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  • Determining Our Goal Before Unwinding Both Legs of a Covered Call Trade: A Real-Life Example with Qualcomm Incorporated (Nasdaq: QCOM) + Trade Management Calculator Discount Coupon Expiring Soon – May 09, 2022

    When share price accelerates exponentially with our covered call writing stocks, the strike moves deeper in-the-money. Although the intrinsic-value component of the option premium rises, the time-value component approaches zero. This creates an opportunity to consider our mid-contract unwind exit strategy. Before implementing this, or any others in our exit strategy arsenal, we must identify our post-exit strategy goal(s).

    What is the mid-contract unwind (MCU) exit strategy?

    This strategy closes both legs of the covered call trade and uses the cash generated from the sale of the underlying security to enter a new covered call trade with the same expiration date. In essence, it represents a second income stream in the same contract month with a similar cash investment. The key to successful implementation of the MCU strategy is to calculate the time-value cost-to-close and identify our target returns in the follow-up step or second income stream.

    A real-life example with QCOM (thank you to Joanna for sharing)

    • 11/6/2021: Buy 100 x QCOM at $166.86
    • 11/6/2021: STO 1 x 11/26/2021 $170.00 call at $3.88
    • 11/16/2021: QCOM trading at $180.23
    • 11/16/2021: BTC the $170.00 call at $11.70
    • 11/16/2021: Sell 100 x QCOM at $180.23

    Calculating the time-value cost-to-close with the “unwind now” tab of the Elite, Elite-Plus and Trade Management  Calculators (Information entered)

    QCOM Unwind: Information Entered

    Calculating the time-value cost-to-close with the Elite-Plus Calculator (Final calculations)

    QCOM Unwind: Final Calculations

    The spreadsheet shows a time-value cost-to-close of $147.00 for the contract which represents 0.86% of the investment.

    What is our post-exit strategy goal used to make a final position management decision?

    Our goal is to generate at least 1% more than the time-value cost-to-close by contract expiration. In this case, it is 1.86% by 11/26/2021. We check our current watch and corresponding option-chains to make our ultimate trade decision.

    Discussion

    Exit strategy opportunities are the intersection of preparation and opportunity. Defining our post exit strategy goals must be part of the decision-making process.

    Best regards,

    Sylvain

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