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.
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Covered Call Writing Blue-Chip Stocks and ETFs
September 13, 2023
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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.
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