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Should I Unwind My Covered Call Trade 1 Week Prior to Contract Expiration?: A Real-Life Example with Alibaba Group

Covered call writing exit strategies are critical to our overall success. There are times, however, when the best action is no action at all. On July 25th 2019, Rob shared with me a successful trade he executed and was considering closing 1 week prior to the 8/2/2019 expiration. For an answer, we need to turn to the “Unwind Now” tab of the Elite version of the Ellman Calculator.

Rob’s trade as of 7/25/2019

  • 6/17/2019: Buy BABA at $173.54
  • 6/17/2019: Sell the August 2nd $175.00 call for $2.35
  • 7/25/2019: BABA trading at $178.00
  • 7/25/2019: Price of $170.00 call is $4.78

Initial trade setup

covered call writing calculations

BABA: Initial Calculations

Calculation entries to unwind the entire position

covered call writing exit strategies

Unwind Now: Trade Information Entries

Calculation results to unwind the entire position

BABA: Unwind Now Calculation Results

Discussion

The initial trade structuring shows a potential 5-week return of 2.2% (yellow cells). If the trade is closed on 7/25, the time-value cost-to-close is 1.02%, almost cutting in half the maximum results Rob is currently enjoying. The question we ask is can we generate more than 1% more than the time-value cost-to-close by contract expiration. In this case, can we generate more than 2.02% in 1 week? The answer is probably not, so unwinding does not appear to be in our best interest. Another (better) approach would be to take no action but continue to monitor the trade.

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Hi Alan,

Your book reviews on Amazon are terrific and I see you have quite a following which I’m really impressed with. Thanks for responding to my questions.

Best,

Lisa S

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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.

34 Responses to “Should I Unwind My Covered Call Trade 1 Week Prior to Contract Expiration?: A Real-Life Example with Alibaba Group”

  1. Jason January 11, 2020 4:29 am #

    Hi Alan,

    I have been reading your books and video, this is one of the best investment I have done. Thank you so much to keep it affordable and providing me with wealth of knowledge to start on CSP and CC.

    I have been going live this month and I came across a good problem.

    Recently, I bought AAPL CSP 32DTE PUT options @265 on 16 Dec and AAPL share just keep shooting up. I follow the 20% rules to exit, reassess the situation and decided to re-enter for 17 DTE CSP with higher strike @ 285. I think it is at the last week and I might hit the 10% rules again. I am wondering now whether to enter other options with less than a week of DTE CSP.

    My question is, if it hit the 20%/10% rules, do I choose another monthly options which can be 42 days away? Your book mentions I should choose AAPL to avoid the earnings on 28 Jan.

    Choose a shorter time frame not more than 17 Jan to ensure I enter on the 3rd week of the month, ensuring all my entry are on monthly options around 30+ days. This is what I have chosen.

    Regards,
    Jason

    • Alan Ellman January 11, 2020 7:10 am #

      Jason,

      WOW… you’re off to an impressive start. The use of exit strategies is what sets BCI members apart from others.

      When we sell cash-secured puts and then employ the 20%/10% guidelines after substantial share appreciation, we generally sell the next put on a different underlying to avoid potential profit-taking. AAPL has been heading north, up 100% in the last year and so using the same stock to roll the strike up has had successful results. It has been fueled by positive news on the trade deal and infusion of capital by the Chinese government into its economy. This benefits companies like AAPL. No guarantees that this will continue but it certainly could.

      You are 100% correct that we must avoid the 1/28 (after-hours) earnings release. Since AAPL has weekly options, the expirations up to 1/24 can be used and then after 1/28.

      Determining whether to close a CSP position, we evaluate how much will be generated from the new put and comparing it to the cost-to-close the original put sale. For example, if the cost-to-close is 1.5% and we can generate 2% within the designated time frame on a new position…. why bother? Just allow the put to expire worthless (we still keep the premium) and move on the another CSP position after expiration.

      Finally, I do prefer Monthly options as I am monitoring 15 – 25 positions each month (50 -100 contracts) and having all expire on the same date works best for me. This is a personal preference rather than a hard rule.

      Keep up the good work.

      Thank you for your kind words.

