Exit Strategies for Covered Call Writing: “Hitting a Triple” with XLU – October 4, 2021
Benefitting from exit strategies, in our covered call writing and put-selling portfolios, is the result of preparation and opportunity. Our 20%/10% guidelines for covered call writing protects us when share price declines and guides us as when to close the short calls. This allows us take further action including selling the stock, waiting to “hit a double” or rolling-down. During the May contracts of 2021, market volatility allowed me to go further than “hitting a double” when I actually “hit a triple”, generating 3 income streams in the same contract month, with the same stock and cash investment. This article will highlight those series of trades.
Covered call writing trades with Select Sector SPDR Utilities (NYSE: XLU), an exchange-traded fund (ETF)
- 4/19/2021: Buy 400 x XLU at $67.05
- 4/19/2021: STO 4 May 21, 2021 $68.00 calls at $0.66
- 4/28/2021: BTC 4 x May 21, 2021 $68.00 calls at $0.15 (20% guideline)
- 5/3/2021: STO 4 x May 21, 2021 $68.00 calls at $0.62 (that’s my “double”)
- 5/5/2021: BTC 4 x May 21, 2021 $68.00 calls at $0.12 (20% guideline)
- 5/10/2021: STO 4 x May 21, 2021 $68.00 calls at $0.33 (that’s my “triple”)
- 5/10/2021: Set a BTC limit order at $0.03 (10% guideline)
Preparation and opportunity
Part of the preparation involves setting the BTC limit orders after entering our covered call trades. Opportunities are created when share price declines and then recovers. If we were to envision the chart pattern of such trades, we would see one or more V-shaped patterns which is precisely what occurred in May 2021 with XLU.
Chart of XLU highlighting the STO and BTC “hitting a triple” trades
Discussion
Mastering and incorporating the 3rd required skill, position management, into our option-selling trades, will assist in elevating our returns to the highest possible levels. The additional income streams created by using exit strategies are the result of the intersection of preparation and opportunity.