Application of the 20%/10% Guidelines for ITM & OTM Strikes + Registration Form for Thursday’s Webinar

One of the key methods to partially automate our covered call writing exit strategy arsenal is to place buy-to-close (BTC), good until cancelled (GTC) limit orders to close our short calls based on our BCI 20%/10% guidelines. We instruct our broker to buy back the short call if the value reaches 20% (in the 1st half of a monthly contract) of its original sale value or 10% in the last 2 weeks of a monthly contract. Option value will decline as share value declines (Delta) and as time passes during that contract (Theta). For example, if we sold a covered call option for $2.00, we’d place a BTC GTC limit order to buy back that option if value decreased to $0.40 in the 1st half of a monthly contract and $0.20 in the last 2 weeks of that contract. I am frequently asked if those guidelines are based on the time-value component of the premiums only or if intrinsic-value (IV) should be included in the calculations for in-the-money (ITM) strikes. This article will detail a real-life example with XLE which will demonstrate why the 20%/10% guidelines apply to the entire premium of ITM strikes. Real-life example with Energy Select Sector SPDR Fund (NYSE: XLE – an exchange-traded fund or ETF) 11/25/2022: XLE trading at $92.21 11/25/2022: The $89.00 ITM strike has a bid-price of $4.95 The time-value component of the $89.00 strike is $1.74 Do we base our 20%/10% guidelines on $4.95 or $1.74? 11/25/2022: The $95.00 OTM strike has a bid price of $1.77 The $95.00 strike is all time-value and therefore will be the basis of our 20%/10% guidelines XLE option-chain on 11/25/2022 XLE Option-Chain for ITM and OTM Strikes Brown cells: The $89.00 (ITM) strike has a bid price of $4.95 and a Delta (amount a premium price will change for every $1.00 change in share price) of 0.68 Yellow cells: The $95.00 (OTM) strike has a bid price of $1.77 and a Delta of 0.38 Initial trade calculations using the BCI Trade Management Calculator XLE: Initial Covered Call Calculations 22-day and annualized returns are practically identical (bottom left of screenshot) Yellow cells: Breakeven price points Brown cell: The $95.00 OTM strike offers 3.03% of upside potential (share appreciation up to the OTM strike price) Purple cell: The $89.00 ITM strike offers 3.48% downside protection of the initial time-value profit What is breakeven? This is the price point at which there is no gain or loss. It is the price of the underlying security at the time of the trade minus the entire option premium. Delta calculations to the 20% guidelines We take the difference between the original premium and the 20% amount and then divide by the Delta. This will provide an approximation of how much share value must decline to trigger the breach of the 20% guideline. Below is a spreadsheet I created to reflect these calculations for the $89.00 strike using both time-value only and the entire premium as well as calculations for the $95.00 strike. 20%/10% guidelines as they relate to breakeven (IV = intrinsic-value) 20%-10% Guidelines and Breakeven Price Points Typically, the 20% guideline will be breached when share price dips slightly below the breakeven price, giving us opportunities to mitigate the small losses or even turn losses into gains By using the entire premium (time-value + intrinsic-value) for ITM strikes and not just time-value, we will close the short call at a higher share price Discussion The 20%/10% guidelines will assist in automating our exit strategy implementation when share price declines. The 20% guidelines are changed to 10% prior to the final 2 weeks of a monthly contract. When using ITM call strikes, we base our 20%/10% guidelines on the entire option premium. BCI Community live Zoom webinar May 11th: A streamlined version of covered call writing: Register here. 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 Registration form below Our platform allows 500 attendees Special offer to those registered and attending the live event Login a few minutes early to ensure a seat To ensure a spot, fill out the registration form by clicking here: 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: Alan, Thank you for your punctual reply. You have been blessed with a style that the reader becomes absorbed in your knowledge. YOU ARE BLESSED, DO NOT EVER STOP!! Sam Z. ______________________________ Upcoming events 1.BCI total community Covered Call Writing: A Streamlined Approach (CEO Strategy introduction) Thursday May 11,2023 8 PM ET Zoom login link will be provided to 1st 500 attendees. Alan Ellman is inviting you to a scheduled