Combining Covered Call Writing and Selling Cash-Secured Puts – January 15, 2024
When we integrate both covered call writing and selling cash-secured puts into one multi-tiered option selling strategy, we have our Put-Call-Put or PCP Strategy. Outside the BCI community, this is often referred to as the wheel strategy. Since we are utilizing 2 option strategies over multiple expiration cycles, it is important to properly enter, calculate and archive our trades. This will allow us to accurately assess our trade returns. This article will set up a hypothetical series of trades that starts with an out-of-the-money (OTM) cash-secured put trade and moves into an OTM covered call trade.
Graphic view of the PCP strategy
Hypothetical series of trades with BCI
- 7/24/2023: BCI trading at $75.00
- 7/24/2023: STO 1 x $72.50 OTM put at $2.00
- 8/18/2023 (expiration Friday): Allow exercise of the put with BCI trading at $71.00
- 8/19/2023 (Saturday after expiration Friday): Shares are put to portfolio at $72.50
- 8/21/2023: STO 1 x $75.00 OTM call at $1.50
Put leg of PCP with initial and final results using the BCI Trade Management Calculator (TMC)
- The initial trade return for this 26-day trade is 2.84%, 39.83% annualized
- The exit strategy dropdown choice is to allow exercise with shares trading at $71.00
- Since shares are put to the portfolio at $72.50 when trading at $71.00, the spreadsheet shows a debit on the stock side of $1.50 per-share and a credit on the option side of $2.00 per-share, resulting in a net final unrealized (shares not sold) credit of 0.71%
- Since the unrealized share loss is incorporated into the put expiration cycle, we will enter the stock price in the next (call) leg as $71.00
Call leg of PCP with initial and final results using the BCI Trade Management Calculator (TMC)
- The stock entry price is $71.00, moved from the price when the put expires
- Selling the OTM $75.00 call strike for $1.50, results in a 26-day initial return of 2.11%, 29.66% annualized
- Any share price gain or loss will be based on this $71.00 price point
Discussion
When using the PCP strategy, care must be taken to make precise entries such that all gains and losses are accounted for and there is no duplication of trade results. The BCI Trade Management Calculator will facilitate all these trades and calculations.
Author: Alan Ellman