Covered call writing exit strategies are critical to our overall success. There are times, however, when the best action is no action at all. On July 25th 2019, Rob shared with me a successful trade he executed and was considering closing 1 week prior to the 8/2/2019 expiration. For an answer, we need to turn to the “Unwind Now” tab of the Elite version of the Ellman Calculator.

Rob’s trade as of 7/25/2019

  • 6/17/2019: Buy BABA at $173.54
  • 6/17/2019: Sell the August 2nd $175.00 call for $2.35
  • 7/25/2019: BABA trading at $178.00
  • 7/25/2019: Price of $170.00 call is $4.78

Initial trade setup

covered call writing calculations

BABA: Initial Calculations

Calculation entries to unwind the entire position

covered call writing exit strategies

Unwind Now: Trade Information Entries

Calculation results to unwind the entire position

BABA: Unwind Now Calculation Results

Discussion

The initial trade structuring shows a potential 5-week return of 2.2% (yellow cells). If the trade is closed on 7/25, the time-value cost-to-close is 1.02%, almost cutting in half the maximum results Rob is currently enjoying. The question we ask is can we generate more than 1% more than the time-value cost-to-close by contract expiration. In this case, can we generate more than 2.02% in 1 week? The answer is probably not, so unwinding does not appear to be in our best interest. Another (better) approach would be to take no action but continue to monitor the trade.

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