We write an out-of-the-money (OTM) covered call and share price moves up but does not breach the OTM strike by expiration Friday, so the option expires worthless. What price do we enter on Monday for the next expiration cycle? The original price, the price at expiration or the original price minus the original premium? This article will present a real-life analysis of such a scenario, using Bank of America Corp. (NYSE: BAC) to demonstrate the BCI approach.
Real-life example with BAC
- 12/1/2025: Buy 100 x BAC at $53.20
- 12/1/2025: STO 1 x 12/19/2025 $55.00 call at $0.61
- 12/18/2025: BTC 1 x 12/19/2025 $55.00 call at $0.06 (10% guideline). No opportunities to generate additional premium by rolling-down
- 12/19/2025: BAC trading at $54.11 as the contract expired
Initial calculations for the BAC trade
- The BCI Trade Management Calculator shows a 19-day return of 1.15%, 22.03% annualized
- There is an opportunity of an additional upside potential of 3.38%, if BAC moves up to, or beyond the $55.00 strike
Post-adjusted calculations for the BAC trade
- There was share appreciation (unrealized, because shares are not yet sold) to $54.11 (from $53.20)
- The final realized option return was 1.03%
- The unrealized share return was 1.71%
- The final realized/unrealized net return for the 19-day period was 2.74%, 52.64% annualized
What cost-basis should we enter for the next contract cycle?
Since the shares are owned at $54.11 prior to market open, and the previous option profits were calculated for the last contract cycle, we will start with this price for the next cycle. If we didn’t write an option and just calculated share appreciation, we would use $54.11 because previous option and share appreciation were booked for the previous cycle. I do not like using the option profit twice, once to calculate returns and the other to lower cost-basis. I understand that other experts may have a different philosophical approach to the mathematics, but I’m happy to share the how and why of the BCI technique.
Discussion
When an OTM covered call expires worthless on expiration Friday, we use the closing price of the stock when entering our next trade on Monday. One final thought: If we don’t enter another call trade on Monday and wait an extended period of time to do so, use the current market value of the stock at the time of the trade.
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