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  • How to Use the Capital Adjustment Section of the Trade Management Calculator When Executing Multiple Exit Strategies in the Same Contract Cycle – January 16, 2023

    Jan 16, 2023 Uncategorized Comments Off on How to Use the Capital Adjustment Section of the Trade Management Calculator When Executing Multiple Exit Strategies in the Same Contract Cycle – January 16, 2023

    Exit strategies for covered call writing and selling cash-secured parts are integral aspects of our trading system. It is critical to learn how to enter, calculate and archive these position management trades. This article will detail one example of this process using a real-life example with Etsy, Inc. (Nasdaq: ETSY) using 2 rolling-up put trades in the same contract week.

    What is the Trade Management Calculator (TMC)? 

    The TMC is a unique spreadsheet developed by BCI that allows us to enter, generate initial calculations, adjust trades with over 20 exit strategy selections and receive final individual trade as well as total portfolio results. To our knowledge, the TMC is the only spreadsheet of its kind anywhere.

    What is the capital adjustment section of the TMC?

    This feature of the TMC allows us to adjust our capital investments when multiple exit strategies are executed with the same contract expiration cycle. If we are using the same cash for 2 or more trades with the same contract expiration date, we can deduct the correct amount so that the total amount of cash invested is not inflated and is accurately reflected, resulting in a correct % returns.

    Real-life example with ETSY (7/18/2022 – 7/22/2022)

    • 7/18/22: ETSY trading at $85.53 with ER due out 7/27/22. Will write a weekly put option and skip the following week of the ER
    • 7/18/22: The 10-Delta, deep OTM 7/22/22 put shows a strike of $76.00 (90% probability of no exercise)
    • 7/18/22: STO 1 x 7/22/22 $76.00 put at $0.37
    • 7/20/22: ETSY trading at $92.66
    • 7/20/22: BTC 1 x 7/22/22 $76.00 put at $0.05
    • 7/20/22: STO 1 x 7/22/22 $84.00 put at $0.27 (roll-up #1)
    • 7/21/22: ETSY trading at $96.87
    • 7/21/22: BTC 1 x 7/22/22 $84.00 put at $0.03
    • 7/21/22: STO 1 7/22/22 $88.00 put at $0.15 (roll-up #2)

    As ETSY accelerated in price from $85.53 to $96.87 from Monday through Thursday, the put option was rolled-up 2 times and expired out-of-the-money.

    How to enter and calculate 2 rolling-up cash-secured put trades

    Before showing the TMC spreadsheet for these trades, here is an overview:

    • After rolling-up for the 1st time, the trade is considered closed with final results calculated in Section IV of the spreadsheet
    • The 2nd rolling-up trade is entered in a new line in the spreadsheet using current market value, the new put strike, and the net premium (new STO premium – the cost-to-close premium for the previous strike)
    • The spreadsheet will reflect an “exaggerated” amount of capital invested since all the cash used for the first trade is also used for the 2nd
    • To get an accurate representation of the total capital invested, the original capital invested must be deducted in the capital adjustment section

    Initial trade with rolling-up #1

    The initial time-value return was 0.49%, 35.71% annualized. After rolling-up to the $84.00 strike, the final return is 0.78%, 56.94% annualized. This included an additional option credit of $0.22 per-share ($0.27 – $0.05).

    Rolling-up trade #2

    The net option credit for roll-up #2 is $0.12 ($0.15 – $0.03). The green cells on the far right show 2 capital investments when the $8788.00 (2nd roll-up) includes the original $7563.00. The blue cells at the bottom of the screenshot shows how to compensate for this in the capital adjustment section of the spreadsheet.

    Total portfolio calculations with and without the capital adjustment

    Notice that the 2-day return for the 2nd roll-up moved from 0.30% to the (now) accurate 0.56% after utilizing the capital adjustment section of the spreadsheet.

    Author: Alan Ellman

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