Zoom meeting. Topic: Covered Call Writing: A Streamlined Approach: Live Webinar Time: May 11, 2023 08:00 PM Eastern Time (US and Canada) To ensure a spot, fill out the registration form by clicking here. 2. Mad Hedge Investor Summit June 14th at 11 AM ET – 12 PM ET Exit Strategy Choices After Exercise of Cash-Secured Puts When we sell cash-secured puts, we are undertaking the contractual obligation to buy shares at the strike price by the expiration date. Typically, we only sell puts on elite-performers that we would be agreeable to own in our portfolio. This presentation will analyze 4 potential exit strategy opportunities to consider should the put option be exercised. Information on the following strategies will be highlighted: Selling the stock Holding the stock in our long-term buy-and-hold portfolio Write a covered call (PCP or “wheel” strategy) Implement the Stock Repair Strategy In addition to these strategies, the following topics will also be included in the webinar: Option basics for selling cash-secured puts Option basics for covered call writing Real-life examples Calculations using the BCI Trade Management Calculator (TMC) Event super discount offer There will be information offered to all levels of options trades, from beginners to advanced. Registration link to follow. 3. Your Mid-Year Portfolio Review Virtual Expo June 27th – 29th, 2023 4. Wealth365 Investor Summit July 10th -11th Details to follow. Alan speaking at a Money Show event*********************************************************************************************************************** [Image] Here are Some More Investing Tips and Resources. Enjoy! Sponsored [Are You Prepared for the Death of the Dollar?]( The dollar is not as stable as we once thought. The national debt is skyrocketing, inflation is rising, and the government seems unable to control it. All of this points to a possible collapse of the dollar, and the consequences will be catastrophic. [Here's How To Prepare]( By clicking the link you are subscribing to The Wealth Creation Investing Newsletter and may receive up to 2 additional free bonus subscriptions. Unsubscribing is easy. [Privacy Policy/Disclosures]( [Application of the 20%/10% Guidelines for ITM & OTM Strikes + Registration Form for Thursday’s Webinar](?site= One of the key methods to partially automate our covered call writing exit strategy arsenal is to place buy-to-close (BTC), good until cancelled (GTC) limit orders to close our short calls based on our BCI 20%/10% guidelines. We instruct our broker to buy back the short call if the value reaches 20% (in the 1st half of a monthly contract) of its original sale value or 10% in the last 2 weeks of a monthly contract. Option value will decline as share value declines (Delta) and as time passes during that contract (Theta). For example, if we sold a covered call option for $2.00, we’d place a BTC GTC limit order to buy back that option if value decreased to $0.40 in the 1st half of a monthly contract and $0.20 in the last 2 weeks of that contract. I am frequently asked if those guidelines are based on the time-value component of the premiums only or if intrinsic-value (IV) should be included in the calculations for in-the-money (ITM) strikes. This article will detail a real-life example with XLE which will demonstrate why the 20%/10% guidelines apply to the entire premium of ITM strikes. Real-life example with Energy Select Sector SPDR Fund (NYSE: XLE – an exchange-traded fund or ETF) 11/25/2022: XLE trading at $92.21 11/25/2022: The $89.00 ITM strike has a bid-price of $4.95 The time-value component of the $89.00 strike is $1.74 Do we base our 20%/10% guidelines on $4.95 or $1.74? 11/25/2022: The $95.00 OTM strike has a bid price of $1.77 The $95.00 strike is all time-value and therefore will be the basis of our 20%/10% guidelines XLE option-chain on 11/25/2022 XLE Option-Chain for ITM and OTM Strikes Brown cells: The $89.00 (ITM) strike has a bid price of $4.95 and a Delta (amount a premium price will change for every $1.00 change in share price) of 0.68 Yellow cells: The $95.00 (OTM) strike has a bid price of $1.77 and a Delta of 0.38 Initial trade calculations using the BCI Trade Management Calculator XLE: Initial Covered Call Calculations 22-day and annualized returns are practically identical (bottom left of screenshot) Yellow cells: Breakeven price points Brown cell: The $95.00 OTM strike offers 3.03% of upside potential (share appreciation up to the OTM strike price) Purple cell: The $89.00 ITM strike offers 3.48% downside protection of the initial time-value profit What is breakeven? This is the price point at which there is no gain or loss. It is the price of the underlying security at the time of the trade minus the entire option premium. Delta calculations to the 20% guidelines We take the difference between the original premium and the 20% amount and then divide by the Delta. This will provide an approximation of how much share value must decline to trigger the breach of the 20% guideline. Below is a spreadsheet I created to reflect these calculations for the $89.00 strike using both time-value only and the entire premium as well as calculations for the $95.00 strike. 