Exit strategies for covered call writing are an inherent part of our BCI methodology, explains Alan Ellman of The Blue Collar Investor.
They allow us to mitigate losses, enhance gains, and even turn losses into gains. There will be times when find ourselves in situations where it not 100% clear whether we should pull the trigger on one of our exit strategies versus taking no action at all. Such was the case when Todd wrote to me in September 2021 with a covered call trade, he initiated with iShares MSCI India ETF (INDA). He was considering rolling the option out-and-up versus allowing assignment.
Todd’s Trade with INDA
- 8/26/2021: Buy 100 x INDA at $46.57
- 8/26/2021: STO the 9/10/2021 $48.50 call at $0.47
- 9/7/2021: INDA trading at $49.70 (pre-market)
- The cost-to-close the 9/10/2021 $48.50 call is $1.35
- The premium generated from selling the 9/24/2021 $50.00 call is $0.45
- 9/7/2021: Considering rolling-out-and-up to the 9/24/2021 $50.00 strike or allowing assignment
Initial Trade Structuring Using the Multiple Tab of the Elite-Plus Calculator
INDA Initial Calculations with the Elite-Plus Calculator
The initial two-week time-value return was 1% (brown cell) with 4.1% (yellow cell) of upside potential. At the time of Todd’s email, there was an unrealized 5.1% two-week return. If share value remained above $48.50 at expiration, the 5.1% two-week return would become realized. So far, so really good.
Rolling Out-and-Up Calculations Using the “What Now” Tab of the Elite-Plus Calculator
INDA: Rolling Out-And-Up
The initial two-week time-value credit is 0.62% (yellow cell–16.1% annualized). With upside potential (if INDA moves up to or beyond the new $50.00 strike, the two-week return would move up to 1.24% (brown cell–32.2% annualized).
Discussion
We will be presented with exit strategy opportunities on a frequent basis. We must make critical decisions as to if and when we should act. In this case, Todd had a successful trade as of 9/7/2021. Since there were four days remaining until contract expiration, my preference would be to wait a few more days before making rolling decisions. This gives us a bit more time to evaluate the price movement of the underlying before pulling the trigger on another trade.
If this was expiration Friday and we still liked INDA as an eligible covered call writing candidate, we would evaluate the returns to see if they met our stated initial time-value return goal range. For most of us, annualized initial returns of 16.1% with a potential of 32.2%, the answer would be a resounding “Yes.”
Learn more about Alan Ellman on the Blue Collar Investor Website.
