Which %, if any, of our original covered call writing initial time-value return, should we use to close both legs of the trade, and guarantee a realized return? 60%? 75%? Higher? Lower? Closing both legs of a covered call writing trade mid-contract is known as the mid-contract unwind (MCU) exit strategy, in our BCI methodology.
On April 5, 2023, Brad shared with me a series of trades he executed with Communication Services Select Sector SPDR Fund (NYSE: XLC) when using BCI’s CEO Strategy.
Brad’s trades with XLC
- 3/21/2023: Buy 300 x XLC at $55.91
- 3/21/2023: STO 3 x 4/21/2023 $57.00 calls at $1.30
- 4/5/2023: BTC 3 x 4/21/2023 $57.00 calls at $2.00
- 4/5/2023: Sell 300 shares of XLC at $58.30
Questions from Brad
- How to calculate final returns?
- Did implementing the MCU make sense?
BCI Trade Management Calculator: Entries, Adjustments, Initial & Final Calculations
XLC: Initial and Final Calculations
Note the following results with the Trade Management Calculator:
- Yellow cell: Breakeven price point
- Brown cell: Initial 31-day time-value return
- Purple cell: Upside potential if XLC moves up to, or beyond the $57.00 strike price
- Red oval area: Final security sale price
- Red arrows: Final % option loss & final % stock gain
- Pink cell: Final realized net % gain
Time-value cost-to-close
The trade was initially structured with a 2.33% initial time-value return and a potential additional 1.95% from share appreciation for a max return of 4.28%. The final realized return after implementing the MCU exit strategy was 3.02%, resulting in a time-value cost-to-close (CTC) of 1.26%.
BCI guideline when to implement MCU
We ask ourselves if we can generate at least 1% more than the time-value CTC, 1.26% + 1% = 2.26% or more by contract expiration. If yes, then MCU is appropriate. If no, we continue to monitor the trade.
***Note: We can also use the Unwind Now worksheet tab at the bottom the TMC spreadsheets to calculate time-value cost-to-close.
Discussion
The initial return was 2.33% and now we are seeking an additional minimum return of 2.26%. Using a security (ETF) of this nature with much less time-to-expiration, makes this goal unlikely. We would have to move to a more volatile security which would not align with the original CEO strategy. Rather than using a specific % return to close, evaluate the time-value CTC and measure that against the probability of achieving a greater return by contract expiration with a new covered call trade.
Premium member benefits video
https://youtube.com/watch?v=EXMO-KwZuJs%3Ffeature%3Doembed
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:
Good afternoon, Alan,
As a premium member, I must say that your service is one of the easiest to learn and the most profitable, if followed closely. For this, I thank you for your efforts.
Best regards,
William
Upcoming events
1. Mad Hedge Investors & Traders Summit
Covered Call Writing Blue-Chip Stocks and ETFs
September 13, 2023
12 PM ET
Zoom event:
Covered call writing is a low-risk option-selling strategy. The degree of our liability is directly related to the implied volatility of the underlying securities. Growth and technology companies tend to create greater exposure to the downside than blue-chip companies like those located in the Dow 30 and S&P 500. However, the former will generate higher premium returns. Only you can decide which underlying securities are most appropriate for your portfolios.
This presentation will review option basics, highlight covered call writing and demonstrate a methodology to select the best-performing Dow 30 and S&P 500 securities to facilitate the implementation of our option-selling and cash-generating strategies.
Real-life examples will be presented using recent BCI Premium Stock and ETF reports.
Real time Q&A via chat box questions will be available throughout the entire webinar.
2. Orlando Money Show Live Event
45-minute workshop: Monday October 30th 2:10 PM ET – 2:55 PM ET
Selling Cash-Secured Puts and Strategy Choices After Exercise
2-hour MoneyMasters Class: Tuesday October 31st 9:30 AM ET – 11:30 AM ET
How to Master Covered Call Writing:
A detailed start-to-finish analysis using real-life examples.
Details & Registration information here.
3. AAII Orange County, California Chapter
AAII Investment Club members only
Saturday November 11, 2023
Details to follow.
Alan,
I’m reading your new book on exit strategies. When the price of the stock goes down, I have a question about rolling down the option to get more premium. Here’s an example.
I buy a stock for 70 and sell the 70 strike. Now the stock goes down to 65 and I want to roll down. What strike would be a good choice?
I look forward to your answer.
Richard
Richard,
Rolling-down is generally reserved for the 2nd half of a monthly contract or for all weekly expirations, when indicated.
