares price has declined $0.53 per-share or 0.69% … not much.
4. The breakeven price point is $75.61, leaving this trade still in a winning position.
5. Rolling-down will offer some protection to the downside, but (most likely) not offer much time-value additional profit, as it stands today. That could change.
Not every trade requires exit strategy intervention. If the BCI methodology is followed to the letter (as I do), this is one example. Keep in mind that our exit strategy price points are “guidelines”, so we do have some flexibility as when to take action, or not.
I always encourage our members to trade within their comfort levels. Adding additional technical requirements to our management process is okay but may end up causing the closure of multiple positions each contract cycle.
I give you a lot of credit for focusing in on management. Far too many covered call writers outside the BCI community do not, and that will impact their long-term return success.
Keep up the good work.
Alan
Morning,
Thanks very much. Even without giving advice, it’s quite helpful to see how the BCI method provides a way to analyze this stock’s performance.
John
Alan,
Is there any reason we shouldn’t sell covered calls on just dividend stocks? This way we are making more income than non dividend stocks.
Thanks.
Gene
Gene,
Dividend yields pales in comparison to the returns we generate from option premium.
Our focus should be on elite, fundamentally sound companies that are enjoying exceptional price performance at the time of the trade.
Limiting ourselves to dividend-only securities will significantly diminish the pool of eligible candidates for covered call writing (we don’t capture dividends when selling puts that are not yet exercised).
That said, when our screening process yields stocks that do provide dividends, and we receive those dividends, I consider that additional income stream “icing on the cake”, and gladly accept it! Our premium member stock and Blue Chip (Dow 30) reports provide dividend yield and ex-dividend date information).
Bottom line: Dividends are nice but should not be the primary focus in our covered call writing portfolios.
Premium members:
This week’s 4-page report of top-performing ETFs, along with our sample trade of the week, 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.
We have also included a sample trade taken from one of our BCI watchlists.
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https://youtu.be/EXMO-KwZuJs
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Alan and the BCI team