Was I Correct to Close My Successful Covered Call Trade? A Real-Life Example with Revolve Group, Inc. (NYSE: RVLV) – December 6, 2021
Alan K asked me to analyze a series of covered call trades he executed with RVLV over a 4-day period. Share price accelerated substantially once the trade was entered and a significant 4-day profit was realized. Let’s investigate all aspects of these trades.
Alan’s trades
6/21/2021: Buy 300 x RVLV at $61.83
6/21/2021: STO 3 x July 16, 2021 $65.00 calls at $2.59
6/25/2021: RVLV priced at $70.00
6/25/2021: BTC 3 x July 16, 2021 $65.00 calls at $6.71
6/25/2021: Sell 300 shares of RVLV at $70.00
*In our BCI methodology, this is known as the mid-contract unwind (MCU) exit strategy.
Bullish price chart of RVLV during the 4-day time-frame
The bullish technical signals in the light brown field reflects an appropriate underlying for option-selling.
Initial covered call writing calculations for RVLV
Using the multiple tab of the BCI Calculators show an initial 1-month time-value return (ROO) of 4.2% with an additional 5.1% of upside potential. This robust 9.3% max return is a reflection of a high-volatility stock.
Determining the time-value cost-to-close: Entries into the “Unwind Now” tab
Determining the time-value cost-to-close: Final calculations from the “Unwind Now” tab
The time-value cost-to-close, using the Elite-Plus Calculator, is 2.63% bringing our max return down from 9.3% to 6.67%. This is a 4-day return!
The question to ask
When closing our entire covered call trades mid-contract, we ask ourselves if we can generate at least 1% more than the time-value cost-to-close in a new trade with a different stock by contract expiration. In Alan K’s case, at least 3.63% over the next 21-days. If the answer is yes, we move forward with MCU. If no or unsure, we take no action and continue to monitor our initial trade.
Discussion
It’s never wrong to take a 4-day 6.67% realized return. It is incumbent upon us to have a structured system in place that will guide us in establishing our management trades. In this case, establishing the time-value cost-to-close along with the 1% guideline are extremely useful in these determinations.
Author: Alan Ellman