Closing a Covered Call Trade Mid-Contract: A Real-Life Example with Nucor Corp. (NYSE: NUE) – December 27, 2021
What happens when a covered call writing trade progresses much better than anticipated? This article will analyze a series of trades executed by William (thanks for sharing) with NUE as he utilized the BCI mid-contract unwind exit strategy. What rules and guidelines should we use to determine if closing both legs of our covered call trades mid-contract makes financial sense and will allow us to achieve even higher overall returns?
William’s NUE trades
- 7/25/2021: Buy 100 x NUE at $96.87
- 7/25/2021: STO the 8/20/2021 $95.00 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
Let’s analyze whether instituting the mid-contract unwind exit strategy was a reasonable maneuver.
NUE: Initial trade structuring and calculations
The 1-month time-value return (ROO) was 3.2% with 1.9% downside protection of that time-value profit.
NUE: Unwind trade entries using the Unwind Now tab of the Elite or Elite-Plus Calculators
NUE: Unwind trade calculations using the Unwind Now tab of the Elite or Elite-Plus Calculators
The time-value cost-to-close is 0.44% with 14 days remaining to contract expiration. We ask ourselves if we can generate at least 1% more than this time-value CTC in a new trade with new underlying security or at least 1.44% This is reasonable given we are still halfway through the contract. I will usually try to accomplish this using an in-the-money strike in the second position. If successful, we have generated more than a maximum return with the initial cash investment by instituting the mid-contract unwind exit strategy.
Discussion
When considering closing a covered call trade mid-contract after share price rises exponentially, we must first determine the time-value cost-to-close. If we can generate at least 1% greater than this CTC, the mid-contract unwind exit strategy makes sense.
Author: Alan Ellman