Alan K asked me to analyze a series of covered call trades he executed with RVLV over a 4-day period. Share price accelerated substantially once the trade was entered and a significant 4-day profit was realized. Let’s investigate all aspects of these trades.
Alan’s trades
- 6/21/2021: Buy 300 x RVLV at $61.83
- 6/21/2021: STO 3 x July 16, 2021 $65.00 calls at $2.59
- 6/25/2021: RVLV priced at $70.00
- 6/25/2021: BTC 3 x July 16, 2021 $65.00 calls at $6.71
- 6/25/2021: Sell 300 shares of RVLV at $70.00
*In our BCI methodology, this is known as the mid-contract unwind (MCU) exit strategy.
Bullish price chart of RVLV during the 4-day time-frame
RVLV Price Chart from 8/21/2021 to 8/25/2021
The bullish technical signals in the light brown field reflects an appropriate underlying for option-selling.
Initial covered call writing calculations for RVLV
RVLV: Initial Calculations
Using the multiple tab of the BCI Calculators show an initial 1-month time-value return (ROO) of 4.2% with an additional 5.1% of upside potential. This robust 9.3% max return is a reflection of a high-volatility stock.
Determining the time-value cost-to-close: Entries into the “Unwind Now” tab
RVLV: Entries into the Unwind Now Tab
Determining the time-value cost-to-close: Final calculations from the “Unwind Now” tab
RVLV: Final Cost-To-Close Calculations
The time-value cost-to-close, using the Elite-Plus Calculator, is 2.63% bringing our max return down from 9.3% to 6.67%. This is a 4-day return!
The question to ask
When closing our entire covered call trades mid-contract, we ask ourselves if we can generate at least 1% more than the time-value cost-to-close in a new trade with a different stock by contract expiration. In Alan K’s case, at least 3.63% over the next 21-days. If the answer is yes, we move forward with MCU. If no or unsure, we take no action and continue to monitor our initial trade.
Discussion
It’s never wrong to take a 4-day 6.67% realized return. It is incumbent upon us to have a structured system in place that will guide us in establishing our management trades. In this case, establishing the time-value cost-to-close along with the 1% guideline are extremely useful in these determinations.
Your generous testimonials
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:
Hi Alan,
I want to tell you how much I value your service. I studied options for two years before I made my first trade in 2013. My studies included all your books as well as others however none of the others provided the insight to options trading that yours did. I traded on my own for a few years finding the underlyings on my own mostly via IBD. However, life and my profits improved markedly once I subscribed to your weekly report! I’m in my 70s now and have a lot of fun trading options and no matter how long I keep this up, I want you to know I’ll be doing it with you! Thanks to all the BCI team members that help make my life easy and fun! You all stay safe and have a happy holiday season!
Regards,
Bob
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January 11th – 13th
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Alan,
I have been using the PCP strategy now for 6 months and pleased with my results. I do have one question which I’m not sure about related to strike selection.
I know you suggest OTM strikes for puts but what about for calls? Only OTM for calls too so we can keep the stock?
Thanks for sharing your knowledge with us retail investors.
Troy
Troy,
You are correct that, in our BCI methodology, we favor OTM puts for the initial leg of the PCP strategy.
If the put is exercised, the call strike selected is based on:
1. Overall market assessment
2. Personal risk-tolerance
3. Chart technicals
4. Initial time-value return goal range
ITM calls are more defensive while ATM and OTM calls are more aggressive.
Bottom line: Strike selection for the call leg of the PCP trades is the same as those we would select for traditional covered call writing.
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 12/03/21.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on 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.
Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan,
I’ve been very happy with your 10 delta put strategy with weekly options. Can you tell me the rules you use for when to roll up if the stock price rises?
Thanks a lot,
Randy
Randy,
The 2 factors required for rolling-up 10-Delta put trades are:
1. A net option credit
2. We retain our 10-Delta requirement with the new, higher strike
The 10-Delta strategy can also be used for monthlys. In a future blog article, I will highlight a series of trades I executed with INMD with a Monthly 10-Delta put option where I rolled-up 5 times for a total of 6 income streams in the same contract month.
It is a great example of how we can benefit from the intersection of preparation and opportunity.
Alan
Dear Alan and BCI community, Hope you are doing well!
I would like to confirm my understanding. In the book of Cash Secured Puts, one of the exit strategies, when stock appreciates significantly, is to BTC the PUT if it reaches the 20%-10% guideline and look for DIFFERENT stock/ETF because of profit takers concerns. However, the 10-Delta put strategy, my understanding is that this is a variation of the “traditional Cash Secured Put strategy”. Under the traditional CSP you should focus on the goal of % ROO (e.g., 2-4% ROO) instead of looking at the Delta.
Why there’s lower concern of profit takers with the 10-Delta strategy? Is it possible to use a different stock with the 10%-Delta or if there’s another parameter to consider?
