Understanding the Math When Rolling ITM Covered Calls Out-And-Up: A Real-Life Example with Utilities Select Sector SPDR Fund (NYSE: XLU) + Save the Date May 11th

All strategies, including covered call writing and selling cash-secured puts, have their pros and cons. The same holds true for the exit strategies associated with them. Several of our members have written to me over the years regarding a “can’t lose” portfolio overwriting strategy that will return 1% – 2% per-month by selling out-of-the-money (OTM) calls and rolling the options out-and-up when the calls are expiring in-the-money (ITM). This article will highlight a real-life example with Select Sector SPDR Utilities (NYSE: XLU) showing an option-chain that will meet the stated initial time-value return goal range and factor in Delta to determine the probability of needing to roll the option out-and-up (probability of expiring in-the-money at expiration). XLU (an exchange-traded fund or ETF) covered call writing trade 11/2/2022: Buy 100 x XLU at $67.26 11/2/2022: STO 1 x 12/2/2022 $70.00 call at $0.79 11/2/2022: The $70.00 call strike shows a Delta of 0.30 Does the premium meet our stated goal? What is the probability of the strike expiring with intrinsic-value or ITM? What is the potential impact of rolling-out-and-up on our 1% – 2% monthly returns? XLU option-chain on 11/2/2022 XLU Option-Chain on 11/2/2022 The Delta of the $70.00 strike reflects an approximate probability of the strike expiring ITM 30% of the time or 3 – 4 months out of a calendar year for monthly expirations. This means rolling the strike out-and-up fairly frequently to retain the out-of-the-money trade status. The BCI Trade Management Calculator XLU: Initial Trade Calculations The red arrows show a 31-day initial time-value return of 1.17%, 13.83% annualized. This meets our stated initial time-value return goal range of 1% – 2% per-month. The blue arrow shows that an additional 4.07% can be realized if share value moves up to and beyond the $70.00 strike. This means that if there is a need to roll-out-and-up, this month’s return would be 5.24% (1.17% + 4.07%). Based on the Delta stat, there is a 30% probability of this occurring. What is the impact of rolling out-and-up? To generate a 1-month return of 1% – 2% for XLU, the $70.00 OTM strike would do the trick. Note the Delta is 30, a 30% chance of exercise without exit strategy intervention. When this occurs, to roll-out-and-up, we do so at an option debit so that will impact overall returns. At expiration, if the strike is ITM, the cost-to-close is the intrinsic-value of the premium + a few pennies of time-value. Let’s say XLU is trading and $72.00, the cost-to-close may be $2.05. Rolling out-and-up will generate a much lower premium. If we allow exercise and sell the shares at $70.00 and buy on Monday at $72.00 (if shares are still the same price), the debit is $2.00, $0.05 less but rolling the option protects us against further share acceleration on market open. An alternative approach if we want to generate more protection is to use a lower Delta strike (deeper out-of-the-money) and settle for lower premiums … we can’t have both. Why this is not a “can’t lose” strategy When share price accelerates past the out-of-the-money strike ($70.00, in this example), we will win nearly every time as we factor in upside potential as we roll out-and-up. However, if share price declines below the breakeven price point, we start to lose money or, at least, devalue the initial time-value return. Discussion There are no “can’t miss” strategies that seek to generate higher than risk-free returns. Rolling-out-and-up to an out-of-the-money (OTM) strike will typically result in an option debit but capture increased share value. When portfolio overwriting securities which we want to retain in our long-term buy-and-hold portfolios, we must balance the returns we receive and the strikes we select. Deeper OTM strikes with lower Deltas, will provide greater protection from the need to roll-out-and-up but also generate lower returns. Each investor must determine the sweet spot that aligns with one’s personal risk-tolerance and strategy goals. BCI Community live Zoom webinar: A streamlined version of covered call writing New Book + 2 New Spreadsheets Previously shared with premium members and now with the entire BCI community. For those with busy schedules who seek to generate cash flow and beat the market on a consistent basis in a user-friendly and time-efficient manner. A “don’t miss” presentation. Thursday May 11th at 8 PM ET Reduce the # of stocks (ETFs) considered from 8000+ to 11 Reduce the # of exit strategy choices from 14 to 4 A Zoom link will be sent to all on our mailing list and posted on this blog in a few weeks Our platform allows 500 attendees Login a few minutes early to ensure a seat Premium Member Benefits Video This is a great time to join our premium member community with its stock screening and educational (over 250 videos) benefits. We offer more benefits than ever before. For information, click here. For video explanation, click here. 