One of our BCI covered call writing exit strategies is titled “hitting a double” This opportunity arises when share price declines after a covered call position is opened, short calls are bought back using our 20%/10% guidelines and then the same option is re-sold when share price rises. This article will highlight how to use the multiple tab of The Ellman Calculator to update and monitor our positions when implementing this position management technique.
Chart pattern when “hitting a double”
Hypothetical “hitting a double” series of trades
- Buy BCI at $48.00
- Sell the $50.00 call for $2.00
- Stock price declines such that the $50.00 call premium meets the 20% guideline (premium value declines to $0.40 or lower)
- Share price rises such that the $50.00 call value rises to $1.00 (in this hypothetical)
Overview of trades
The cost basis of $48.00 remains the same throughout these trades, option credit/debit is moving in both directions and upside potential from $48.00 to the $50.00 strike remains constant at $2.00. With these facts in mind, we can monitor the trades by simply changing the option credit throughout the various legs of the trades. The option credit starts at $2.00, drops to $1.60 and then moves up to $2.60
The Ellman Calculator monitoring the “hitting a double” trades
- Brown field: Options returns move from 4.2% to 3.3% to 5.4% as options are sold, bought back and then re-sold
- Yellow field: Upside potential remains constant at 4.2%
- The stock side of the final trade will be determined by the price of the stock at contract expiration
The screenshot shows the trade adjustments on different lines. In real-life trading we can simply adjust the top line in the spreadsheet.
The “hitting a double” exit strategy has 3 legs that can be monitored using the multiple tab of the Ellman Calculator by adjusting the net option credit during the life of the trade. Final results (realized or unrealized) will be calculated when stock price at expiration is known.
***For more information on covered call writing exit strategies:
Complete Encyclopedia for Covered Call Writing- classic edition: Pages 245 – 302
Complete Encyclopedia for Covered Call Writing- Volume 2: Pages 243 – 272
For a real-life example of “hitting a double”, click here.
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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 share some of these testimonials in our blog articles. We will never use a last name unless given permission:
My name is Francesco, Italian national living in UAE, commercial airline pilot, 34 years old.
I have been following your blogs and videos for some time and I have been really impressed, thank you so much for your work! The feedback I have seen on BCI has been truly amazing!
It would be an honor to meet you some day!
All Stars of Options
Bally’s Hotel, Las Vegas
10 AM – 10:45 AM
How to Select the Best Options in Bull and Bear Markets
Las Vegas Money Show
Bally’s/ Paris Hotel
12:15 – 3:15
This is a paid event hosted by The Money Show
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