Best regards as always.
Alex,
These are examples of the multiplicity of applications we have at our disposal with these low-risk option-selling strategies.
The 10-Delta put strategy is an ultra-low-risk approach to selling cash-secured puts. The exit strategy for rolling-up has 2 requirements:
1. A net rolling-up time-value credit.
2. The 10-Delta requirement remains in place for the new, higher put strike
Yes, we can combine the 2 strategies and close the initial 10-Delta put trade using the 20%/10% guidelines and initiate a new 10-Delta trade with a different underlying.
I use one or the other.
Alan
I agree, never a bad time to quick a good profit. What I would recommend though is to track the trade to the end, after you closed it. That way you can start to build a history of whether it was best approach or not for you. Many times when I see a stock move up so much in a few days, wait a week or so and it pulls back. Not always, but I think this is more common than not. Always profit takers out there to pull the stock back to earth.
Congrats on a great trade though, with I had done it.
Alan,
I have made some good profits with options even though I am still learning. I have had a couple of Duds.
On 1122, I sold to open 1 GNRC $390 puts for 1/21/22 and received $9.59/share. I did this when the stock price was $450.
Now the strike is ITM at $385. I am thinking of rolling this option to $380 strike for 5/20/22. I would immediately lock in a $2030 loss but would also receive $2010 in new premium.
What do you think of this trade? I could buy a put to hedge but it seems pricey to me.
I hope to hear from you.
Thanks,
Jim S.
Jim,
The BCI guideline for closing cash-secured put trades is when the share price drops >3% below the put strike, about $378.00 in this situation.
The glaring risk in rolling-out and-down to the 5/22/2022 $385.00 put is that we will be subjected to the risk inherent in 2 upcoming earnings reports.
Alan
Dear Alan, Barry
I have another question. I notice that the stock report lists some stocks which does not meet the requirement of Open Interest of at least 100 contracts or less than 30 cents bid-ask spread. In the particular case of the report of this week, (Dec 3, 2021), I found SiteOne Landscape / SITE. I discard these stocks immediately from my candidates of the “traditional CC strategy”. However, I was thinking of there should be other use of these stocks. Is it Portfolio Overwriting or long term stocks, as described in the book of Stock Investing for Students?
Thanks so much for all your support!
Alex,
We leave these stocks in our reports because they are so strong from fundamental, technical and common-sense perspectives. The rationale for leaving these securities in our lists and identifying the open interest situation is twofold:
1. Open interest can change during the contract
2. Many of our members also use these lists for simply buying and selling stocks without the option components.
Alan
Good Afternoon Alan,
Could you explain again the “initial trade cost” on your calculator and how it is computed?
I feel like I’m missing something watching the tutorial about getting this figure lower.
Also, I like a ETF (spyg) with low extrinsic value on the ITM calls (less than 1% of share price) but the leaps only go out 6 months. Would you stay away from this due to theta? I like the the etfs to avoid earnings calls and dividends.
Thanks Alan and happy holidays!
Courtney
Courtney,
The required initial trade structuring formula for the PMCC Strategy is:
[(Difference between the short and long call strikes) + initial short call premium] > Cost of LEAPS
In the screenshot below:
[($139.50 – $110.00) + $0.62] > $29.00
$30.12 > $29.00
The difference is a positive $1.12 as displayed in the calculator spreadsheet.
SPYG does not have LEAPS options associated with it, so it is not an ideal candidate for the PMCC.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Hi Alan,
Thank you for explaining this and the quick reply!
Have a great day…Courtney
Good morning Sir, hope you are well.
Quick question. I’m using the Elite-Plus Calculator & like it very much. Thank you. Question; in regards to the BTC methodology @ 20%/10% (which I agree with), the number that’s posted in these two columns, do I simply take this number & put it on my order ticket in the “Price” window?
As a Limit Order? Or Stop Limit? There’s no other math for me to figure? Simply take the 20% Option BTC number that’s given & put it in my “Price” window on my order ticket? I’m a bit confused here.
Please clarify.
Thank you for all your help & hard work. You’re making a HUGE difference in people’s lives 👍💪
Cheers,
Ken
Ken,
Thank you for your kind words.
The Elite-Plus Calculator will compute the 20%/10% guidelines to be used in the first and latter halves of a contract. These stats can be entered into our brokerage account as buy-to-close limit orders thereby partially automating the exit strategy aspect of our trades. Enter these BTC limit orders immediately after executing our trades as GTC (good until cancelled) limit orders.
When using monthlys, we first enter the 20% stat and change to 10% midway through the contract if the first threshold is not reached. I make a note on my calendar when to make the changes.
Alan
….sorry to bother you again Sir.
