Evaluating a Series of Multi-Rolling Covered Call Trades: A Real-Life Example with Elevance Health Inc. (NYSE: ELV) – May 30, 2023
In this article, we will analyze a series of covered call trades shared with me by a BCI premium member. These trade executions involve establishing a bullish covered call position, then rolling-down and then rolling-out. All of our trades serve as learning opportunities and these ELV trades are no exceptions.
ELV trades from 11/7/2022 to 12/1/2022
- 11/7/2022: Buy 200 x ELV at $532.09
- 11/7/2022: Sell 2 x 12/16/2022 $530.00 calls at $26.50 (bullish near-the-money strike)
- 11/11/2022: ELV trading near $490.00
- 11/11/2022: BTC 2 x 12/16/2022 $530.00 calls at $4.30
- 11/17/2022: ELV declines to $477.00
- 11/17/2022: STO 2 x 12/16/2022 $490.00 calls at $9.12 (rolling-down)
- 12/1/2022: ELV trading at $529.50 (missed a “hitting a double” opportunity)
- 12/1/2022: BTC 2 x 12/16/2022 $490.00 calls at $41.00
- 12/1/2022: STO 2 x 12/30/2022 $530.00 calls at $10.40 (rolling-out for a net debit of $30.60)
BCI Trade Management Calculator showing initial trade structuring and rolling-down adjustments
- #1: Initial trade entries
- #2: Initial returns (4.61%; 42.03% annualized based on a 40-day trade). The downside protection of 0.39% is negligible as we are using a near-the-money strike
- #3: Rolling-down trade entries (shares cannot be worth more than the new rolled-down $490.00 strike)
- #4: Final post adjustment option return after rolling-down: 5.89%
- #5: Post adjustment unrealized stock loss (-7.91%) and net stock and option unrealized loss (-2.02%)
BCI Trade Management Calculator showing rolling-out initial trade status
Note the following:
- The value of the shares at the time of the roll was $490.00, the previous contract strike or our obligation to sell at that price
- The BTC-STO net premium was -$30.60 (-6.24%)
- The success of this trade depends on upside potential (8.16%), if share price moves up to or beyond the $530.00 strike
Discussion and lessons learned
- The BTC on 11/11 was excellent (near our 20% guideline)
- The BCI guideline is that prior to the last 2 weeks of a monthly contract after breach of the 20%/10% guidelines, we seek to “hit a double” if share price recovers (may have worked out in this case). If not, we roll-down in the last 2 weeks of that contract
- By rolling -down on 11/17, a share loss of $42.09 was locked in ($532.09 – $490.00)
- On 12/1, $41.00 was paid to make shares worth $39.50 more ($529.50 – $490.00). It is possible, another $0.50 could be gained, if share price moves up to or beyond the $530.00 strike but no more due to the contract obligation to sell at $530.00
- Whether share price moves to $532.00 or $535.00 or $1000.00, shares can only be worth $530.00, the new strike
Over the past 25 years, I have made every mistake in the books and learned from them. This process has allowed me to develop the skillsets I wish for all our members.
Author: Alan Ellman