Mitigating Losses by Rolling-Down During a Severe Market Decline: The BCI Trade Management Calculator in Action – June 27, 2022
Rolling-down is one of our frequently used covered call writing exit strategies. During the January 2022 contracts, there was a 5% market decline due to COVD-19, inflation, and interest rate concerns. This article will highlight a rolling-down strategy I implemented with Healthcare Select Sector SPDR (NYSE: XLV) in one of my portfolios where a 4.68% share loss was mitigated down to a 2.8% loss. The BCI Trade Management Calculator will show trade entry, initial calculations, trade adjustments, and final results.
Rolling-down trade overview
- 12/20/2021: Buy 200 x XLV at $135.83
- 12/20/2021: STO 2 x $137.50 1/21/2022 calls at $2.20
- 1/7/2022: BTC 2 x 1/21/2022 $137.50 calls at $0.44 (20% guideline)
- 1/11/2022: STO 2 x 1/21/2022 $136.50 calls (rolling-down) at $0.80
- 1/21/2022: XLV shares worth $129.47 (a loss of 4.68%)
BCI Trade Management Calculator: XLV trade entry
BCI Trade Management Calculator: XLV initial calculations
Rolling down with XLV (broker screenshots)
BCI Trade Management Calculator: XLV adjustment entries
BCI Trade Management Calculator: XLV final results
Discussion
Writing covered calls and then mitigating losses by rolling-down decreased a 4.68% loss in share value down to an unrealized loss of 2.80% due to an option net credit of $512.00 or 1.88%. Position management is the 3rd of the 3 required skills (along with stock and option selection) that must be mastered before risking even one penny of our hard-earned money.
Author: Alan Ellman