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Stock & Covered Call Breakeven When Rolling Out-And-Up

12/31/2019 10:25 am EST


Alan Ellman

President, The Blue Collar Investor Corp.

Here is an analysis of a breakeven when rolling out your covered calls, by Alan Ellman.

When we write a covered call, our breakeven is the stock purchase price minus the entire call premium. If we buy a stock for $48 and sell an option for $2.50, the breakeven is $45.50. In June 2019, John shared with me a series of trades he executed with Planet Fitness, Inc. (PLNT) where he wrote a call and then rolled that position out-and-up. He was trying to decide what stock price to use when rolling the option and where his breakeven was in the second month of these trades.

Let’s evaluate the stock cost-basis and BE over the 2-month time frame.

John’s trades with PLNT

  • June 3, 2019: John bought PLNT at $75.58 and sold-to-open the June 21, 2019 $75.00 call at $2.70
  • June 21, 2019: PLNT trading at $76.01
  • June 21, 2019: Buy-to-close the June $75.00 call at $1.10/Sell-to-open the July $77.50 call at $2 (roll out-and up)

Stock cost-basis and breakeven on 6/3/2019

covered call writing calculations

PLNT: Initial Calculations with The Ellman Calculator

  • The stock purchase price is $75.58
  • The cost-basis when calculating initial time-value returns is $75 (deducting the premium intrinsic-value (58¢) from the stock purchase price
  • The breakeven is $72.88 (purchase price – entire premium: $75.58 – $2.70)
  • The initial 18-day time-value return is 2.8% with 0.8% downside protection of that time-value initial profit

Stock cost-basis and breakeven on June 21, 2019

Rolling out-and-up information entered (“What Now” tab of the Ellman Calculator)

covered call writing exit strategies

PLNT: Rolling Out-And-Up: Information Entered

Rolling out-and-up calculations

covered call writing exit strategy calculations

PLNT: Rolling Out-And-Up Calculations

The stock cost-basis is $75.00 (brown cells) because that is what the shares are worth on June 21 because of the contract obligation.

Based on this cost-basis, the initial return on option is 2.55% and with upside potential (share price moves up to the new $77.50 strike) the maximum return is 4.53% (yellow cells).

Overall breakeven on June 21

  • Shares were purchased at $75.58
  • Option credits: $2.70 + $2.00 = $4.70
  • Option buy-to-close debit = $1.10
  • Net option credit = $3.60
  • Overall trade breakeven = $75.58 – $3.60 = $71.98

When viewing our stock cost-basis and breakeven, there are two sets of calculations. One is used to make the best trading decision at that point in time as we used a $75 cost-basis when rolling the option and the other when viewing a long-term analysis of a series of trades with a specific security ($71.98 overall breakeven).

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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