20%/10% Guidelines: “Hitting a Double” in the Same Day: A Real-Life Example with Consumer Staples Select Sector SPDR (NYSE: XLP)

After entering our covered call writing trades, we immediately enter our 20%/10% BTC (buy-to-close), GTC (good-until-cancelled) limit orders. If and when these thresholds are reached (resulting from share price decline) are short calls will be closed (bought back). At that point, we can plan our next steps to mitigate losses or turn losses into gains. This article will highlight a hitting a double trade I executed with XLP where the short call was bought back in the morning and the same option was re-sold later that afternoon. This result could not have been achieved without our 20% guideline.

What are the 20%/10% guidelines for covered call writing?

After entering our covered call trades, we immediately enter BTC GTC limit orders based on the premium received from the initial trade. We instruct our broker to close the short call if option value declines to 20% or less of the original premium in the first half of a monthly contract or 10% or less in the last 2 weeks of a monthly contract. These trades will be executed automatically if the stated thresholds are reached.

Initial trade with XLP

• 4/18/2022: Buy 300 shares of XLP at $78.59
• 4/18/2022: STO 3 x 5/20/2022 $80.00 calls at$0.84
• 4/18/2022: Place 3 x BTC GTC limit orders at $0.17 (20% guideline)
• 5/4/2022: BTC 3 x 5/20/2022 $80.00 calls at $0.17
• 5/4/2022: STO 3 x 5/20/2022 $80.00 calls at $0.46
• 5/4/2022: Place 3 x BTC GTC limit orders at $0.05 (10% guideline)

May 4, 2022

The market had been reeling from inflation and interest rate concerns as well as the Russian invasion of Ukraine. The Fed was to make an announcement at 2 PM ET regarding an interest rate hike and many investors were expecting a 50-basis point increase but feared a 75-basis point rise. The Fed announced a 50-basis point increase and stated that there was no consideration for a 75-point increase. The market loved the statement and rose by nearly 3%.

Price chart of XLP on 5/4/2022

Broker transactions on 5-4-2022

XLP: Broker Transactions

Discussion

By having the 20% guideline in place, along with the market volatility created by the Fed announcement, an additional $87.00 of premium was added to our account [($46.00 – $17.00) x 3]. Since we were approaching the final 2 weeks of the May contracts, I used the 10% guideline for the new $0.46 premium. Generating additional time-value premium in our option-selling trades is not luck. It is the intersection of preparation and opportunity.

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Analyzing a 1-Month Covered call Writing Portfolio from Start to Finish

Thursday February 16,2023

7:30 PM ET- 9 PM ET

A real-life example with a $100k ETF Select Sector SPDR portfolio
Covered call writing is a low-risk option-selling strategy that generates weekly or
monthly cash flow. This presentation will demonstrate how to implement this
strategy using a database of only 11 exchange-traded funds for a 1-month option
contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s
portfolios with screenshots verifying each trade. A final monthly contract result
compared to the performance of the S&P 500 will be calculated.

Topics included in this webinar:

 What are the Select Sector SPDRs?
 How to establish a covered call writing portfolio
 What is the role of diversification?
 What is the role of cash allocation?
 Calculating initial returns
 Analyzing each trade in the monthly contract
 Final results
 Next steps

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