Making a Great Covered Call Trade Even Better: A Real-Life Example with Revolve Group, Inc. (NYSE: RVLV) – February 21, 2022
Covered call writing trades, when structured and managed properly, can result in impressive short-term and annualized returns. Such was the case with Art who shared with me a series of trades he executed with RVLV in August – September 2021. The returns were outstanding and enhanced via exit strategy execution. This article will analyze the final returns after closing both legs of the trade.
Art’s trades with RVLV
- 8/24/2021: Buy 500 x RVLV at $57.06
- 8/24/2021: STO 5 x 9/10/2021 $58.00 calls at 2.16
- 8/27/2021: Buy 200 x RVLV at $57.02
- 8/27/2021: STO 2 x 9/10/2021 $58.00 calls at $1.45
- Average cost/share = $57.05
- 9/10/2021: RVLV trading at $62.08
- 9/10/2021: BTC 7 x RVLV 9/10/2021 $58.00 calls at $4.20
- 9/10/2021: STO 7 $9/17/2021 $63.00 calls at $1.74
Art questioned what the final trade results would calculate to, should the 7 contracts be exercised at the $63.00 strike.
What was the impact of rolling out-and-up to the 9/17/2021 strike?
Using the “What Now” tab of the BCI Calculators, we see a positive initial return, when factoring in “bought-up” value of the shares, of 2.79% for the week and 4.38% if shares price moves up the new $63.00 strike, an assumption Art asked me to make.
Final trade calculations if RVLV is sold at the new $63.00 strike
- Stock side: [($63.00 – $57.05) x 700] = $4165.00
- Option side: [($1080.00) + ($290.00) – ($2940.00) + $1218.00)] = -$352.00
- Total net profit: [($4165.00) – ($352.00)] = $3813.00
- 24-day % return: $3813.00/$39,935.00 = 9.5%
- Annualized % return: [(9.5%/24) x 365] = 145%
Discussion
Art hit a grand slam homerun with this one. An elite-performing security was selected and OTM (bullish) strikes were sold allowing for additional share appreciation income. Rolling-out-and-up resulted in a favorable (to say the least) profit enhancement trade execution. It looks like Art doesn’t need me anymore.
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Good morning Dr. Ellman,
First, I’d like to express my gratitude and appreciation for everything you have taught me. It has been a great experience for me these past few months. I’ve learned as I went along every step of the way, Now, my mind is full of strategies and how-to’s. I feel in control of my investing.
I can’t thank you enough for the book and knowledge you have shared with me and, likely, countless others.
Sincerely,
George