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