When Should I Take My Profits with a Successful Covered Call Writing Trade? – September 11, 2023
Which %, if any, of our original covered call writing initial time-value return, should we use to close both legs of the trade, and guarantee a realized return? 60%? 75%? Higher? Lower? Closing both legs of a covered call writing trade mid-contract is known as the mid-contract unwind (MCU) exit strategy, in our BCI methodology.
On April 5, 2023, Brad shared with me a series of trades he executed with Communication Services Select Sector SPDR Fund (NYSE: XLC) when using BCI’s CEO Strategy.
Brad’s trades with XLC
- 3/21/2023: Buy 300 x XLC at $55.91
- 3/21/2023: STO 3 x 4/21/2023 $57.00 calls at $1.30
- 4/5/2023: BTC 3 x 4/21/2023 $57.00 calls at $2.00
- 4/5/2023: Sell 300 shares of XLC at $58.30
Questions from Brad
- How to calculate final returns?
- Did implementing the MCU make sense?
BCI Trade Management Calculator: Entries, Adjustments, Initial & Final Calculations
Note the following results with the Trade Management Calculator:
- Yellow cell: Breakeven price point
- Brown cell: Initial 31-day time-value return
- Purple cell: Upside potential if XLC moves up to, or beyond the $57.00 strike price
- Red oval area: Final security sale price
- Red arrows: Final % option loss & final % stock gain
- Pink cell: Final realized net % gain
Time-value cost-to-close
The trade was initially structured with a 2.33% initial time-value return and a potential additional 1.95% from share appreciation for a max return of 4.28%. The final realized return after implementing the MCU exit strategy was 3.02%, resulting in a time-value cost-to-close (CTC) of 1.26%.
BCI guideline when to implement MCU
We ask ourselves if we can generate at least 1% more than the time-value CTC, 1.26% + 1% = 2.26% or more by contract expiration. If yes, then MCU is appropriate. If no, we continue to monitor the trade.
***Note: We can also use the Unwind Now worksheet tab at the bottom the TMC spreadsheets to calculate time-value cost-to-close.
Discussion
The initial return was 2.33% and now we are seeking an additional minimum return of 2.26%. Using a security (ETF) of this nature with much less time-to-expiration, makes this goal unlikely. We would have to move to a more volatile security which would not align with the original CEO strategy. Rather than using a specific % return to close, evaluate the time-value CTC and measure that against the probability of achieving a greater return by contract expiration with a new covered call trade.
Author: Alan Ellman