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After entering our covered call trades and share price rises substantially, there are often opportunities to generate a 2nd inc0me stream by closing both legs of the original trade and entering a new one with a different underlying security. In the BCI methodology, this is known as the Mid-Contract Unwind (MCU) exit strategy. This article will highlight an example of this strategy using Nucor Corp. (NYSE: NUE). The BCI Trade Management Calculator will show trade entry, initial calculations, trade adjustments and final results.
MCU trade overview
- 7/25/2021: Buy 100 x NUE at $96.87
- 7/25/2021: STO the 8/20/2021 $95.00 ITM call at $4.90
- 8/6/2021: BTC the 8/20/2021 $95.00 call at $9.70
- 8/6/2021: Sell 100 x NUE at $104.28
- 8/6/2021: With 14 days remaining to contract expiration, the cash available from selling the NUE shares is now available for a 2nd income stream in the same contract cycle
BCI Trade Management Calculator: NUE trade entry
NUE: Initial Trade Entries
BCI Trade Management Calculator: NUE initial calculations
NUE: Initial Covered Call Calculations
The spreadsheet shows an initial time-value return of 3.20%. Since the option sold was in-the-money, no additional profit can be gleaned from share appreciation.
BCI Trade Management Calculator: NUE adjustment entries
NUE: MCU Trade Adjustment Entries
BCI Trade Management Calculator: NUE final results
NUE: Final Returns After Trade Adjustments
The final trade result after trade adjustments is 2.75%
Discussion
The MCU exit strategy resulted in a time-value cost-to-close of 0.45% (3.20% – 2.75%). We use this exit strategy when we can generate at least 1% more than this time-value cost-to-close or 1.45% or higher, thereby initiating a 2nd income stream with a similar cash investment. Note that we must have cash available in our portfolios to close our short option positions when exit strategy opportunities are available.
Information on the BCI Trade Management Calculator
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Image and article originally from www.thebluecollarinvestor.com. Read the original article here.