      Alan

  2. Tay January 11, 2020 5:27 pm #

    Hi Alan,

    I have several questions for you to please respond to:

    #1. When do you (Alan, as an individual investor) start to review/evaluate for your own stock/option picks/portfolio from the latest provided stocks from the BCI Weekly Stock Screener? More specifically….

    Say for an example… the BCI Weekly Stock Screener with a Report Date of January 17, 2020 is made available to BCI premium members on Saturday afternoon/evening (January 18, 2020).

    Do you (meaning Alan, as an individual investor) wait until Monday January 20, 2020 and of course, wait until sometime after the NYSE has been open for an hour or slightly more to ***start to*** make your stock/option ***reviews/evaluations*** (of both the monthly possible stock/option candidates from the BCI Weekly Stock Screener) with a February 21, 2020 Friday Expiration Date? February 21, 2020 being the next monthly Expiration Date Friday.

    If you were to start on say Saturday or Sunday (January 18/19, 2020) the market is closed and all you can see from a bid/ask standpoint is “after hours” quotes and many times wild numbers for both stock and option pricing. Granted, you can see the stock’s past fundamentals and the past technicals, as well as the stock’s historical pricing charting, EMA’s, volume, etc.

    #2. Do you (meaning Alan, as an individual investor) keep a personal continual stock watch list at all times and review that list throughout each week and each month… adding and deleting as appropriate?

    I really enjoy the BCI and your books and videos!! Thank you Alan!

    Tay

    • Alan Ellman January 12, 2020 8:03 am #

      Tay,

      My responses:

      1. On Friday (Thursday if I’m traveling) I will evaluate my current positions for rolling opportunities and those that I decide to roll will be part of my February contract portfolios.

      2. I will review the new stock report on Sunday to pre-market on Monday (once a month) to make my stock selections depending on cash available. I will review recent option pricing to assure that the implied volatility of the stock will result in an initial time-value return goal range that meets my system criteria (2% – 4% for me).

      3. I will review the option-pricing when the market is open on Monday to confirm which options to sell and reassure they will meet my goals.

      4. I will enter new trades between 11 AM and 3 PM ET to avoid the volatility of early morning and late afternoon computerized institutional trading. I will then move into position-management mode by entering buy-to-close option limit orders that meet our 20% guidelines (change to 10% mid-contract).

      5. I will check my positions at least once a day.

      6. I do keep personal watch lists next to my computer. They are the same reports all our premium members receive for ETFs and stocks. When a new report comes out, I print it out and replace the previous one.

      All this will not take that long and has been working successfully for me for over 2 decades.

      Glad you’re enjoying my books and videos.

      Alan

  3. Barry B January 11, 2020 9:11 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 01/10/20.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at 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]

  4. Andy January 12, 2020 10:52 am #

    Alan,

    If a call I Purchased from the list for consideration the first week but is off the following week(s) does that mean it should be closed out?

    Thank you

    Andy

    • Alan Ellman January 13, 2020 6:19 am #

      Andy,

      No. Once a trade is entered, we manage it based on our exit strategy arsenal set forth in my books & DVDs. Should we sell the stock, a new one is selected from our most recent stock or ETF report.

      Alan

  5. Bert January 12, 2020 5:14 pm #

    Alan,

    What is the formula for calculating profit or loss on an exercised
    stock when a deep in the money covered call is made on that stock?

    Regards,
    Bert

    • Alan Ellman January 13, 2020 6:39 am #

      Bert,

      If we sell an ITM covered call on a stock that is subsequently exercised (sold), the profit is the time-value (TV) component of the premium:

      FINAL Profit = TV/ (Stock price – Entire premium)

      If we buy a stock a sell the $30.00 call for $3.00 and the stock is sold at the strike price:

      $1.00/($32.00 – $3.00) = 3.45%

      Now the Ellman Calculator for INITIAL TV returns is set up slightly differently for ITM strikes where the cost-basis is the stock price – intrinsic-value (IV) component on the premium. In this hypothetical:

      $1.00/ $32.00 – $2.00) = 3.33%

      I make this subtle distinction because the final outcome is not known when our covered call trade is initially executed.