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: Hi Alan! I cannot thank you enough for your work. I already have 4 of your books and the number 5 is on its way. It’s so exciting! Have a great day! Denis ______________________________ Upcoming events To request a private webinar for your investment club, hosted by Alan & Barry: info@thebluecollarinvestor.com 1. Wealth365 Summit April 18th 10 AM – 11 AM ET Covered Call Writing Dividend Stocks to Create a 3-Income Strategy Covered call writing is a low-risk option-selling strategy that generates weekly or monthly cash-flow. By mastering the skill of strike price selection and adding dividend distributions, a potential 3-income strategy can be crafted with a goal of beating the market on a consistent basis. Bonus topic: An introduction to the BCI streamlined approach to covered call writing creating a more user-friendly and time-efficient path to this low-risk option-selling program. Topics covered in this webinar include: Strategy analysis Option basics What is covered call writing? Dividend distribution Stock selection Option selection Trade management Q&A Real-life examples will be highlighted with Dow 30 stocks using option-chains and calculation spreadsheets. Attendees will have the opportunity to participate in written Q&A during the entire webinar. Register here. 2.BCI total community webinar plus Q&A Covered Call Writing: A Streamlined Approach (CEO Strategy introduction) Thursday May 11,2023 8 PM ET Zoom login link to follow for 1st 500 attendees. 3. Your Mid-Year Portfolio Review Virtual Expo June 27th – 29th, 2023 Specific time, date, topic & description and registration link to follow. Alan speaking at a Money Show event *********************************************************************************************************************** [Image] Here are Some More Investing Tips and Resources. Enjoy! Sponsored [Book In A Call With Guy's Team Now & Secure A Complimentary Ticket Upgrade Worth $1,000]( [Understanding the Math When Rolling ITM Covered Calls Out-And-Up: A Real-Life Example with Utilities Select Sector SPDR Fund (NYSE: XLU) + Save the Date May 11th](?site= All strategies, including covered call writing and selling cash-secured puts, have their pros and cons. The same holds true for the exit strategies associated with them. Several of our members have written to me over the years regarding a “can’t lose” portfolio overwriting strategy that will return 1% – 2% per-month by selling out-of-the-money (OTM) calls and rolling the options out-and-up when the calls are expiring in-the-money (ITM). This article will highlight a real-life example with Select Sector SPDR Utilities (NYSE: XLU) showing an option-chain that will meet the stated initial time-value return goal range and factor in Delta to determine the probability of needing to roll the option out-and-up (probability of expiring in-the-money at expiration). XLU (an exchange-traded fund or ETF) covered call writing trade 11/2/2022: Buy 100 x XLU at $67.26 11/2/2022: STO 1 x 12/2/2022 $70.00 call at $0.79 11/2/2022: The $70.00 call strike shows a Delta of 0.30 Does the premium meet our stated goal? What is the probability of the strike expiring with intrinsic-value or ITM? What is the potential impact of rolling-out-and-up on our 1% – 2% monthly returns? XLU option-chain on 11/2/2022 XLU Option-Chain on 11/2/2022 The Delta of the $70.00 strike reflects an approximate probability of the strike expiring ITM 30% of the time or 3 – 4 months out of a calendar year for monthly expirations. This means rolling the strike out-and-up fairly frequently to retain the out-of-the-money trade status. The BCI Trade Management Calculator XLU: Initial Trade Calculations The red arrows show a 31-day initial time-value return of 1.17%, 13.83% annualized. This meets our stated initial time-value return goal range of 1% – 2% per-month. The blue arrow shows that an additional 4.07% can be realized if share value moves up to and beyond the $70.00 strike. This means that if there is a need to roll-out-and-up, this month’s return would be 5.24% (1.17% + 4.07%). Based on the Delta stat, there is a 30% probability of this occurring. What is the impact of rolling out-and-up? To generate a 1-month return of 1% – 2% for XLU, the $70.00 OTM strike would do the trick. Note the Delta is 30, a 30% chance of exercise without exit strategy intervention. When this occurs, to roll-out-and-up, we do so at an option debit so that will impact overall returns. At expiration, if the strike is ITM, the cost-to-close is the intrinsic-value of the premium + a few pennies of time-value. Let’s say XLU is trading and $72.00, the cost-to-close may be $2.05. Rolling out-and-up will generate a much lower premium. If we allow exercise and sell the shares at $70.00 and buy on Monday at $72.00 (if shares