Covered call writing dilemmas can frequently result from positive circumstances. In August 2017, Vincent shared a trade he executed where an out-of-the-money strike was sold and share price had moved up significantly and was approaching the strike price. This means that Vincent realized an initial option premium return plus had an unrealized share appreciation component to this yet unsettled trade. Since the trade had nearly reached its maximum return, Vincent was considering closing the short call and either selling the stock or rolling out to a latter expiration date. Let’s explore, which action, if any, should be considered.


Vincent’s trade

  • 8/14/2017: Buy 100 shares of ATHM at $61.95 (shown in 8/11/2017 and 8/18/2017 Premium Stock Report below)
  • 8/14/2017: Sell 1 x September $65.00 call at $1.90
  • 8/18/2017: ATHM trading at $64.41 (unrealized share gain of $2.46 per share)
  • 8/18/2017: Cost-to-close the September $65.00 call is $2.70
stock selection for covered call writing

Premium Stock Report Listing ATHM


Trade rationale and assumption

When we sell out-of-the-money strikes, we are confirming a bullish assumption on the stock and the overall market. This includes a bullish technical chart which is shown below and produced on 8/21/2017:

covered call writing and technical analysis

ATHM: Bullish Chart Pattern


The red arrows and green circle highlight a bullish and confirming technical chart pattern. In a neutral to bullish overall market environment, out-of-the-money strikes are most appropriate when also associated with chart patterns like this one.


Vincent’s considerations after closing the short call at $2.70

  • Sell the stock for a 1-week net return of 2.7% (factoring in the option net debit of $0.80)
  • Roll out to the December 2017 $65.00 call and receive $5.90
  • Roll out-and-down to the December $60.00 call and receive 8.50


Evaluating the 3 considerations

Sell the stock for a 1-week net return of 2.7%

Let’s assume we are fearful of the overall market. Choice (a) can be considered. Keep in mind that we are spending 4.4% of our initial investment to close. However, that will still leave us with a 2.7%, 1-week return…not so bad. To consider this, our bullish assessment must have turned around 180 degrees in the past week.


Roll out to the December 2017 $65.00 call and receive $5.90/ Roll out-and-down to the December $60.00 call and receive $8.50 

I’ll group these last 2 considerations together. Both involve rolling to the December calls. The attraction to each are the juicy premiums. Don’t be enticed. They will bring you through the next earnings release, breaking one of our BCI rules. Also, we will generate greater annualized returns using Monthlys rather than longer-term options. Finally, we also will have more opportunities to re-assess our bullish assumptions with shorter-term options.



Although I never give specific financial advice in this venue, I can comfortably tell you that I would not consider (b) and (c) leaving your decision to either take no action or close at the 2.7%, 1-week profit depending on your current overall market and stock assessment. Taking no action is therefore a 4th consideration.


Upcoming events

Portfolio Overwriting webinar for The Options Industry Council (OIC)

March 23 @ 10:30 am – 11:30 am

College and graduate school finance majors only

Quinnipiac G.A.M.E. VIII Forum

New York City

Friday March 23, 2018

“The 3-day forum, held annually in the spring, gathers some of the most successful people in finance together to share their knowledge, expertise and outlook for the future with graduate and undergraduate students”.


Market tone

This week’s economic news of importance:

  • Markit services PMI Feb 55.9 (expansion)
  • ISM nonmanufacturing index Feb 59.5% (better than expected)
  • Factory orders Jan (-)1.4% (expected)
  • ADP employment Feb 235,000
  • Trade deficit Jan. (-) $56.5 billion (larger than expected)
  • Weekly jobless claims week ending Mar 3 231,00 (more than expected)
  • Non-farm payrolls Feb 313,000 (much better than expected)
  • Unemployment rate Feb 4.1% (4.0% expected)
  • Average hourly earnings Feb 0.1% (0.2% expected)


Mon March 12th

Tue March 13th

Wed March 14th

  • Producer price index Feb
  • Retail sales Feb

Thu March 15th

  • Weekly jobless claims through 3/10
  • Philly Fed
  • Homebuilders Index Mar

Fri March 16th

  • Housing starts Feb
  • Building permits Feb
  • Consumer sentiment March
  • Industrial production Feb

For the week, the S&P 500 rose by 3.54% for a year-to-date return of 4.22%


IBD: Market in confirmed uptrend

GMI: 6/6- Buy signal since market close of February 20, 2018

BCI: Initiating a more bullish stance on trades moving forward as the market has strengthened and volatility has substantially subsided. Still cautious selling 3 out-of-the-money strikes for every 2 in-the-money strikes.


The 6-month charts point to a neutral to slightly bullish outlook. In the past six months, the S&P 500 was up 17% while the VIX (14.64) moved up by 55% but trending down.

Wishing you much success,

Alan and the BCI team

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