Enhancing Gains with the Mid-Contract Unwind Exit Strategy: The BCI Trade Management Calculator in Action – July 5, 2022
After entering our covered call trades and share price rises substantially, there are often opportunities to generate a 2nd income stream by closing both legs of the original trade and entering a new one with a different underlying security. In the BCI methodology, this is known as the Mid-Contract Unwind (MCU) exit strategy. This article will highlight an example of this strategy using Nucor Corp. (NYSE: NUE). The BCI Trade Management Calculator will show trade entry, initial calculations, trade adjustments and final results.
MCU trade overview
- 7/25/2021: Buy 100 x NUE at $96.87
- 7/25/2021: STO the 8/20/2021 $95.00 ITM call at $4.90
- 8/6/2021: BTC the 8/20/2021 $95.00 call at $9.70
- 8/6/2021: Sell 100 x NUE at $104.28
- 8/6/2021: With 14 days remaining to contract expiration, the cash available from selling the NUE shares is now available for a 2nd income stream in the same contract cycle
BCI Trade Management Calculator: NUE trade entry
BCI Trade Management Calculator: NUE initial calculations
The spreadsheet shows an initial time-value return of 3.20%. Since the option sold was in-the-money, no additional profit can be gleaned from share appreciation.
BCI Trade Management Calculator: NUE adjustment entries
BCI Trade Management Calculator: NUE final results
The final trade result after trade adjustments is 2.75%
Discussion
The MCU exit strategy resulted in a time-value cost-to-close of 0.45% (3.20% – 2.75%). We use this exit strategy when we can generate at least 1% more than this time-value cost-to-close or 1.45% or higher, thereby initiating a 2nd income stream with a similar cash investment. Note that we must have cash available in our portfolios to close our short option positions when exit strategy opportunities are available.
Author: Alan Ellman