Automating Option Position Management

07/24/2020 6:00 am EST

Focus: OPTIONS

Alan Ellman

President, The Blue Collar Investor Corp.

Alan Ellman provides a key lesson is managing short covered call positions.

Position management is the third required skill for achieving the highest level of option-selling success. One of the most important of the Blue Collar Investor (BCI) protocols for covered call writing are the 20%/10% guidelines, which assists us is closing short calls when those opportunities are presented.

This allows us to mitigate situations when share price declines. These guidelines can be automated such that, if specific thresholds are realized, the short calls will automatically be closed without further action by the investor.

Generic description of the 20%/10% guidelines

  • Sell-to-open at $2.00 (selling the covered call)
  • Buy-to-close at 40¢ in first half of the contract (20% guideline)
  • Buy-to-close at 20¢ in the latter part of the contract (10% guideline)

Entering covered call trade for Invesco QQQ Trust (QQQ)

covered call trade

Buy 100 Shares of QQQ

Sell-to-open the covered call and enter buy-to-close limit order

Sell-to-open the covered call

QQQ: BTC Limit Order Set at 20%

The $249 out-of-the-money call was sold for $5.10 and a buy to close limit order was set at $1 (20%).

A note is placed in our calendar to change to 10% on July 6, if these 20% limit orders are not executed in the first half of the contract:

Entering the 10% guidelines mid-contract

Entering the 10% guidelines mid-contract

QQQ: BTC Limit Order Set at 10%

The buy to close limit order was changed from $1.00 to $0.50¢. If this threshold is met, the exit strategy will be executed automatically.

Summary

Exit strategy execution is the third required skill necessary to become an elite option-seller. Implementation of the 20%/10% guidelines can be automated by entering buy-to-close 20% limit orders immediately after entering our trades and then changing to 10% mid-contract. If the short call is closed using these guidelines, we are in a position to take further action such as rolling-down, selling the stock and using a lower strike price.

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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