Covered Call Winning Trades

12/16/2019 9:33 am EST


Alan Ellman

President, The Blue Collar Investor Corp.

Here is a winning four-day and two-month options play in the Biotech exchange traded fund XBI, described by Alan Ellman.

Option traders can protect winning positions and maintain their opportunity longer through sell weekly calls.

A subscriber named Mario recently shared his covered call writing trades in the SPDR S&P Biotech ETF (XBI). The trades were executed over a two-month time-frame, the last of which was a four-day weekly option.

Mario’s XBI trade

  • April 17, 2019: Buy XBI at $84.95
  • April 17, 2019 – June 2019: Sell calls and “hit doubles” to lower cost-basis (breakeven) to $81.93
  • June 18, 2019: Current share price is $86.92
  • June 18, 2019: Sell June 21, 2019, four-day $87.00 call at 89¢ (after commissions)

4-day returns on the Weekly option

covered call writing calculations

The Ellman Calculator reflects a four-day 1% initial time value return with a possible additional 0.1% return on share appreciation. This annualizes to 100.4%.

The big picture

  • After the sale of the weekly option, the new breakeven point is $81.04 ($81.93 – $0.89)
  • If share price remains the same and the option is not exercised, unrealized share profit is $5.88 ($86.92 – $81.04) = +6.92%
  • If the option is exercised and shares sold at $87.00, the total two-month gain is realized at 7.01% which annualizes to 42%

Covered call writing is a cash-generating strategy that can be viewed from a short-term option-selling perspective and a longer-term perspective. As option-sellers we must focus on the former and factor in the latter when analyzing our long-term success with these conservative option-selling strategies. 

***Many thanks to Mario for sharing his trades with our BCI community. These are critical to the education process and benefits us all.

Use the multiple tab of the Ellman Calculator to calculate initial option returns (ROO), upside potential (for out-of-the-money strikes) and downside protection (for in-the-money strikes). The breakeven price point is also calculated. For more information on the PCP strategy and put-selling trade management click here and here.

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