Multiple Applications of the Mid-Contract Unwind (MCU) Exit Strategy: A Real-Life Example with Super Micro Computer, Inc. (Nasdaq: SMCI) – May 15, 2023
covered call writing exit strategies allow us to mitigate trade losses and enhance trade profits. On 11/30/2022, Paul shares with me a series of trades he executed with SMCI where a trade turned against him, and he wasn’t sure how to enter it into the BCI Trade Management Calculator. Both legs of the covered call trade were closed with the intention of using the freed-up cash to mitigate the initial losses.
What is the mid-contract unwind (MCU) exit strategy?
This is a covered call writing exit strategy where both legs of the trade are closed (short call first, then the sale of the stock). It is typically used when share price accelerates and the time-value component of the option approaches $0.00. After closing the entire trade, the cash is used to establish a new income stream.
MCU can also be used when share price declines and we decide not to create a scenario where we can “hit a double” (re-sell the same option) or roll-down to a lower strike with the same expiration date. Both are viable alternatives to MCU in this example. MCU means closing both legs of a covered call trade prior to contract expiration.
Paul’s SMCI trades
- 11/28/2022: Buy 200 x SMCI at $94.60
- 11/28/2022: STO 2 x 12/16/2022 $95.00 calls at $4.65
- 11/30/2022: BTC the 12/16/2022 SMCI $95.00 call at $1.51
- 11/30/2022: Sell 200 x SMCI at $87.42
- Blue cells: Trade entries
- Green oval: Initial and annualized time-value returns based on a 19-day trade
- Red arrow: 7% guideline is the depreciation price point to consider selling the stock after closing the short call
- Purple arrow: MCU exit strategy is selected when closing both legs of a covered call trade prior to contract expiration
- Brown cells: Combined stock and option debit in $ and % stats after executing the MCU exit strategy
- Blue arrow: A note is made in the TMC Trade Journal regarding the reason for closing the covered call trade
Discussion
When closing the 2 legs of a covered call trade, we enter the exit strategy as the mid-contract unwind whether it is because share price accelerated exponentially or declined precipitously. In both cases, we close the short call first and then sell the underlying security.