The success of our covered call writing trades is, to a great extent, dependent on our position management skill set. One of the strategies in our exit strategy arsenal is the mid-contract unwind exit strategy (MCU). WE may close both legs of the trade if share price declines precipitously, but let’s focus on situations when share price accelerates exponentially. When should we close our trades that are in an unrealized maximum gain position?
Relevant factors impacting our option premiums when share price soars after trade entry
When the share price rises substantially, the intrinsic-value component (amount share price is above the call strike) of the premium rises dollar-for-dollar with share increase. However, the time-value component of the premium decreases and heads to, but rarely reaches, $0.00 as the strike moves deeper and deeper in-the-money.
This means that the total cost-to-close the short call goes up, but most of that is in the form of intrinsic-value. This “loss” of intrinsic-value is negated by the unrealized rise in share value when the call strike is no longer creating a maximum gain ceiling on share value. Therefore, the actual debit caused by closing both legs of the trade is the time-value component of the premium only. This is known as the time-value cost-to-close.
Real-life example with Vertiv Holdings Co. (NYSE: VRT)
- These trades were shared with me by a BCI member
- 3/14/2024: Buy 100 x VRT at $92.00
- 3/14/2024: STO 1 x 7/18/2025 $90.00 call at $13.00
- 11/21/2024: VRT trading at $140.48
- 11/21/2024: The cost-to-close the 7/18/2025 $90.00 call is $57.90 (intrinsic-value + time-value)
- Should the mid-contract unwind exit strategy be initiated?
Mid-contract unwind exit strategy implementation guideline
If we can generate at least 1% more than the time-value cost-to-close (CTC) by contract expiration, the MCU exit strategy should be given serious consideration. We will use the “Unwind Now” worksheet tab of the BCI Trade Management Calculator to calculate a % time-value CTC. This tab is located at the bottom of the TMC spreadsheet.
VRT “Unwind Now” worksheet entries
VRT “Unwind Now” worksheet final calculations
The spreadsheet shows a loss of 8.24% in time-value if both legs of the trade are closed today. Can we generate > 9.24% over the next 8 months by initiating the MCU exit strategy? Probably, yes.
Discussion
These trades represent wonderful educational opportunities:
- When share price accelerates exponentially, leaving the call strike deep, deep in-the-money, the MCU exit strategy should be evaluated, utilizing the “Unwind Now” worksheet tab of the TMC
- It is not the entire premium we should evaluate, but rather the time-value component only
- This started as a 16-month trade, taking the shareholder through multiple earnings reports … way too risky
- Longer-dated options generate lower annualized returns. Consider weekly and monthly options as our go-to expirations
Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts
This book will detail how to enter, manage and calculate trade adjustments for all market conditions. After we select the underlying security and sell the corresponding option, we immediately move into position management mode. There are over 20 exit strategies defined, as well and when and how to implement these plans.
The BCI Trade Management Calculator facilitates the analysis of each exit strategy by showing initial trade entries, initial trade calculations for both each individual trade as well as that of the entire portfolio. From there we learn how to enter our trade adjustments and finally to calculate trade and total portfolio post-adjustment results.
Click here for more information.
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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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:
Hi Alan,
Cheers,
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Good Morning Alan,
I want to btc a covered call, the price is .9364 and cost 3.34.
How do I calculate the gain or loss if I execute.
Thank You,
John
John,
If the option was originally sold for $3.34 and closed at $0.94, the net gain is $2.40.
If the stock was purchased (or already owned) at $100.00 the % return is 2.4%.
Let me know if I am not fully understanding your trade.
Alan
So then I should btc at those terms? So if the price is lower than cost as in example btc?
John,
I can’t offer specific financial advice in this venue, but I can help.
We don’t automatically close a trade if it’s at a profit. It must make financial sense to do so.
Send me the trade specifics and I can let you know your choices.
I’ll need trade date, expiration date, price of stock when trade was entered, current value of stock. I already have the original premium and cost-to-close premium.
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 04/11/25.
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:
https://www.youtube.com/user/BlueCollarInvestor
Barry and The Blue Collar Investor Team
Alan,
One last question. I understand the bid ask spread and use this often using the Mark.
How does this apply in puts since I do not do a lot of puts.
Tom
Tom,
Use the exact same process for puts.
If the spread is $2.50 – $3.00, find the “mark” ($2.75).
Drop down a bit if selling the option (say, $2.70) and then enter a STO limit order at that price (day only).
Follow the same process as we do for calls.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs, along with our sample trade of the week, has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
ALL ETFS IN THIS REPORT HAVE ACTUALLY GONE UP IN VALUE OVER THE PAST 1-MONTH.
We have also included a sample trade taken from one of our BCI watchlists.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
NOT A PREMIUM MEMBER? Check out this link:
https://www.thebluecollarinvestor.com/membership.shtml
Alan and the BCI team