      Alan

  6. Nancy January 12, 2020 7:21 pm #

    Alan,

    I am using the Elite Calculator as I think through what to do about an initially OTM AAPL $250 covered call that has turned very very ITM. I’ve rolled the expiration out and up to $260 exp Jan 2021(!) It feels like gambling but I don’t think that AAPL can continue this pace of stock price increase.

    Currently, the value loss is $310 minus $260 which is quite unpleasant. Is continuing to roll out and up the right answer when the stock price corrects?

    Thank you in advance –
    Nancy

    • Alan Ellman January 13, 2020 6:50 am #

      Nancy,

      There are 2 ways to view these trade results:

      Pessimistic: If we used a different strategy (buy shares, do not write a covered call), we would be up more money at this point in time.

      Optimistic: We have maximized our trade as initially structured and have downside protection down to the $260.00 strike. I use this one.

      If we buy back the $260.00 call on 1/17 if the strike is still ITM, we will pay the difference between current market value and the $260.00 strike (intrinsic-value) plus a very small time-value premium. Is this risky? The question we ask ourselves on 1/17 is “would I buy AAPL today at the current price?”

      The next question is “if yes, will the time-value credit meet my initial time-value return goal range?”

      We should never feel bad when we maximize a trade as initially structured. We should also reject any emotions when making our trade decisions.

      Keep up the good work.

      Alan

      • Nancy January 13, 2020 10:44 am #

        Thank you so much, Alan. I am looking forward to learning more from you and your teaching materials. The Elite Calculator and the Blog Q&As are excellent.

        With Appreciation,
        Nancy

    • Terry January 13, 2020 5:19 pm #

      AAPL and TSLA stock prices have gone parabolic.

  7. Barry W Link January 13, 2020 5:16 pm #

    I have an option that has gone down to the buy back rule 10%.
    At the end of day the stock has a buy order imbalance. Does that mean too many buyers and not enough sellers. Shouldn’t the stock go up tomorrow?
    The stock ticker is FND

    • Alan Ellman January 13, 2020 6:35 pm #

      Barry,

      After-hours trading is showing a neutral bias. We’ll have a better assessment after 8 AM tomorrow morning.

      Alan

  8. Alan Ellman January 13, 2020 6:37 pm #

    Webinar just added:

    I was invited to be the featured speaker for an Options Industry Council (OIC) webinar event on Wednesday April 8th. I’ll post more information as I receive it.

    Alan

  9. Steve January 14, 2020 6:07 am #

    Alan,

    On the latest weekly stock screen and watchlist for 1/10/20, the expiration is 1/17. Is it too close to expiration to place new positions, or can I go out to the Feb. 21, 2020 expiration?

    Thanks,
    Steve

    • Alan Ellman January 14, 2020 8:04 am #

      Steve,

      My preference is to wait until Monday or Tuesday after expiration Friday to enter new monthly contract trades. Because of the logarithmic nature of time-value erosion or Theta (starts off very slowly and increases exponentially as we get closer to expiration), we will lose very little (if any) time-value premium and eliminate several days of risk.

      Waiting until Monday also gives us the benefit of the latest premium stock report which is published on the member site over the weekend.

      Alan

      • Steve January 15, 2020 8:56 pm #

        Thanks Alan!

        By the way, I decided to use your covered call picks on the weekly expiration 01/24 on my paper account and I’m up about $1200. Just to get my feet wet with your system.

        Regards,
        Steve

      • Other Steve January 19, 2020 11:35 am #

        Looks like we have another Steve on here, so I’ll be the other one 🙂

        In regards to the article I had a similar situation come up recently. Here’s a summary: 3 weeks in the stock had climbed to where I could unwind for about the same return as if I waited the full 4 weeks until expiration. My thought process was: Why not take the money early and reinvest it to make more money? So I did that, but as Alan said, when looking for a new investment it didn’t seem there was much extra money to be made on calls 5 weeks out.

        -Other Steve

  10. Dietmar January 14, 2020 6:29 am #

    Hi Alan,

    I need to ask you for advice. Since I do not have a protected account as you guys in the US, I was wondering if it would make sense to place a stop limit order on stocks that are getting close to earning reports. If the stock kept it’s value, I could avoid short term gains, an in case it moves south I would have stop limit order to limit my downward risk.

