Status of a Rolling-Down Trade with Williams-Sonoma, Inc. (NYSE: WSM) – May 17, 2021
Exit strategies for covered call writing is a critical element necessary to maximize our returns. In December 2020, Alan K shared with me a rolling-down trade he executed with WSM and was curious as to the total trade status. This article will highlight the series of trades from 11/23/2020 to 12/9/2020 for the December 2020 contracts expiring on 12/18/2020.
Alan’s trades
- 11/18/2020: Buy 100 x WSM at $110.55
- 11/18/2020: Sell-to-open (STO) the December 18, 2020 $115.00 call at $2.45
- 12/9/2020: Price of WSM is $104.87
- 12/9/2020: Buy-to-close (BTC) the December 18, 2020 $115.00 call at $0.45
- 12/9/2020: STO the December 18, 2020 $105.00 call at $2.60 (rolling-down)
What is the status of the trade at this point in time?
Using the multiple tab of the Ellman, Elite and Elite-Plus Calculators to determine current trade position
- Top row: This is the initial trade structuring
- Second row: Status of trade after closing the initial $115.00 short call at $0.45 (net option credit moves down to $2.00)
- Third row: Status after rolling-down to the $105.00 strike (net option credit moves up to $4.60)
- Option status after rolling-down: +4.16% ($4.60/$110.55)
- Stock loss locked-in at $5.55 (best case scenario): $110.55 – $105.00 = -5.02%
- Net loss on trade (row 3) if stock price closes at or above $105.00: -0.9%
Discussion
Rolling-down is an excellent exit strategy for covered call writing when share price declines, especially in the latter half of a contract. In the case of WSM, by writing covered calls and implementing the rolling-down exit strategy, a potential 5.02% stock loss was reduced to a 0.9% loss. Calculations can be accomplished using the multiple tab of the BCI calculators.
Author: Alan Ellman