Exit strategies for covered call writing are an inherent part of our BCI methodology. They allow us to mitigate losses, enhance gains and even turn losses into gains. There will be times when find ourselves in situations where it not 100% clear whether we should pull the trigger on one of our exit strategies versus taking no action at all. Such was the case when Todd wrote to me in September 2021 with a covered call trade he initiated with INDA. He was considering rolling the option out-and-up versus allowing assignment.
Todd’s trade with INDA
- 8/26/2021: Buy 100 x INDA at $46.57
- 8/26/2021: STO the 9/10/2021 $48.50 call at $0.47
- 9/7/2021: INDA trading at $49.70 (pre-market)
- The cost-to-close the 9/10/2021 $48.50 call is $1.35
- The premium generated from selling the 9/24/2021 $50.00 call is $0.45
- 9/7/2021: Considering rolling-out-and-up to the 9/24/2021 $50.00 strike or allowing assignment
Initial trade structuring using the multiple tab of the Elite-Plus Calculator
INDA Initial Calculations with the Elite-Plus Calculator
The initial 2-week time-value return was 1% (brown cell) with 4.1% (yellow cell) of upside potential. At the time of Todd’s email, there was an unrealized 5.1% 2-week return. If share value remained above $48.50 at expiration, the 5.1% 2-week return would become realized. So far, so really good.
Rolling out-and-up calculations using the “What Now” tab of the Elite-Plus Calculator
INDA: Rolling Out-And-Up
The initial 2-week time-value credit is 0.62% (yellow cell- 16.1% annualized). With upside potential (if INDA moves up to or beyond the new $50.00 strike, the 2-week return would move up to 1.24% (brown cell- 32.2% annualized).
Discussion
We will be presented with exit strategy opportunities on a frequent basis. We must make critical decisions as to if and when we should act. In this case, Todd had a successful trade as of 9/7/2021. Since there were 4 days remaining until contract expiration, my preference would be to wait a few more days before making rolling decisions. This gives us a bit more time to evaluate the price movement of the underlying before pulling the trigger on another trade.
If this was expiration Friday and we still liked INDA as an eligible covered call writing candidate, we would evaluate the returns to see if they met our stated initial time-value return goal range. For most of us, annualized initial returns of 16.1% with a potential of 32.2%, the answer would be a resounding “YES”
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:
Dear Alan,
I can’t say enough good things about Vol 1 and 2, and the Exit Strategies booklet.
I want to share my success with you over just the last few weeks.
Like many investors, I had a portfolio of ‘’buy and hold’ stocks but was unaware of covered call writing.
I have earned in excess of $6k in option premiums and almost $3k on max profit assignments in 70 days.
My Return on initial investment is 17.05%
Annualized at 90.26%.
Currently I have a dozen or so active contracts against largely the same initial investment.
My only disappointment is that I was not aware of covered call writing much sooner.
I think one of the most important take-aways from the program is that the transactional risk
is in the underlying security, not the option contract.
Congratulations on a great system!
And a warning to new covered call writers…it’s a bit addicting!
All my best,
Joe
Upcoming events
1.BCI-only free webinar: February 17, 2022, at 8 PM ET
Introducing a New Exit Strategy and Exit Strategy Term
Registration link to follow
Exit strategy implementation is a critical aspect of successful covered call writing and put-selling strategies. Over the past 15 years, the BCI team has been creating rules and guidelines regarding our trade entries and adjustments while always seeking to enhance the opportunities to elevate our returns to the highest possible levels.
This webinar will introduce a new exit strategy and exit strategy term that can be applied to both covered call writing and selling cash-secured puts. We have also integrated this new exit strategy into our upcoming BCI Trade Management System which includes our new Trade Management Calculator. This new tool is the first of its kind anywhere and will be available to our BCI community during the 1st quarter, 2022. You have been asking for a trading log that allows us to both enter, adjust and calculate final returns and now you will have it.
This presentation will include scenarios when the exit strategy can be applied, how to apply it and show calculation results using both stocks and ETFs for both calls and puts.
Let’s learn from each other and use this information to become the best and most elite of all option traders.
2.Long Island Stock Investors Meetup Group
Stock Options: How to Use Implied Volatility to Determine Strike Selection
Creating 84% probability successful trades for covered call writing and selling cash-secured puts
Wednesday April 13, 2022
7:30 PM ET – 9:30 PM ET
***********************************************************************************************************************
Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
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Hi Alan,
Do you recommend selling weekly 10 Delta Puts on QQQ ? Is it even lower risk than the QQQ/VOLQ weekly Covered Calls ?
