Whenever a covered call trade results in a maximum return, it is a successful trade…period…end of story. To most, this statement appears nonsensical and self-evident. But I’m here to tell you that there are a lot of covered call writers that question that success. In late December 2017, Paul shared with me a series of trades he executed that resulted in a return that left him a bit discouraged. There were several components to his trades, but we will focus on the final trades:


Paul’s trades

  • 11/16/2017: Long 800 SPY (SPDR S&P 500 ETF) at $258.91
  • 11/16/2017: Sell (short) 8 x $255.00 12/15/2017 at $5.44
  • 12/8/2017: (1-week prior to expiration) SPY was trading at $265.05
  • 12/8/2017: $255.00 call was trading at $10.33
  • 12/8/2017: Paul wanted to avoid exercise and was considering closing the short calls


Calculations when entering the trade

Since an in-the-money strike was sold, we know that there is no opportunity to enhance returns via share appreciation. Let’s feed this information into the Multiple tab of the Ellman Calculator:

covered call writing calculations

SPY Calculations using the Ellman Calculator


The initial time value return when entering the trade was 0.6% (yellow field) with no opportunity for additional profit (brown field). There was a 1.5% protection of that initial time value profit. The trade goal had been defined upon entering the trade. No matter how high the share price rises that goal of 0.6% for the 1-month has been realized.


What about the cost-to-close if we want to retain our shares?

Initially, it would appear that the cost-to-close the short call ($10.33) is quite expensive especially when compared to the initial $5.44 premium received. However, we must view this cost through the lens of share value as well. When the $255.00 call was sold, the price of SPY could never be worth more than that strike price while the contract obligation was in effect. If the call is bought back (buy-to-close), share value rises to current market value or $265.05, an increase of $10.05. This means that the actual time value cost-to-close is only $0.28 per- share ($10.33 – $10.05). Since this evaluation took place a week prior to contract expiration, waiting another week would result in an even lower time value cost-to-close.


What if Paul bought back the short call to avoid exercise?

On 12/8/2017, to close the short call would cost Paul $10.33, $10.05 in intrinsic value and $0.28 in time value. The time value cost-to-close is 0.11% ($0.28/$255.00). A lower cost-to-close would be achieved if we wait closer to contract expiration. 



Certainly, Paul would have generated a higher return not having sold the option. However, it never makes sense to look back on a trade and feel that more money could have been generated if a different strategy was used. We all would have made a fortune if we used the lottery numbers on Friday’s ticket purchase with the numbers we read in the newspapers on Sunday. Paul managed this trade to perfection given the following assumptions:

  • His goal was about 1/2% per month
  • He was bearish or concerned about the market and wanted the protection of an in-the-money strike

I’m going with those assumptions so congratulations Paul on achieving maximum returns.


Upcoming events

Denver Colorado: American Association of Individual Investors

August 18 @ 9:00 am – 12:00 pm

Saturday August 18, 2018

Click for information and registration details


San Francisco Money Show

August 23 @ 10:00 am – 11:00 am

Hilton San Francisco Union Square

1.Thursday August 23rd: 12:30 PM – 1:15 PM

All Stars of Options: “How to Select the Best Covered Call Options in Bull and Bear Markets”

2. Friday August 23rd: 10:15 AM – 1:15 PM

Masters Class: “How to Generate Monthly Cash Flow and Buy a Stock at a Discount Using 2 Low- Risk Option Strategies (covered call writing and selling cash-secured puts)”

3. Friday August 23rd: 6:00 PM – 6:45 PM

Workshop: “Converting Non-Dividend Stocks to Dividend Stocks using Stock Options”

Click for information


Market tone

This week’s economic news of importance:

  • Pending home sales June 0.9% (-0.5% last)
  • Employment cost index Q2 0.6% (0.7% expected)
  • Personal income June 0.4% (as expected)
  • Consumer spending June 0.4% (0.5% expected)
  • Core inflation June 0.1% (as expected)
  • Case-Shiller home price index May 6.4% (6.4% last)
  • Consumer confidence index July 127.4 (127.0 expected)
  • ADP employment July 219,000 (181,000 last)
  • Markit manufacturing PMI final July 55.3 (55.4 last)
  • ISM manufacturing index July 58.1% (59.5% expected)
  • Construction spending June -1.1% (0.2% expected)
  • FOMC announcement 1.75 – 2% (as expected)
  • Weekly jobless claims 7/28 218,000 (220,000 expected)
  • Factory orders June 0.7% (as expected)
  • Nonfarm payrolls July 157,000 (195,000 expected)
  • Unemployment rate July 3.9% (as expected)
  • Average hourly earnings July 0.3% (0.2% expected)
  • Trade deficit June -46.3 billion (-46.6 billion last)
  • Markit services PMI July 56.0 (56.2 last)
  • ISM non-manufacturing index July 55.7% (58.6% expected)


Mon August 6th

  • Survey of consumer expectations July

Tue August 7th

  • Job openings June
  • Consumer credit June

Wed August 8th

Thu August 9th

  • Weekly jobless claims 8/4
  • Producer price index July
  • Wholesale inventories June

Fri August 10th

  • Consumer price index July
  • Core CPI July
  • Federal budget July

For the week, the S&P 500 moved up by 0.76% for a year-to-date return of 6.24%


IBD: Market in confirmed uptrend

GMI: 5/6- Bullish signal since market close of July 9, 2018

BCI: Using an equal number of in-the-money and out-of-the-money strikes. Impact of tariffs/trade wars unclear.



The 6-month charts point to a bullish tone. In the past six months, the S&P 500 was up 8% while the VIX (11.69) down by 70%.

Wishing you much success,

Alan and the BCI team

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