Our covered call writing and put-selling positions can be radically impacted by corporate events. In July 2020, Match Group, Inc. (NASDAQ: MTCH) showed extreme price volatility due to 2 corporate events, a spinoff and a stock split. Price dropped from $105.00 to $95.00. They also resulted in option contract adjustments. The loss was severe but not quite as extreme as it initially appeared. On July 1st, IAC/InteractiveCorp. (NASDAQ: IAC) was spun off and there was an unusual stock split.
MTCH price chart in July 2020
MTCH Stock Split: 2nd corporate event after spinoff
- For every 100 shares of MTCH owned, 103 shares would be delivered
- $36.81 per contract would also be delivered
- If MTCH is trading at $95.00, the actual value becomes: ($95.00 x 1.03) +$0 .3681 = $98.22
When stock price has extreme movements, we need to investigate the causes. In some cases, corporate events like spinoffs and stock splits account for most of that movement. In this case of MTCH, the spinoff was not well-accepted in the investment community and the stock split created an additional price change that was mitigated by the new deliverables.
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Are there any ways or is there anything we should look for to take advantage of these corporate events?
Thanks for article.
As I was reading through your Complete Encycl for Covered Call book I came across a section I need clarity on.
Specifically, at the top of page 144 in the first paragraph ie ” As demonstrated in Figure 60 … unwind exit strategy.”
Can you explain how the $11 came about in the calculation ($390 – $248 – $11 – commissions)? And the $115 per contract bonus that is generated from this calculation above -> is this the profit to be reused in the next covered call position that you write?
In the Conclusion paragraph just below it you refer to this $11 per contract of extra generated cash flow from the unwinding of the covered position.
I don’t understand the numbers? Am I missing the mid contract option value for the current position if the position is closed out? What is the relationship between the $11 and the $115?
Sorry for any confusion in what I am sharing.
Thank you in advance.
This trade is an example of the mid-contract unwind exit strategy. Let’s break it down:
1. The $50.00 call was sold for PRGO
2. 7-days later PRGO moved up to $56.79
3. The cost-to-close the $50.00 call was $6.90 ($0.11 time-value)
4. After closing both legs of the PRGO trade, the ITM $65.00 call was sold for BUCY, currently trading at $67.48. This generated a premium of $3.90 ( a second income stream in the same contract month).
5. Of the $3.90, $2.48 was intrinsic-value (not profit so we deduct it), $11.00 was the cost-to-close the PRGO position and $16.00 was the trading commissions (more expensive when I executed these trades)
6. We do the math and come up with a net gain of $115.00 per-contract for initiating the mid-contract unwind exit strategy.
Hi again Alan.
One more item I need clarity on.
On page 149 of the Complete Encycl for Covered Call Writing in Figure 64 and Figure 65 you have a Cost or Basis value of $124 – how is this number calculated?
The APPL purchase price is $198 and Call Option Premium is $65.
And, do you normally use the cost basis ($124) to repurchase the option – as you mention at the top of the next page?
Again thank you.
This example relates to tab D3 of the Schedule D of the Elite Calculator where a stock is purchased, an option sold and then the option is bought back or closed while still retaining the stock shares.
In the case of covered call writing, the option acquisition date (purchase date) is after the sale date. In the example on page 149 of The Complete Encyclopedia for Covered Call Writing (classic edition), the AAPL options were sold for $650.00 per-contract and bought back (BTC) at $124.00 per-contract. This would be analogous to buying a stock at $124.00 and selling for $650.00… our cost-basis is $124.00.
Awesome. Thanks for the clarity Alan.
I am really enjoying your book.
No. The Options Clearing Corporation (OCC) evaluates each of these corporate events on their own merit and then makes contract adjustments such that buyers and sellers of calls and puts are made whole. There are no winners or losers.
It is our job as retail investors to understand these contract adjustments so that we can manage our trades appropriately.
Just wanted to get your thoughts on how you think your system would fair if we run into a long-term sideways market over the next decade or so? Your system of stock selection yields the strongest stocks in the strongest sectors. I think it looks like they are mostly mid-cap to large-cap stocks. What if the broad market experiences anemic performance over the next decade and the potential candidates of strong stocks dry up? Would you modify your stock selection process in any way to generate more candidates for writing covered calls on? Would you do more ATM or ITM strikes on solid companies that are not experiencing much price appreciation? Your insights would be appreciated.
My expectation is that a decade of market movement would consist of both upturns and declines. But let’s assume that we have a decade of completely flat returns.
For those of us who have mastered the 3-required skills, my expectation is that we would beat the market and significantly in many of those years. Just envision a flat stock where we generated even 1% – 2% per-month… annualize that.
In reality, a decade of stock trading will have its ups and downs and, even in a consolidating market, there will be stocks and industries that are out-performing. Members of our BCI community must locate these securities and take advantage of the opportunities they present.