    For instance, I BTC the BMY 17Jan20 62.50 USD contract at 1.99 USD on 27.12.19. I sold the contract for 1.29 USD, leaving me 70.00 USD loss. The stock appreciated so far by 8.07 USD, making up greatly for the option loss. The chart for the stock looks good although it is not in bold on your actual running list. Would it make sense to hang on to the stock until the next ER on Feb 6th, by placing a stop limit order to protect the gains and sell the next contract after ER has been published?

    The stock has been moving up on the weekly charts since July 22nd 2019.

    I know Feb 6th is not right around the corner.

    Thank you for your thoughts.

    Regards
    Dietmar

    Would that make sense

    • Alan Ellman January 14, 2020 5:33 pm #

      Dietmar,

      We generally avoid earnings reports in our covered call writing portfolios. Rarely, there may be a stock we have so much confidence in that we decide to hold it through the report and then write the call post-report. Years ago, I did this successfully with CSCO and AAPL.

      Setting a stop limit order does not protect against a gap-down that may pass lower than the limit strike. A safer approach would be to buy a protective put but, in this case, we are spending money.

      Earnings reports represent risk. Each investor must decide if our personal risk-tolerance matches that risk.

      Alan

  11. Alan Ellman January 15, 2020 7:26 am #

    Premium members:

    A new Blue Chip Report for the top-performing Dow 30 stocks for the February 2020 contracts has been uploaded to your member site. Look in the “resources/downloads” section (right side) and scroll down to “B”

    Alan

  12. Alan Ellman January 15, 2020 5:35 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

    New members check out the video user guide located above the recent reports.

    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

  13. Tay January 15, 2020 5:52 pm #

    Alan,

    This is my first Earning Season Report Quarter as a member of BCI. I have seen/read your information on what to possibly do during Earning Reporting Season…. Several options are: Totally avoid stocks that have earning report during the monthly contract (next ending 2-21-20, a 5 week contract period). Obviously OK to go with stocks that have no earnings reports and/or wait until the earning report has past and/or ETF’s, stay in cash (which I don’t like to do, especially in this market), etc.

    Question: Could any other “idea” be to, say on January 17, 2020… roll to one (1) week AAPL contracts, as Apple reports its earnings on Tuesday, January 28, 2020; then reevaluate everything regarding AAPL and maybe roll to a AAPL 2-21-2020 contract if all satisfactory with my requirements (EMA’s, option pricing, fundaments, technicals, etc)… at the end of the one (1) week?

    I have not seen this idea mentioned in any of the videos, written material of BCI. Granted though, I have only been a member for a few months and I may have missed this option (no pun intended) in one of the videos/written materials.

    Thanks Alan!!

    Tay

  14. Patrick January 15, 2020 5:54 pm #

    Hi Alan,

    I hope that the new year is treating you and yours well. I’m so excited to finally be a part of the BCI group with my premium membership. I’m eager to fully understand all the information you provide.

    After trying my hand at buying options for quick profits I have found that is not for me. Your proven slow and steady system is one I wish to master and employ from here on out. I just wanted to again say how grateful I am that you created the BCI way for your followers.

    I have sold some company stock so as to have a proper amount of funds to begin with. While I wait for these funds to be deposited in my brokerage account I just have a basic question I hope you can field. I’m a bit overwhelmed and wanted to know if you think this would be a good way to get started.

    Sell several OTM puts to establish a holding of stocks for covered call writing or simply buy/write covered calls? Should I sell OTM puts to acquire stock I’d like to own and then write covered calls on this stock or simply buy/write. Or both? Hopefully this is a fair question.

    Either way any guidance no matter how general is most welcome. I’m in from here on out with the BCI way. Thank you again for all that you do!

    Warm regards,

    Patrick

    • Alan Ellman January 16, 2020 7:17 am #

      Patrick,

      Let’s start with the assumption that we have mastered the 3-required skills for both strategies (stock selection, option selection and position management). Let’s also assume that we have paper-traded both strategies to confirm that we have a practical understanding of the basics and nuances of the strategies. This preparation should take about 3 – 4 months. Now, to your question.

