Setting Our 20%/10% Guidelines After Rolling an Option Out or Out-And-Up

Rolling-out is a covered call writing exit strategy we frequently use when a strike is expiring in-the-money (ITM) and we want to retain the underlying shares for the next contract cycle. After closing the short call in the current month prior to rolling, a new trade with the same security is set up in our trading log for the next contract. This article will demonstrate how to set up our 20%/10% guidelines for the rolled-out trade. Since the concept is a bit complex, I will create a hypothetical example with nice even numbers.

 

Proposed BCI trade

  • 3/21/2022: Buy 100 x BCI at $48.00
  • 3/21/2022: STO 1 x 4/15/2022 $50.00 call at $1.50
  • 4/15/2022: BCI trading at $52.00 on expiration Friday
  • 4/15/2022: BTC the 4/15/2022 $50.00 call at $2.10
  • 4/15/2022: STO 1 x 5/20/2022 $55.00 call at $1.75

 

Results of the 4/15/2022 contract before rolling

  • Option profit: $1.50 per-share
  • Stock unrealized profit: $2.00 per-share ($50.00 – $48.00)
  • Total profit %: $3.50/$48.00 = 7.29%

 

Rolling entries into the next contract cycle

  • Value of stock at rolling (ITM strike): $50.00
  • Net option credit or debit (debit in this hypothetical): -$2.10 + $1.75 = -$0.35
  • Investment per-contract: $5000.00 (value of stock x 100)

 

BCI pre-rolling final results

 

BCI: Final Initial Contract results

The final result for the current contract cycle is a cash (partially unrealized) profit of $350.00 or 7.29%. This result is partially unrealized because the shares have not been sold.

 

BCI rolled-out-and-up trade as a standalone trade (if there was no trade the previous contract cycle)

 

BCI: Rolled-Out-And-Up Trade for the 2nd Contract Cycle Only

The $1.75 premium resulted in a 20% guideline of $0.35 and a 10% guideline of $0.18. This does not factor in the value of our shares pre-rolling ($50.00, the ITM strike) and the cost-to-close the current month contract ($2.10).

 

BCI combined roll-out-and-up trade

 

BCI: Rolled-Out-And-Up Trade Factoring in Both contracts

 

Notice that when factoring in the cost-to-close the previous contract short call, the net option premium is actually a negative number, rendering the 20%/10% guidelines not applicable.

 

Discussion

Establishing our 20%/10% guidelines after rolling an option requires 2 sets of calculations. The first has to do with initial time-value returns which factors in practical value of the underlying at the time of the roll ($50.00 in this hypothetical) and the net option credit or debit (-$0.35, in this hypothetical). The second data set reflects the actual time-value premium received for the rolled-out trade without factoring in the time-value cost-to-close. The post-rolling 20%/10% guidelines are based on the latter contract data, not the combined data ($1.75, in this hypothetical). In this hypothetical, the 20%/10% guidelines are $$0.35 and $0.18.

 

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Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI teaemail 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:

Alan,

I just signed up for the incredible value (to me anyway) full BCI Package. Immediate need was for the Trade Management Calculator.

I’m very impressed with the body of work (what else to call it?) that your books and website contains. Unlike the many I’ve seen, it doesn’t feel like a commercial enterprise designed mostly to generate profits. That is commendable big time.

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Upcoming events

To request a private webinar for your investment club, hosted by Alan & Barry: info@thebluecollarinvestor.com

1.Money Show Orlando live event

October 30th – November 1st, 2022

OMNI ORLANDO RESORT AT CHAMPIONSGATE

Visit Alan, Barry and members of the BCI team at Booth # 415

Register here

 

Sunday, October 30, 2022, at 5:00 pm – 5:45 pm EDT
Covered Call Writing: Multiple Applications Based on Current Market Conditions

Monday, October 31, 2022, at 4:30 pm – 6:30 pm EDT
Selling Cash-Secured Puts: Detailed Start-to-Finish Six-Part Program*

 

Masters Class

Comprehensive Course on Selling Cash-Secured Puts

Detailed start-to-finish 6-part program

This presentation will provide all the information, with real-life examples, necessary to master the strategy of selling cash-secured puts. The program is divided into 6 sections:

  • Section I:
    • Option basics
  • Section II
    • Traditional put-selling
  • Section III
    • PCP (wheel) strategy
  • Section IV
    • Buy a stock at a discount instead of a limit order
  • Section V
    • Ultra-low-risk put/Delta strategy
  • Section VI
    • Ultra-low-risk put/Implied volatility strategy

This presentation was developed to benefit both beginner and experienced option traders and will provide all the information needed to initiate the strategy and elevate returns to the highest possible levels.

45-minute presentation

Covered Call Writing: Multiple Applications Based on Current Market Conditions

Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)

Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:

  • Normal to bull markets
  • Bear and volatile markets
  • Low interest-rate environments

A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.

Registration link 

 

2. Money Show’s Post-Election Strategies Virtual Expo

November 10th -11th, 2022

Portfolio Overwriting

Increasing Profits in Our Buy-And-Hold Portfolios Using Covered Call Writing 

Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”.  Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk covered call writing-like strategy.

Topics discussed

  • Brief review of covered call writing
  • Option basics
  • What is an option-chain?
  • Option selection
  • Calculating covered call returns: Real-Life examples
  • Portfolio overwriting defined
  • Pros and cons of portfolio overwriting
  • Why early exercise is so rare
  • Rolling options
  • Role of dividends
  • Locating ex-dividend dates
  • How to avoid early exercise
  • Real-life examples with calculations
  • BCI Portfolio Overwriting Calculator
  • Summary

Date, time & registration link to follow

 

3. Long Island Stock Traders Meetup Group (Private webinar)

Thursday February 16,2023

7:30 PM ET- 9 PM ET

A real-life example with a $100k ETF Select Sector SPDR portfolio
Covered call writing is a low-risk option-selling strategy that generates weekly or
monthly cash flow. This presentation will demonstrate how to implement this
strategy using a database of only 11 exchange-traded funds for a 1-month option
contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s
portfolios with screenshots verifying each trade. A final monthly contract result
compared to the performance of the S&P 500 will be calculated.

Topics included in this webinar:

 What are the Select Sector SPDRs?
 How to establish a covered call writing portfolio
 What is the role of diversification?
 What is the role of cash allocation?
 Calculating initial returns
 Analyzing each trade in the monthly contract
 Final results
 Next steps

 

Alan speaking at a Money Show event

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