Regards,
Kevin
Kevin,
I love both strategies when pursuing an ultra-low-risk approach to option-selling.
Since VOLQ is specific for QQQ, and is extremely accurate, I would give it a slight edge specifically for QQQ. For all other underlyings, it’s a toss-up between using 10-Delta and implied volatility. Statistically, a miniscule edge to 10-Delta but we will have a high degree of success with either approach.
Alan
Dear Alan. Checking the EFT and stock reports. You mentioned that your plan is to enter equal number of ITM and OTM CCs. Assuming this hypothetical example. There is an index ETF and because of the decline of the market now in January 2021, the previous call expired worthless. The cost basis of the ETF is higher than the current market price. Is it possible to use Deep OTM CC (using 10-Delta or Implied Volatility strategy) to allow appreciation of the ETF. I was studying again your books and found that one of the most common 10 mistakes is to use a CC in exponential bullish markets. I fully understand that nobody knows if the market will be bullish, neutral or bearish in the following months. But do you have any guidelines? I am curious why you decided to enter your contracts of February 2022 with OTM CCs. Was it to allow appreciation to shares with high cost basis? Thanks so much as always.
Alex,
Yes, the 10-Delta (or implied volatility trading range) approach can be used to establish strike prices when our goal is to generate cash flow while still retaining the underlying shares. That decision should not be based on share recovery but rather on a continuing bullish assumption moving forward or a decision to retain that security as a long-term buy-and-hold security.
Covered call writing can absolutely be used in a bull market but crafted in such a way as to allow for significant share appreciation in addition to the option premium … use deeper OTM call strikes.
I am using an equal number of OTM and ITM call strikes because my overall market assessment is neutral. If I leaned bearish, I would use a greater percentage of ITM calls strikes or deeper OTM put strikes.
Alan
Thanks so much Alan for this great explanation.
Alan,
When we roll the options out or out and up, do we count the second option credit in the current or next contract month? I keep tabs of my profits on a monthly contract basis.
Thanks you as always,
Marsha
Marsha,
The best way to establish our trading log for rolling ITM covered call trades (in my humble opinion) is to use the following accounting approach:
1. The current contract month (or week) is closed and ended by entering the ending stock value to be the (now) ITM strike. This means the final contract result has been maximized.
2. For the next contract cycle, enter the stock value as the previous (now) ITM strike, the new expiration date and the net option credit/debit resulting from closing the previous ITM strike and the premium from selling the new (next contract) strike.
For example, if we bought s stock at $48.00 and sold the $50.00 call at $1.50 and as expiration approaches, the stock is trading at $52.00, we decide to roll-out. The cost-to-close the $50.00 strike is $2.10 and the STO of the next month $50.00 strike is $3.50.
For the current (pre-roll) month, our final return is $1.50 (premium) + $2.00 (share appreciation) = $3.50, on a cost-basis of $48.00.
Next, we move the trade to the next contract month where we enter a stock price of $50.00 and an option premium of $1.40 ($3.50 – $2.10).
By the way, by the end of March, we are launching our new BCI Trade Management System which includes our BCI Trade Management Calculator. The user guide will detail how to enter all rolling trades and where to enter the stats and receive the calculation results for each leg of the trade adjustment.
For now, follow the guidelines I presented in this response.
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 01/28/22.
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:
http://www.youtube.com/user/BlueCollarInvestor
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.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan,
Am I wrong in thinking that even if my cost basis is low, the real beauty of writing covered calls is that should my stock be called away from me, I can turn around and take the premium and the funds from the sale of the positions to repurchase the stock and continue writing covered calls against it: Wash, rinse, repeat….
Thanks,
Marcus
Marcus,
Tax issues aside, you are not wrong. We can also roll the option prior to 4 PM ET on expiration to keep the trade going. This may involve adding more cash to the trade in the form of the intrinsic-value cost-to-close instead of re-purchasing the shares at a higher price after expiration. Earnings reports and ex-dividend dates may play roles in our decisions, as well.
Alan
Alan,
I am new to BCI. I am using the Elite Put Calculator for the first time today along with reading your Selling Cash-Secured Puts book. I have sold CSP’s in the past, but not with the same focus that I am developing using your book and calculator.
