Writing covered calls is a solid income-producing strategy for any investor.
The option premium collected is money in the bank.
Most of our exit strategies are designed to mitigate these losses and turn losses into gains. However, as Blue Collar Investors we should also be prepared to act if the opposite scenario occurs.
From time to time, you will buy a stock, sell the call option and your equity will subsequently dart straight for the moon! That will leave your strike price deep in-the-money. One way of looking at this situation is that you made a significant profit, and now that cash is protected by the difference between the share value and strike price of the option, or the intrinsic value of the option premium the amount it is in the money.
If satisfied with this situation, you will just allow assignment and enter a new position the next contract cycle. When a strike moves deep in-the-money, the time value of that option premium declines and approaches zero.
This means that the option premium consists predominantly of intrinsic value. The amount of cash it takes to buy back the option is greatly offset by the share appreciation we would realize by eliminating the option obligation closing our short option position by buying the option back and selling the stock.
Always consider a mid-contract unwind exit strategy when the time value of the option premium approaches zero and there is enough time remaining in the current contract cycle to generate additional profit with another position.
Real-life example of a mid-contract unwind exit strategy: There is nothing like a real-life example to clarify the utilization of the mid-contract unwind exit strategy. The charts and graphs below depict the primary stages that occurred when I utilized this strategy in a covered call position for the underlying security, Perrigo Company PRGO.
PRGO heads to the moon! In order to examine the viability of this cash-generating opportunity, we must first explore the current options chain for PRGO, below: Perhaps, some may feel that we can generate the extra cash by rolling up, however, the following two reasons may render the decision to utilize this strategy an unwise one: The price of the stock may not be in a favorable position to generate a decent return Given the drastic share appreciation over a short period of time, the possibility exists that profit-takers sellers could cause the price to experience a drastic decline in value.
To do this, we look to our watch list, which contains fundamentally sound equities, and in this exampleBucyrus International, Inc. BUCY surfaces as a viable candidate. This stock was selected from our watch list which was established with the fundamental, technical and common sense principles addressed in my books and DVDs.
We then put BUCY through our technical screens, which in this example it passed, as depicted below: Technical analysis of replacement security Next, we look to the options chain for BUCY Figure below in order to obtain the relevant figures necessary to perform our ROO calculations via the Ellman Calculator: When a stock appreciates in value over a short period of time, and there are still two weeks or more remaining in the cycle, unwinding your position may offer an opportunity to generate additional cash into your account.
This is one of the strategies that sets us aside from all the others. The keys are that the time value of the option premium must be close to zero, and the new position must generate more cash than the amount of time value paid to close the original position.
Nook Barnes and Noble:Writing covered calls with a plan for exit falls under conservative strategies, IMO, and Alan's book helps the beginner focus on the important aspects of this strategy.
He not only cuts out the "noise" but has a methodical plan for closing out your open positions. Covered Call Exit Strategies. Read This Free Report. Managing the exit side of a covered call is far harder than the entry side and should be decided in advance of entering the trade.
if the call option is in-the-money by as little as $, the buyer of the call will exercise their right to purchase the shares at the strike price and.
Covered Call Writing: Mid-Contract Unwind Exit Strategy Mid-Contract Unwind: The major concern for covered call writers is the stock price dropping in value. The option premium collected is money in the bank.
Most of our exit strategies are designed to mitigate these losses and turn losses into gains. Exit Strategies for Covered Call Writing.
Exit Strategies for Covered Call Writing: Making the most money when selling stock options by Alan Ellman Exit Strategies for Covered Call Writing covers option management choices like rolling down, rolling out and many heartoftexashop.com: $ One of our covered call writing exit strategies is rolling out-and-up.
This involves buying back (buy-to-close) the current in-the-money option and selling the later-date higher strike price. For example, we may buy back the October $ call option and then sell the November $ call option.
Covered Call Writing: Using Multiple Exit Strategies In The Same Contract Month By being prepared with appropriate exit strategy execution we can mitigate losses. By using multiple exit.