Exit strategies for covered call writing is a critical element necessary to maximize our returns. In December 2020, Alan K shared with me a rolling-down trade he executed with WSM and was curious as to the total trade status. This article will highlight the series of trades from 11/23/2020 to 12/9/2020 for the December 2020 contracts expiring on 12/18/2020.
Alan’s trades
- 11/18/2020: Buy 100 x WSM at $110.55
- 11/18/2020: Sell-to-open (STO) the December 18, 2020 $115.00 call at $2.45
- 12/9/2020: Price of WSM is $104.87
- 12/9/2020: Buy-to-close (BTC) the December 18, 2020 $115.00 call at $0.45
- 12/9/2020: STO the December 18, 2020 $105.00 call at $2.60 (rolling-down)
What is the status of the trade at this point in time?
Using the multiple tab of the Ellman, Elite and Elite-Plus Calculators to determine current trade position
WSM Rolling-Down Calculations
- Top row: This is the initial trade structuring
- Second row: Status of trade after closing the initial $115.00 short call at $0.45 (net option credit moves down to $2.00)
- Third row: Status after rolling-down to the $105.00 strike (net option credit moves up to $4.60)
- Option status after rolling-down: +4.16% ($4.60/$110.55)
- Stock loss locked-in at $5.55 (best case scenario): $110.55 – $105.00 = -5.02%
- Net loss on trade (row 3) if stock price closes at or above $105.00: -0.9%
Discussion
Rolling-down is an excellent exit strategy for covered call writing when share price declines, especially in the latter half of a contract. In the case of WSM, by writing covered calls and implementing the rolling-down exit strategy, a potential 5.02% stock loss was reduced to a 0.9% loss. Calculations can be accomplished using the multiple tab of the BCI calculators.
Best BCI Calculator for Covered Call Writing and Put-Selling click here
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Hi Alan!
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Alan,
If I have a good feeling about a stock I was going to use, and that it may in the short term go up (maybe it has broken above resistance level in uptrend, etc), then can I buy the stock and wait for price rise to go up, and when near a resistance level sell the Call option right then?
If this is alright, then what amount of time(or days) should you think is a maximum time frame to wait upon an expected price rise?(like no more than say 2 days before selling the option?)
Thanks,
Adrian
Adrian,
It is extremely difficult, bordering on impossible, to consistently predict the movement of a stock price in the short-term. In this global economy there are too many factors that can influence share price in the course of a few days. Just look at last week’s price action, a veritable roller-coaster.
After identifying a stock we like from fundamental, technical and common-sense perspectives, we check the calculations to see if the initial time-value returns meet are goals. If the “deal” is there, we take it. We are only undertaking weekly or monthly obligations and have Theta (time-value erosion) raring its ugly head looking to deplete our premium values.
When I locate a security that meets system criteria that will generate the initial returns I am seeking, I execute the trade and move to position management mode.
Alan
Hi Alan,
Quick question – in the final week of a contract cycle (expiration week), do you keep the 10% BTC rule intact? Since there is little time to seize an opportunity to “hit a double”, wouldn’t it be better to take off the 10% BTC and allow any deep OTM positions to expire worthless?
Thanks,
Roger
Roger,
We can remove the 10% guideline in the final week of a contract as long as we can closely monitor our trades in that time-frame. I don’t like leaving our trades neglected.
Even in the final week, there will be exit strategy opportunities that present. Here is an example of one from one of my portfolios that I previously published:
https://www.thebluecollarinvestor.com/hitting-a-double-on-the-last-day-of-a-contract/
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 05/14/21.
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:
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On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close
Since we are now in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan,
I wish to repeat that Your “Reasons to remain calm” letter was very reassuring and your forecast came true.
I have not sold my shares. Several 05/21 CC buyback orders were filled, some at 20% and others at 10%, and I have not yet rolled down because the prices were very low, even after the market rebound.
Coincidently WSM is one of my trades from last month, and was rolled out as follows:
03/22/21 buy 200 shares WSM at 176.58
03/22/21 sell 2 WSM 04/16/2021 175.00 C for 8.64
04/05/21 buy 2 WSM 04/16/2021 175.00 C for 0.90
04/15/21 sell 2 WSM 05/21/2021 175.00 C for 6.20
WSM closed yesterday at 171.77 and ER is expected for 06/16/21.