20%/10% guidelines as they relate to breakeven (IV = intrinsic-value) 20%-10% Guidelines and Breakeven Price Points Typically, the 20% guideline will be breached when share price dips slightly below the breakeven price, giving us opportunities to mitigate the small losses or even turn losses into gains By using the entire premium (time-value + intrinsic-value) for ITM strikes and not just time-value, we will close the short call at a higher share price Discussion The 20%/10% guidelines will assist in automating our exit strategy implementation when share price declines. The 20% guidelines are changed to 10% prior to the final 2 weeks of a monthly contract. When using ITM call strikes, we base our 20%/10% guidelines on the entire option premium. BCI Community live Zoom webinar May 11th: A streamlined version of covered call writing: Register here. 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 Registration form below Our platform allows 500 attendees Special offer to those registered and attending the live event Login a few minutes early to ensure a seat To ensure a spot, fill out the registration form by clicking here: 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: Alan, Thank you for your punctual reply. You have been blessed with a style that the reader becomes absorbed in your knowledge. YOU ARE BLESSED, DO NOT EVER STOP!! Sam Z. ______________________________ Upcoming events 1.BCI total community Covered Call Writing: A Streamlined Approach (CEO Strategy introduction) Thursday May 11,2023 8 PM ET Zoom login link will be provided to 1st 500 attendees. Alan Ellman is inviting you to a scheduled Zoom meeting. Topic: Covered Call Writing: A Streamlined Approach: Live Webinar Time: May 11, 2023 08:00 PM Eastern Time (US and Canada) To ensure a spot, fill out the registration form by clicking here. 2. Mad Hedge Investor Summit June 14th at 11 AM ET – 12 PM ET Exit Strategy Choices After Exercise of Cash-Secured Puts When we sell cash-secured puts, we are undertaking the contractual obligation to buy shares at the strike price by the expiration date. Typically, we only sell puts on elite-performers that we would be agreeable to own in our portfolio. This presentation will analyze 4 potential exit strategy opportunities to consider should the put option be exercised. Information on the following strategies will be highlighted: Selling the stock Holding the stock in our long-term buy-and-hold portfolio Write a covered call (PCP or “wheel” strategy) Implement the Stock Repair Strategy In addition to these strategies, the following topics will also be included in the webinar: Option basics for selling cash-secured puts Option basics for covered call writing Real-life examples Calculations using the BCI Trade Management Calculator (TMC) Event super discount offer There will be information offered to all levels of options trades, from beginners to advanced. Registration link to follow. 3. Your Mid-Year Portfolio Review Virtual Expo June 27th – 29th, 2023 4. Wealth365 Investor Summit July 10th -11th Details to follow. Alan speaking at a Money Show event*********************************************************************************************************************** [Continue Reading...](?site= [Application of the 20%/10% Guidelines for ITM & OTM Strikes + Registration Form for Thursday’s Webinar]( And, in case you missed it: - [Science 37 Reports Inducement Grant Under NASDAQ Listing Rule 5635(c)(4)](?site= - [ORIC Pharmaceuticals Reports Inducement Grants under Nasdaq Listing Rule 5635(c)(4)](?site= - [Chinook Therapeutics Announces New Employment Inducement Grant Under Nasdaq Listing Rule 5635(c)(4)](?site= - [Entera Bio Announces Q1 2023 Financial Results and Corporate Updates](?site= - [Pardes Biosciences Reports First Quarter 2023 Financial Results](?site= - FREE OR LOW COST INVESTING RESOURCES - [i]( [i]( [i]( [i]( Sponsored [Build Wealth 10x Faster By Doing This]( As you know, the stock market has been volatile lately, and there's a lot of uncertainty in the air. 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