In this case I own 5 shares of ADM and am evaluating it for a CSP. I see that the ex-div is approaching. I also see that earnings just passed and the stock has responded very well and is in an uptrend, against the total market which has been in quite a challenging period recently.
I am considering selling a shorter dated CSP, SELL -1 ADM 100 (Weeklys) 4 FEB 22 73 PUT
My thought being that if I am assigned, I will own the shares at ex-div and would be very happy to own them at such a great discount.
What I probably haven’t yet read in your book is how to make the best choice of strike price when my goal is to own the shares at ex-div and collect the div in this kind of volatile market.
If you were looking at ADM right now, what would your perspective be?
Thank you for any input you are willing to share!
Michelle
Michelle,
I can’t give specific financial advice in this venue, but I can make some general comments you should find useful.
We must first define our investment goal. Is it to generate cash-flow, capture dividends with a long-term buy-and-hold stock or both?
If we are looking to generate cash-flow only, we use OTM put strikes (lower than current market value) that meet our initial time-value return goal range. That appears not to be the case here.
If we are looking to capture a dividend and continue to do so with a given security, we buy the stock for the long-term.
If we want to sell a put to both own the stock at a discount and capture the dividend, we favor an ITM put strike with a high Delta (approaching -1.0, for puts). Delta approximates the probability of the put ending in-the-money or with intrinsic-value. The BCI Elite Put Calculator can then be used to run the calculations for that specific strike.
In the screenshot below, I highlighted the Deltas for the 2/4/2022 expirations.
We must first define our goals before structuring our investment strategy approach.
Alan
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Perfect! Exactly the kind of input I was hoping for.
Thank you so much for taking the time to reply!
Michelle
Hi Alan.
On my Elite calculator, regarding INDA ask Alan section, I can’t get “Your upside potential return is” on the Roll out and Up section to fill in the $30
Please help.
Jeff
Jeff,
The $30.00 upside in the article is calculated by the spreadsheet. It is not an entry. The screenshot below shows how to enter the trade into the blue cells on the right side of the spreadsheet to get the results shown in the article.
Alan
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Hello Alan..
I believe a CC and CSP is a strategy suited for generally up or sideways market. Last month was a down month. Would it have been prudent not to trade the list last month??? Just asking for my learning.
Thanks,
Manjit
Manjit,
CCW and C-S Puts can be successful in all market conditions. Assuming our market assessment is bearish, we can:
Sell ITM calls
Sell deeper OTM puts
Use our PCP strategy (use C-S puts to enter CC trades)
Use low volatility securities
Use Delta and implied volatility to establish trading ranges for ultra-low-risk trades
Add protective puts to our cc trades (collar strategy)
Use inverse ETFs in extreme bear market conditions
If we are not comfortable trading in current market conditions, we should turn to cash. There is no right or wrong here. For me, I am almost always fully invested, crafting my trades to current market conditions as I state in our weekly premium member reports.
There have been a few exceptions over the years where I wasn’t fully invested:
September 2008 – March 2009
Pre-election 2016
Pre-election 2020
Pre-Brexit
Alan
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
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Alan and the BCI team
Hi Alan:
I’m continuing to watch your videos and looking forward to your new strategy.
I wanted to make sure I was thinking about this right for doing so buy/writes
Looking at ATI. Very strong move yesterday; strong today with bad market. Hard to see it coming back down to 21 or less in next two weeks (I’m a charting guy)
So…
Stock right now is 23
A Feb 18th call option at 22.50 is selling right now for 1.1
14 days from now
So if I buy and write… my downside protection is 5% (23-1.1 = 21.90)
Meanwhile, the return could be 1.1 on 21.90 = .05 in 14 days; which is > 100% annualized
Am I thinking about this the right way?
Thanks,
Mike
Mike,
You are correct in that the calculations are impressive.
Here’s how we do the calculations at BCI:
Downside protection is defined as the amount a share price can decline while still retaining the full initial time-value return. In this case (per-contract):
$60.00/$2300.00 = 2.6%
The 5% represents the amount a share price can decline to the breakeven price point.
The actual time-value return (ROO) involves deducting the intrinsic-value component of the premium and using it to lower our cost-basis down to the $22.50 strike. In this case:
[($1.10 – $0.60)/$22.50] = 2.2% = 59.7% annualized from 14 days.
Alan