Exit strategies for covered call writing and selling cash-secured puts are an integral part of the BCI success model, explains Alan Ellman of The Blue Collar Investor.
In April of 2021, Tom was excited to share with me a series of trades he astutely executed with Lowe's Companies, Inc., (LOW) where he generated three income streams with the same stock in the same contract month.
Put Delta explaining price movement in relation to stock price change
Puts have negative Deltas because the price movement of the underlying security is inversely related to put value. If share price accelerates, put value declines and vice versa. From mid-March 2021 to mid-April 2021, LOW went to the moon and the value of the corresponding puts plummeted. This created huge opportunities for put-sellers of LOW.
Tom’s trades
- 3/19/2021: LOW trading at $178.44
- 3/19/2021: STO 4/16/2021 $170.00 put at $2.11
- 3/28/2021: LOW trading at $188.63
- 3/28/2021: BTC $170.00 put at $0.40 (20% put guideline)
- 3/28/2021: STO 4/16/2021: $180.00 put at $1.70 (hitting a double)
- 4/12/2021: LOW trading at $199.05
- 4/12/2021: BTC the $180.00 put at $0.15 (10% put guideline)
- 4/12/2021: STO the 4/16/2021 (near-the-money) $200.00 put (Tom was okay, if assigned) at $2.45 (hitting a triple)
Price chart reflecting Tom’s trades
LOW Price Chart: Tom’s Trades in Yellow Field
Trade results as of 4/12/2021
The last put strike of $200.00 required a cash amount of $197.55 ($200.00 – $2.45) to secure that final put sale. The net put credit was $5.71, for a 24-day time-value return of 2.9%. The initial trade time-value return, prior to exit strategy executions, was 1.26%.
Discussion
Position management is the 3rd required skill needed to achieve the highest levels success for our option-selling strategies. When selling cash-secured puts, we can take advantage of share price acceleration by rolling puts up and taking advantage of the inverse relationship between put and share value. The 10-Delta requirement remains in place for all management trades.
Learn more about Alan Ellman on the Blue Collar Investor Website.