If WSM continues to go up and is exercised next Friday, I will be very happy. but if my calls end up worthless, I cannot roll again, as WSM has no weeklies. In that case, do you have any comments about the best steps to take?
Roni
Roni,
On 5/21, if the $175.00 strike is OTM, we hold shares worth $???.??. That’s what we have. Now, what do we do with this $???.??. It doesn’t matter what we paid for WSM.
Following the BCI guidelines, we sell the shares and move on to another security that meets our system criteria for option-selling for the June contracts.
A rare exception to this rule would be if we wanted to retain these shares in our portfolio as a longer-term position. In that scenario, we hold WSM and write the call for the subsequent contract month after the report passes (Monday or Tuesday after expiration Friday).
The main takeaway is that we don’t base our decisions on previous data but rather on the current status of our trades.
Let us know how the trade works out.
Alan
Alan,
I always follow the BCI guidelines, thank you for reminding me.
I will follow the rules with WSM and will post the results as soon as possible.
Roni 🙂
Alan,
May I get your advice on the following?
1. Capital Allocation, how should I go about? Follow your advice in the report?
– What if some stocks still remains in the portfolio? How will that affects capital allocation?
2. Stock Selection
– Can you explain the difference between Stock Screening Report, High Dividend Stocks and Blue Chips?
– Is Stock Screening Report only meant for Covered Call and Cash Secure Puts?
– Blue Chips only for PMCC?
– BTW, you mentioned in another email about TLT for PMCC but I didn’t see it in the ETF report
Regards
Dennis
Dennis,
Capital allocation: Take the total cash available and divide by the number of positions planned. Then divide the price-per-share into that amount and round to the nearest 100. That will determine how many shares we buy and how many contracts to sell. Use this formula for the cash remaining in our portfolio outside existing shares.
Reports: The stock report is our main report and consists of more growth type companies. The ETF report and Blue Chip reports are more conservative approaches to option-selling (in most cases) that will result in lower risk and lower returns. The ETF Reports will also give greater diversification for less positions and therefore require less cash investment. These 3 reports are appropriate for both covered call writing and selling cash-secured puts. I would favor the Blue Chip Report for the PMCC strategy since we are taking long-term positions. The High Dividend Yield report is for a strategy outside option-selling (dividend capture).
TLT: This ETF has been in our reports from time-to-time. If we enter a PMCC trade with a security like TLT, we don’t close the trade if it is removed from our rigorous screening watch lists but rather manage the trade as set forth in our books and online courses.
Alan
Hello Alan,
Thanks for the reply.
For capital allocation, may I know when should I use 100% or lower percentage? When should we use 50% for this and leave 50% in cash?
One more question: why is PMCC Leaps considered a longer term commitment compared to Stocks in CC? Shouldn’t both be long term?
Regards
Dennis
Dennis,
The amount of our available cash that should be invested is based on our overall market assessment and personal risk-tolerance so it will vary from investor-to-investor.
I am almost always fully invested with the exception of extreme aberrations (2008 crash, pre-presidential elections, COVID) where I may drop to 50% or 0% invested. I will always be 100% transparent in our premium reports when I am not fully invested. This is not a call to action for our members but simply giving my personal opinion.
The PMCC strategy generally uses a long LEAPS position 1 – 2-years out. The underlyings are usually blue chip stocks that are cash rich with a long history of quality earnings and revenue growth.
With traditional covered call writing, we are using the best-performers at the point of trade entry and constantly re-evaluating our bullish assumptions. We are also avoiding earnings reports meaning that we rarely will hold a stock for more than 2 months. ETFs are exceptions.
There are pros and cons to both approaches that must be fully understood before selecting which option-selling approach is best for us and our families.
Alan
Hi Allan,
I am a current subscriber, but don’t have paid access to stochart. Many traders are using TradingView.com for charting because is more friendly and has mobile cloud support.
The only indicator that I have trouble setting up is “Slow Stochastic”. TradingView has a normal Stochastic (14, 3, 3).
For example, in today email, MS is marked as good to go and indeed:
1. Price above ema20
2. Ema20 above ema100
3. Obv up
4. Macd histogram above 0
I have trouble with understanding the stochastic indicator. Blue line is %D and the red line is %K.
Should I treat this as following: blue line (%D) above red line (%K) and disregard divergences or overbought/oversold?
Thank you Alan
Mick
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Mick,
The default setting for slow stochastics is perfect (14,3). Focus in on %K, not %D where there will be too many whipsaws (in the latter) to be of any significance, so %K only.