The “moneyness” of the option will vary based on market conditions and chart technicals. Even in a consolidating market, I lean to more OTM strikes than ITM strikes.
The BCI community will take a consolidating market and watch us go.
So, if I had a time machine and went back to 2000-2010 or even back to the era of 70’s “stagflation” and applied the BCI strategy there probably would have still been good covered call candidates for this system?
I’ve wondered about this ever since I first read Alan’s excellent book. I still haven’t found any analysis online for stock options in a (stag)-inflationary environment. (One wonders if we even have good historical options data for that period)
It would be interesting for Alan to post an article about BCI and speculate on how it might fare in all the different stages of the long-term debt cycle. It sure feels like we are coming up on some major shifts…
Roger and Josh,
I can take this time machine back to the mid-1990s when I started selling stock options. There have been a multiplicity of economic cycles during the past 2+ decades and certainly some periods were more challenging than others.
That said, we have more than 4000 securities to choose from and during even the most troublesome of times there were always out-performers to choose from for option-selling. Our job is to locate the stocks and ETFs and then take advantage of the opportunities they offer.
We currently have a near 0% interest rate that the Fed projects to remain at this level through the end of 2023 and perhaps beyond. The stock market is one of the “few games in town” to make money. My plan is to move forward with confidence, a structured plan in place and an exit strategy arsenal ready to be initiated if needed.
So Roger, yes, there was an adequate and sometimes plentiful number of eligible candidates for option-selling during the decade in question.
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 02/05/21.
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Good Morning Alan,
I recently watched one of your Youtube Videos. I liked how you laid everything out (Stocks versus calls and the upside and downside etc. of each strategy-basic but effective). I am hoping that you could provide some guidance for me.
I currently own 23/Contracts of ALT Jan 22’ $30/Call. I waited patiently to get the calls at a good price ($2.35/Average).
My investment excluding any fees is as follows:
$2.35 * 23= $5,290-/Dollars-again not including fees.
I am up 132% (or $7,218.18/Dollars).
Getting to the point. If you were me (I like risk for greater potential profit) what would you do if you were me understanding that I believe this stock will be close to $30/Share come January 2022.
1. Sell short the call and take the profits and then hope to get back in at the $2.35?
2. What other options might I have to make even more money with the options I have?
I’ve been sitting on these long calls for 2 months and want get the most out of them. (Please understand that I am not complaining about the current profit showing).
Maybe a better approach to my buying habits with calls?
Here, at BCI, we are on the sell side of options and cannot offer specific financial advice but can make some general statements you should find useful:
1. With ALT trading at $18.36 pre-market this morning, the long calls are all time-value.
2. If ALT closes close to $30.00 in January 2022, the time-value will have approached zero and the option would expire with no intrinsic-value or worthless.
3. Long calls are battling Theta (time-value erosion) and depending on Delta to enhance value.
4. When investors have winning trades that could dissipate quickly, some might mitigate risk by closing a percentage of the current holdings. This all depends on the amount of risk we are willing to take and our strategy goals which should be defined prior to entering the trade.
A pleasure talking to you. I bought your book “Complete encyclopedia for Covered Call Writings”. And really, it is a method that I love and that totally fits with my way of seeing life. Thanks a lot.
I would like to give you a strategy that I think about after reading your book.
It is about choosing a stock in which you trust and which you would maintain over time, even without using the sale of options on it. Like for example Apple. Just like Warren Buffet is doing with Apple, he keeps it up for years.
If I hold that stock for years, I no longer care whether it goes down or up in a month and would therefore eliminate the continuous search for a new stock from my strategy.
In a complementary way, it would sell options every month. And this way I would have extra income, in addition to what the stock itself can provide me, as long as it is bullish.
I would try to sell “Out of the money” options to benefit from bullish trends. If the options are assigned, I would buy the stock again.
Without a doubt, I know that it is possible to sell a stock with a maturity of one year, however, I think the benefits are less than if I sell the stock monthly.
Do you consider this strategy adequate? Or do you see it as risky, by linking portfolio growth to the long-term performance of the stock?
Thank you very much Alan.
And thank you very much for your weekly emails, with all the advice.
The strategy you have identified is a valid, solid strategy to consider. In my books and online video courses, it is referred to as “portfolio overwriting” (PO)
We set lower weekly or monthly goals, use only OTM call strikes and avoid having options in place around earnings and ex-dividend dates. BCI has also created a Portfolio Overwriting Calculator to assist with our investment decisions.
Here are links to our PO products:
ONLINE VIDEO COURSE:
I know you say you like to hear about your customer trades so here it goes.
This trade was….
1/27/21 Buy 100 Shares of DAR 60.63 $6,063.00
2/8/21 Sell 100 shares DAR 71.307 $7,130.53
1/27/21 Sold DAR Call at 65 strike 170.30
2/8/21 Bought back DAR Call 65 strike 674.69
Loss on Option trade 504.39
Gain on Stock trade 1,067.53
Total Gain on position 563.14
9.3% Gain in 8 trading days or 12 calendar days for 282% Annualized return.