The actual “number” in the 20%/10% column is what we enter? Example: I’m currently trading LIVE UMC as a BuyWrite. Stock was $12.29 at purchase. Option Paying 3.10. Expires 01/19/24 Strike at 12.50. The BTC 20% says .62. 10% says .31. After I initiate my BuyWrite order, I go right back in & set up my BTC order & put in .62 as a Limit order, GTC, ?
I put .62 in the “price” box as a Limit GTC order.
Is my thinking correct? Just need to clarify please
Thanks Ken.
Ken,
You are correct. After executing the covered call trade, we enter a BTC GTC limit order of $0.62 which is 20% of $3.10. If that threshold is not reached, we change the BTC limit order to $0.31 which is 10% of $3.10 for the final 2 weeks of the contract. These orders are GTC.
These are “guidelines”, so if we want to close the short call when the option price is close to, but not precisely the same as, the specific guideline amount, that is allowable.
Alan
Alan,
In reading exit strategy opportunities, page 143 the 20%/10% Guideline. For some reason i had not thought about the fact that just because you sell a put for a premium of 2.00 that you may not end up with that 2.00 premium.
So if the maximum payout on a put option is the premium, am I correct to assume that at the time of expiration the premium that you receive could be less then the 2.00 premium you may have sold it for disregarding any factors that you have to sell before expiration.
I guess my question is does the premium you receive get adjusted based upon the market at the time of expiration.
Tom
Tom,
The premium we receive is ours to keep no matter what the value of that option is at expiration.
Look at this as if we sold the right to buy our used car for $1000.00 at any time over the next month. If the value of that car goes up or down, the contract parameters remain the same. The option buyer has the right to buy, and we have the obligation to sell but the premium received does not change.
This is a common misconception.
Alan
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Alan and the BCI team
Hello Alan,
First time poster here, though I’ve read a lot of your archives. Thursday I ordered you Encyclopedia for CC Writing directly from the website, so I can’t wait to start diving into that.
I enjoyed this particular blog post because it’s a situation I’ve faced, and it confirmed for me that you calculate profit/loss percentages the same way I do, as well as evaluating early closure in a similar way.
There’s a tiny error in the “RETURN IF I UNWIND THIS POSITION TODAY” table, under “Number of days position was open.” It has “54,” but the real number is “4” (probably a “fat-finger” event, hitting the 5 & 4 at the same time.) which gave Alan K a terrific annualized return based on 6.6% in that week of over 300%.
Mike,
Thanks for the post and I encourage you to become a regular on our blog as we all benefit and learn from each other.
My fingers were quite upset when they read your post because, in this case, they were not guilty as charged.
Here’s what happened: When I wrote this article, the spreadsheet automatically picks up the day of entries. Evidently, it was 54 days after trade entries, and this skewed the annualized returns.
If I were to write this article today, see the screenshot below on how the current date is picked up by the calculator. The results would show 272 days in the trade with an annualized return of 10%.
In the future, when I use this spreadsheet, I will make note to ignore the annualized return stat in the calculator as well as days in trade unless I am writing the post on the actual day of the trade.
That said, we will be moving to the BCI Trade Management Calculator for my screenshots in the very near future. This will expand our ability to enter the specific dates of each leg of our trades and not be skewed by the actual date the entries are made.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Alan,
Thanks for explaining about the “days in trade”. I meant to add earlier that below that screenshot you did acknowledge that it was 6.67% over only 4 days.
Thanks for the invite to the blog, I’m still digging through past posts, and especially the comments after each one.
I found your site while researching short-term Covered Calls (or more specifically, buy-writes, where we don’t particularly care what the underlying is, which seems to be your focus). And what really drew me in was your target of 2-4% per month, where others are talking about *maybe* 1%/month, even down to just “matching the dividend yield on blue chips,” so another 3-4% per year.
I’ve gotten excited about WEEKLY CCs and wonder if you have any broad thoughts around them (apologies if you’ve written on that, I haven’t found it yet). If a person was willing to put in the time, do you think they could be successful with them? Specifically, are there any “gotchas” I’m missing about Weeklies? The fundamentals seem to be the same.
Thanks,
Mike in Atlanta
Mike,
We can, absolutely, be successful with Weeklys.
They offer the advantage of potential greater annualized returns and can be used to circumvent earnings reports and ex-dividend dates. We can also avoid weekend risk.
Monthlys will require less time and effort, give us more opportunity to manage our trades, have greater liquidity and, therefore, smaller bid-ask spreads as well as less trading commissions (less of a factor today than years ago).
I have multiple portfolios dedicated to option trading and some use weeklys.
Here is a link to an article I published regarding weekly put trades:
https://www.thebluecollarinvestor.com/rolling-weekly-10-delta-put-options-prior-to-a-holiday-weekend-a-real-life-example-with-etsy-inc-nasdaq-etsy/
Alan