See pages 65 – 67 of “The Complete Encyclopedia for Covered call Writing- classic edition” for more information on the slow stochastic oscillator.
Alan
Alan,
I really appreciate all of your detailed articles.
Some of the best I’ve found!
I could use some advice for this week:
I followed your formula and I currently have a PMCC in play – however, the short leg just moved ITM. It expires this Friday, May 21.
I’m concerned about early assignment – so what do I do? (This is the 1st time I’ve been in this position)
• Immediately close the trade? (buy back the short leg and sell back the LEAPS)
• Roll the short leg up and out – but risk being in the same position next week?
I’m hoping the stock drops a little and the short leg expires worthless, but I’m not confident that will happen.
Your help is appreciated!
Thank you,
Justin
Justin,
Early assignment of our short calls is extremely rare. When it does occur (still rarely) it is usually associated with an ex-dividend date. If your underlying generates dividends check the ex-date here:
http://www.dividendinvestor.com
Assuming no ex-date prior to contract expiration, we consider rolling as expiration (4 PM ET on expiration Friday) approaches. I usually start rolling ITM options between 1 PM ET and 2 PM ET on expiration Friday.
Early exercise not associated with ex-dates is possible but extremely unlikely and so we trade based on reasonable expectations.
Alan
Thank you!
Hi Alan
I love your content and have been in search of an answer to this question.
Rolling down when your bid and ask are 0?
For example.
As i am getting closer to expiration, i have noticed some options have a zero Bid and Ask value?
Due to the large change in share price over the month, my original option that I STO has now a 0 bid and 0 ask?
Can i actually BTC on a 0 ask and then STO a new option contract with 2-3 days left?
kind regards
Ed
Ed,
Make sure you check option-chains during hours when markets are open. You should see at least an “ask” price (a penny or more).
We cannot close our trades for $0.00 but a few pennies is not unusual as expiration approaches.
Alan
Alan,
Reconfiguration of Rusell 2000 index – I read in your triple witching Friday (CC Enc Chapter 19) that Russell 2000 index is reconfigured every June.
Since my current Wheel underlying ETF is IWM, do I need to find out this exact date and treat it like an earnings week on a stock (i.e., don’t sell any obligations expiring that week)?
Thanks,
Brian
Brian,
Yes, I do believe that it is a good idea not to have a short call in place when the Russell 2000 rebalances. Since IWM has weekly options, we can continue to write short calls against our long positions with the exception of the week of the rebalancing. We can then return to Monthlys if that is our preference.
This year the rebalancing will go into effect after the market closes on the last Friday of June (the 25th).
Alan
Alan,
Thanks so much for the follow-up! With regard to the Russell rebalancing, is Friday June 25th the Friday we don’t want to have a Short Call position expiring?
Or the following week since the “rebalancing” occurs after the close Friday 6/25? (in other words, will market react the next week and I won’t want to be in Short Call position for Friday, June 30?
Or is is it going to be announced the companies shuffling around prior to 6/25 causing market to react during that week?
Thanks,
Brian
Brian,
Rebalancing the Russell 2000 portfolio positions are pre-announced on June 4th, 11th and 18th and finalized after market closes on the 25th. The week of the 25th may see the greatest volatility leading into the following Monday. Keep in mind that we may see little or no volatility.
Since it occurs only once a year, avoiding short calls the week ending June 25th is reasonable as a hedge. Re-entering short calls mid-day on Monday or Tuesday after any remaining volatility (if any) subsides is also a reasonable approach.
Alan
Alan
I have liquidated 2 trades this week which were OTM and had very low time value. I got a very nice profit and left a small amount on the table.
Now I have the resulting cash, free for re-investing.
Question:
Do you place new trades for the 06/18/21 cycle, or do you wait until next week?
Roni
Correction * deep ITM, not OTM.
Roni,
I wait until Monday. Market-makers tend to reduce the time-value of the premiums on Thursday or Friday prior to the weekend so there is little or no loss in time-value if we wait until Monday. This will also allow us to avoid weekend risk.
Alan
Alan,
thank you so much for this information.
This question has bothered me for a long time.
Roni
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.
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Alan and the BCI team
Premium members,
A new Blue Chip (Dow 30) Report for the June contracts has been published on your member site. Look in the “resources/downloads” section of the site (right side) and scroll down to “B”
Alan and the BCI team