In your example, when a rolling-down opportunity arises, it is usually to an out-of-the-money strike where decent premium credits are achieved.
Let’s create a hypothetical example.
Buy BCI for $70.00.
Sell the $70.00 ATM call for $2.00.
BCI drops to $65.00, and the $70.00 call can be closed for $0.20.
Sell-to-open (STO) the $67.00 OTM call for $1.00.
This will generate an additional $80.00 per-contract in premium and allow for an additional $2.00 per-share price recovery.
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 09/08/23.
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:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as the membership remains active.
Best,
Barry and The Blue Collar Investor Team
Hello Alan,
If one sold a CC on a stock that passed the previous week and the stock now appears on “failed current week” listing, what if any future action should be taken?
Not a candidate for future roll-out or roll-up? Do nothing?
How to interpret the change in listing please.
Thanks
Bob
Bob,
Once we enter an option trade with an “eligible” security from one of our premium members watch lists, those trades are managed via our exit strategy arsenal as detailed in my books and videos, not by their removal from the lists.
The BCI screening process is incredibly rigorous, and some stocks or ETFs may be moved to the “failed current week” section due to the technical parameters. They may reappear later in the same monthly contract.
So, why create lists on a weekly basis? The answer is that many of our members use weekly options. That’s one reason. Another is that if we decide to sell an underlying, we use our most recent list to locate a replacement security.
Bottom line: Once we enter a trade with an eligible candidate and the security is subsequently moved to “failed current week”, we continue to manage with our exit strategy arsenal and re-evaluate when the next contract cycle begins. This may include selling the stock when such exit strategy guideline thresholds are reached.
Alan
Dr. Ellman:
Thank you for sending out your weekly emails with trading examples. I use your examples to check my own calculations.
In yesterday’s example (see subject above) it appears that the Combined Final Trade Total Profit/Loss (%) was calculated by: 100 X (Combined Final Trade Total Profit/Loss) / (Entry Stock Price X 300) => 100 X 507 / (55.91 X 300) = 3.02%.
However in your book Complete Encyclopedia for Covered Call Writing (Second Edition – 2019), page 270, the Mid-Contract Unwind Net Return On Position is calculated by: 100 X (Net gain/loss to unwind) / (Net cash to open position) => 100 X 507 / ((55.91 – 1.30) X 300) = 3.09%.
I realize the difference in calculation is small in most cases but I wonder if you have changed your preference for getting this answer?
Best regards,
Dan
Dan,
You made my day!
Your question demonstrates that you have an exceptional understanding of option calculations. I hope I had a little something to do with that.
Let’s first take the example I gave on page 270 of my book with PRGO:
You’ll note that an ITM call strike was originally sold. The way we calculate initial returns is to use the time-value component of the premium only in the numerator. For the denominator we use the stock price minus the intrinsic-value of the premium. Since we are not using the intrinsic-value as initial profit, we use it to “buy-down” the cost of the shares. Another (shorter) way to summarize the process for initial returns of ITM call strikes is: Time value/Call strike.
For ATM and OTM call strikes, the denominator is always the cost of the shares, as it was in the article.
Now, to finish up with the book formula: I took the final net credit and divided it by the original cost-basis, rather than the original cost of the shares.
In the recent article, we sold an OTM call strike, so the cost basis was the cost of the shares, both initially and after closing both legs of the trade.
I hope you’re hanging in there with me because I’m about to give a little history. Two years ago, when Barry and I were formulating the Trade Management Calculator (TMC), I revisited the cost-basis after closing both legs of an ITM covered call trade, as I created formulas in the management section of the spreadsheet.
I decided that using the entire cost of the shares for final calculations only, was slightly more accurate and so the denominator is slightly different between the example on page 270 of the Encyclopedia and that of the article.
The difference is minimal, but a difference, nonetheless, 3.02% compared to 3.09%.
I’m impressed, Dan.
Keep up the good work.
Alan
Premium members,
The new Blue Chip Report for the best-performing Dow stocks for the October 2023 contracts has been uploaded to your member site.
Look on the right side of the member page in the “resources/downloads” section and scroll down to “B”.
Alan & the BCI team
Premium members:
This week’s 4-page report of top-performing ETFs 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.
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
New product now available:
The softcover version of my 9th book, “Covered Call Writing: A Streamlined Approach” is now available in the BCI store.
Use coupon code “ceo5” and enter “submit” or “apply” for a $5.00 discount:
https://thebluecollarinvestor.com/minimembership/covered-call-writing-a-streamlined-approach/
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan & the BCI team