How to Enter Our Rolling-Out Trades into Our Monthly Trading Logs – September 6, 2022
When we roll-out our covered call trades, we are actually combining 2 months of option premiums, the current month and the next contract cycle. This may create some confusion as how to enter these combination trades into our trading logs. As you will see, there is no perfect solution, but BCI has created guidelines that will represent a reasonable approach to this dilemma. My philosophy is that there is not always a perfect solution, but there is always a best solution.
Hypothetical trade
- 12/27/2021: Buy 100 x BCI at $48.00
- 12/27/2021: STO 1 x 1/21/2022 $50.00 call at $1.50
- 1/21/2022: BCI trading at $52.00
- 1/21/2022: BTC the 1/21/2022 $50.00 call at $2.05 ($2.00 intrinsic-value + $0.05 time-value)
- 1/21/2022: STO the 2/18/2022 $50.00 call at $3.50
- How to we calculate the current month results?
- Where do we place the 2 option credits and 1 option debit?
- What cost-basis do we use for the next month entry?
BCI guidelines for rolling trade entries: current contract month
The current month concludes with the final stock price as the in-the-money strike (ITM), $50.00, in this hypothetical (we generally roll strikes that are ITM), our contract obligation. This means we have maximized our trade as initially structured as shown in this screenshot:
Using our BCI Trade Management Calculator, we determine our initial month final results.
In this hypothetical trade, a 1-month return of $350.00 or 7.29% (red arrows on bottom) was realized.
BCI guidelines for rolling trade entries: next contract month
At the time we roll the option, shares can be worth no more than our contract obligation to sell at $50.00, so we enter $50.00 as the price per-share. Since we are rolling-out, the strike is the same $50.00 but we enter the new contract expiration date, 2/18/2022, in this case. We then use the BTC and STO net option credit of $1.45 ($3.50 – $2.05) as our option $/Share entry. This results in a 2.9%, 1-month initial time-value return (red arrow).
Now, here is the (minor) flaw in this approach. We see downside protection of 0%, when, in fact, it is 3.8% ($2.00/$52.00) because the shares are, in fact, trading at $52.00 at the time of the roll. If we entered $52.00, it would skew the initial time-value return which is a much more important stat than the downside protection. As I said, not a perfect world but the best world we can provide. Here is the screenshot for the next month calculations:
Discussion
When rolling-out our covered call trades, we must break up our trade entries over the 2 contract cycles. This includes having rules and guidelines for:
- Stock price entry
- Final stock price
- Dividing option credits and debits over 2 contract cycles
Author: Alan Ellman