      Selling OTM puts to enter a covered call trade is known as the PCP (Put-Call-Put) strategy in our BCI methodology. I love this strategy in bear and volatile markets because it gives us an additional layer of downside protection (if exercised, we can write an ITM call option).

      In normal to bull market environments, I prefer covered call writing because we can take advantage of OTM calls to potentially generate 2 income streams per trade.

      You do make an excellent point that, when starting out, using the PCP strategy may be a defensive way to transition to these strategies. I agree.

      If we are starting out in a normal-to-bull market environment, using the PCP strategy and then transition into covered call writing only is a sensible plan.

      Alan

      • Patrick January 16, 2020 3:18 pm #

        Alan,

        Thank you for your response. To say I have completely mastered the three required skills for both strategies is a stretch but now I have a clearer path.

        Thank you for your comments. I mentioned the PCP strategy because it seems like it would be easy money to sell a put on a strong stock in a bull market. Assignment wouldn’t seem likely and one could simply take in the premiums thus adding capital to ones account in the process. But rest assured, I will finish reading everything and I will put in the work to master the required skills.

        I hope you are down in Florida these days where it’s warm. We are just digging out from a terrific snow storm here in the Pacific Northwest. Take care and I look forward to seeing you again at one of your seminars.

        Sincerely,

        Patrick

        • Alan Ellman January 17, 2020 7:44 am #

          Patrick,

          Your due-diligence and motivation is a recipe for success. After mastering the 3-required skills, we are taking advantage of lowering our cost-basis and beating the market consistently, many years substantially.

          Alan (from sunny Florida… no snow shovels in my garage)

  15. Alan Ellman January 16, 2020 3:53 pm #

    Las Vegas Money Show:

    I accepted an invitation to speak at this event May 11th -13th I’ll post detailed information as it develops.

    Alan

  16. Ken January 17, 2020 3:15 pm #

    Hi everyone, what would you do in this situation: CDW had been performing well over the past few weeks. It’s been in my portfolio for 2 options cycles, and up 8% total including premiums. However, today, one analyst suddenly downgraded it, causing a 5% drop. I don’t see any other negative news. Today is expiration Friday and ER is on first week February (no weeklies). It will most likely expire OTM today. Which would you recommend:
    1.) sell on Monday at 3% total gain for less than 3 months, move the cash to another stock with no ER and sell calls there
    2.) hold and wait til just before ER (maybe it will recover?), sell before ER, and decide again after ER if buy it again or move on
    3.) hold and wait til after ER and sell calls after ER?

    My understanding of BCI methodology is to go for the first option. Is that correct?

    • Hoyt T January 17, 2020 11:41 pm #

      Hey Ken,

      We all find ourselves in a situation like this from time to time. Some say it builds character. If that’s true then I am a man of real character.:)

      First, you are starting from a good point. Having owned CDW for less than three months you probably haven’t built an affection for it. Don’t.

      I am not an expert but it appears CDW fell, during market hours, to it’s first level of support at around $136. After hours it rose slightly but then finished unchanged. If it opens down Tuesday morning the next level of support is around $125. If it opened down I would definitely sell it. But that is just me.

      It appears that CDW is not expected to grow much this year and neither are it’s earnings. Could be why it was downgraded by MS.

      CDW is up 75%+ in the last year. Doesn’t mean it can’t go higher. There have been some recent management changes and only insider selling. That is not necessarily meaningful as I once owned a biotech where all the officers sold $100s of millions in the year before it was bought out at a 75% premium.

      I am not qualified to give and am not giving financial advice. However if it were me I would sell and move on. Don’t look back and second guess yourself. Sometimes you get confirmation and sometimes you don’t.

      Consistence is the name of the game. Set rules that apply to your risk tolerance and time available to monitor. Then stick to the rules.

      Good Luck,
      HOYT

      • Ken January 21, 2020 9:33 pm #

        Thank you Hoyt! I was able to sell the stocks before the market went down due to coronavirus concerns

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