are still the same price), the debit is $2.00, $0.05 less but rolling the option protects us against further share acceleration on market open. An alternative approach if we want to generate more protection is to use a lower Delta strike (deeper out-of-the-money) and settle for lower premiums … we can’t have both. Why this is not a “can’t lose” strategy When share price accelerates past the out-of-the-money strike ($70.00, in this example), we will win nearly every time as we factor in upside potential as we roll out-and-up. However, if share price declines below the breakeven price point, we start to lose money or, at least, devalue the initial time-value return. Discussion There are no “can’t miss” strategies that seek to generate higher than risk-free returns. Rolling-out-and-up to an out-of-the-money (OTM) strike will typically result in an option debit but capture increased share value. When portfolio overwriting securities which we want to retain in our long-term buy-and-hold portfolios, we must balance the returns we receive and the strikes we select. Deeper OTM strikes with lower Deltas, will provide greater protection from the need to roll-out-and-up but also generate lower returns. Each investor must determine the sweet spot that aligns with one’s personal risk-tolerance and strategy goals. BCI Community live Zoom webinar: A streamlined version of covered call writing New Book + 2 New Spreadsheets Previously shared with premium members and now with the entire BCI community. For those with busy schedules who seek to generate cash flow and beat the market on a consistent basis in a user-friendly and time-efficient manner. A “don’t miss” presentation. Thursday May 11th at 8 PM ET Reduce the # of stocks (ETFs) considered from 8000+ to 11 Reduce the # of exit strategy choices from 14 to 4 A Zoom link will be sent to all on our mailing list and posted on this blog in a few weeks Our platform allows 500 attendees Login a few minutes early to ensure a seat Premium Member Benefits Video This is a great time to join our premium member community with its stock screening and educational (over 250 videos) benefits. We offer more benefits than ever before. For information, click here. For video explanation, click here. 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: Hi Alan! I cannot thank you enough for your work. I already have 4 of your books and the number 5 is on its way. It’s so exciting! Have a great day! Denis ______________________________ Upcoming events To request a private webinar for your investment club, hosted by Alan & Barry: info@thebluecollarinvestor.com 1. Wealth365 Summit April 18th 10 AM – 11 AM ET Covered Call Writing Dividend Stocks to Create a 3-Income Strategy Covered call writing is a low-risk option-selling strategy that generates weekly or monthly cash-flow. By mastering the skill of strike price selection and adding dividend distributions, a potential 3-income strategy can be crafted with a goal of beating the market on a consistent basis. Bonus topic: An introduction to the BCI streamlined approach to covered call writing creating a more user-friendly and time-efficient path to this low-risk option-selling program. Topics covered in this webinar include: Strategy analysis Option basics What is covered call writing? Dividend distribution Stock selection Option selection Trade management Q&A Real-life examples will be highlighted with Dow 30 stocks using option-chains and calculation spreadsheets. Attendees will have the opportunity to participate in written Q&A during the entire webinar. Register here. 2.BCI total community webinar plus Q&A Covered Call Writing: A Streamlined Approach (CEO Strategy introduction) Thursday May 11,2023 8 PM ET Zoom login link to follow for 1st 500 attendees. 3. Your Mid-Year Portfolio Review Virtual Expo June 27th – 29th, 2023 Specific time, date, topic & description and registration link to follow. Alan speaking at a Money Show event *********************************************************************************************************************** [Continue Reading...](?site= [Understanding the Math When Rolling ITM Covered Calls Out-And-Up: A Real-Life Example with Utilities Select Sector SPDR Fund (NYSE: XLU) + Save the Date May 11th]( And, in case you missed it: - [Madame Lagarde’s Admission: CBDCs Are about Control](?site= - [Scilex Holding Company Announces Final Postponement of Annual Meeting of Stockholders](?site= - [Biomerica Reports Q3 Fiscal 2023 Results](?site= - [Predicine to Introduce PredicineALERT™ MRD Assay and Present Twelve Posters at AACR 2023 Conference](?site= - [Law Restricting Incentives For Cryptocurrency Miners Passes The Texas Senate And Is Sent To The House](?site= - FREE OR LOW COST INVESTING RESOURCES - [i]( [i]( [i]( [i]( Sponsored [Click Here to Get Your FREE Strategy Guide Now!]( - CLICK THE IMAGE BELOW FOR MORE INFORMATION - [i]( Good Investing! 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