Hope you enjoyed hearing from your newer pupil.
I more than enjoyed hearing from a new member… you made my day.
Continued success and let’s become even better investors as we share information as a community every single day.
I have just finished reviewing the stock watchlist you sent for 2/5, thanks for that…
This is probably a rhetorical question, but, even though the market continues to be “bullish” which would lead us to sell more OTM calls than ITM calls, do you consider the fact that the market and most of the stocks are at all time highs and maybe give up a bit in upside potential for downside protection, until after the inevitable correction.
Probably a personal risk decision I suppose… thanks Michael
One of the advantages of the BCI methodology is that we have opportunities to re-evaluate our bullish assumptions on a weekly or monthly basis.
We also factor in overall market assessment in addition to chart technicals before making strike price decisions.
We also factor in our personal risk-tolerance to complete these determinations.
Finally, we have our exit strategy arsenal in place to take advantage of position management opportunities.
To sum up: We have all bases covered.
Very grateful for all your help. What do you think of ACB?
ACB has been performing well of late and may be a good option-selling candidate. However, poor company fundamentals keep it from making our reports of eligible candidates.
I am currently in a trade that is going very well and I could use your advice on how to exit.
Trade type: Long stock, short call
Stock trade price: $20
Trade date: Feb 2
Option Expiry Date: February 19
Strike Price: $22
Premium Gained: $70
Stock price now: 29.08
Price to buy back option: $7.30
As I understand it, I have made $200 on share appreciation, plus $70 selling the call for a total of $270.
The stock is now worth $2900, giving an appreciation of $900 since I bought it. I’m assuming I can buy back the call for $730, and generate an extra $170 on top of what I’ve made so far?
Any help is greatly appreciated. I am grateful for your previous replies to my questions – it gave me the confidence to get started and I am up 8% so far for the year.
On the stock side, we have a net gain of $908.00 ($2908 – $2000). On the option side, we have a net loss of $660.00 ($730.00 – $70.00). This leaves us a net gain of $248.00 or a 1-week return of 12.4%
If no action is taken and the strike expires in-the-money with the subsequent sale of the shares, the final return will be 13.5%
The “Unwind Now” tab of the Elite and Elite-Plus calculators will do the calculations for us.
I understand the calculations behind the 12.4% if we unwind now, but less sure about how we arrive at 13.5% if no action is taken. Could you please help me understand how we get to that number?
13.5% is the result of adding initial time-value + share appreciation if MJ is priced above the $22.00 strike at expiration.
See the spreadsheet below where I used the multiple tab of the Elite calculator.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
I would love to get your input on my current scenario with my BCI portfolio. I have 3 stocks that I’m bullish on and most of my FEB ITM/OTM calls have moved in the money with all 3 stocks reporting earnings in March. Most of them do not meet the requirements to Unwind.
I know you have mentioned in your books that you have chanced holding options before thru earnings and was wondering what your thoughts are on holding positions that have moved in the money and rolling out and up thru earnings versus giving up the stock gains to avoid earnings reports?
If we decide to hold a stock through an earnings report, we wait until after the report passes before writing the call.
If a strike is ITM during the current contract and we want to retain that stock (about to report), we BTC the near month option and sell the next option after the report passes. This will work in our favor more often than not. We use this approach only when we have confidence in the earnings outcome.
I generally do not undertake earnings risk in my option-selling portfolios.
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 option and implied volatility stats are also incorporated.
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Alan and the BCI team
Hi again Alan,
I was just wondering if you’ve ever done a Pros / Cons video of rolling up an option in the same expiration near expiration for a debit for the purpose of still keeping it ITM to try and capture an extra bit of intrinsic in the hopes it will still assign on expiration day.
I know you’ve done many a vid on at least part of that since roll ups and roll up and out are well known and discussed topics. And of course one of the cons is there’s no guarantee if you pay a debit to do this that the underlying won’t fall before expiration and not actually assign, then you are stuck with a debit for the transaction and have to decide whether to stay in and sell more calls or close or whatever is next in your plan of attack since you didn’t capture the new higher strike intrinsic.
Anyway, I noticed you seemed to be doing more videos lately which is always nice and noticed some pros and cons and comparisons lists in them and just wanted to float an idea for you.
In our BCI methodology, if a strike moves deep in-the-money during a contract, the strategy we consider is the mid-contract unwind exit strategy (MCU). Rolling-up in the same contract puts us at risk of profit-taking with a compromised amount of time to mitigate.
An exception to this guideline is when we are using the PMCC strategy where we have a long-term commitment to the underlying security.
For more information on the MCU:
Complete Encyclopedia-Classic: Pages 266 – 273
Complete Encyclopedia- Volume 2: Pages 243 – 252
You are 100% correct that we should be prepared to take advantage of substantial appreciation in the same contract month (week). The decision upon us is which path to take.