After entering our covered call writing trades, we immediately enter our 20% buy-to-close (BTC) limit orders. This will automate the process to close our short calls in the first half of a monthly contract should share price decline significantly, explains Alan Ellman of The Blue Collar Investor.
This article will highlight such an opportunity that occurred with Procter & Gamble Company (PG) in May 2020 for the June contracts.
PG Trades
- 5/18/2020: 100 PG purchased at $116.21
- 5/18/2020: 1 x 6/19/2020 $117.00 call sold at $1.40
- 5/26/2020: 1 x 6/19/2020 $117.00 call closed at $0.30 (meeting the 20% threshold)
- 5/28/2020: 1 x 6/19/2020 $117.00 call was re-sold at $1.90
PG Price Chart with the Classic V-Shaped “Hitting a Double” Pattern
PG Price Chart in May 2020
PG Option Chart with the Classic V-Shaped “Hitting a Double” Pattern
PG Option Chart for the $117.00 Call
“Hitting a Double” Calculations with the Multiple Tab of the Ellman Calculator
PG Exit Strategy Calculations
The initial trade structuring was for an initial time-value return of 1.2% with an additional 0.7% as upside potential for a total one-month maximum return of 1.9%. With the BTC limit order executed, the initial return was reduced to 0.9%. When the $117.00 call was re-sold, the time-value return was elevated to 2.6%, more than double the original return.
Discussion
Exit strategies are difference-makers. In this real-life example with PG, the time-value return was doubled, and the trade was still early in the June contract where other opportunities may arise.
Learn more about Alan Ellman on the Blue Collar Investor Website.
