Analyzing a Rolling-Up Covered Call Writing Trade: A Real-Life Example with Sinclair Broadcast Group, Inc. (NASDAQ: SBGI)


Covered call writing exit strategies include rolling-out and rolling-out-and-up but what about rolling-up in the same contract month? On January 4, 2021, Court shared with me a series of trades she executed with SBGI where a covered call trade was rolled-up as share price accelerated. This article will dissect all aspects of the trades and come to several trading perspective.

 

Court’s trades

  • 12/14/2020: Buy 100 x SBGI at $28.19
  • 12/14/2020: Sell-to-open (STO) 1 x 1/15/2021 $29.00 call at $1.70
  • 1/4/2021: Buy-to-close (BTC) the $29.00 call at $3.50
  • 1/4/2021: Sell 100 shares SBGI at 32.16
  • 1/4/2021: Buy 100 x SBGI at $32.15
  • 1/4/2021: STO 1 x 1/15/2021 $32.00 call at 1.35

 

Initial calculations with the Ellman Calculator

 

SBGI: Initial Time-Value Calculations

The spreadsheet shows an initial 12-day time-value return of 6% with the possibility of an additional 2.9% should SBGI move up to the $29.00 strike price at expiration. This results in a maximum return of 8.9%.

 

Calculating the time-value cost-to-close using the “Unwind Now” tab of the Elite and Elite-Plus Calculators

 

SBGI Calculating the Time-Value Cost-To-Close

 

The time-value cost-to-close is 1.21%, lowering our max return from 8.9% to 7.7%.

 

Court’s 2nd trade in the same contract month (cost-basis is $29.00)

SBGI: 2nd Trade in the Same Contract Month

The spreadsheet shows an additional initial time-value return of 3.8%.

 

Discussion and analysis

  • The initial trade had a max return of 8.9% (6% + 2.9%). That’s where the trade stood on 1/4/2021
  • When the short call was rolled, there was no need to sell the stock for $32.16 and buy it back for $32.15
  • The calculator shows a cost-to-close of 1.2% which makes sense (8.9% – 1.2% = 7.7%)
  • The new trade depends on SBGI remaining at or above the appreciated $32.15 price
  • My preference when stock value moves up and option value approaches zero (not the case here), is to close the entire position and enter a new one where the initial time-value return is at least 1% more than the time-value cost-to-close.
  • On 1/4/2021, no action was needed.

 

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Covered Call Writing with Invesco QQQ Trust (Nasdaq: QQQ)

Multiple Applications

Weekly and monthly cash flow can be generated by selling call options against shares of large-cap technology companies. QQQ is an exchange-traded fund consisting of 100 of the largest non-financial companies listed on the Nasdaq exchange and frequently an outstanding security for option-selling.

This presentation will include the basics of covered call writing, spreadsheet calculations and the rationale for entering these trades in various market conditions.

This webinar will also detail how to implement the covered call writing strategy with QQQ in 3 types of market environments:

  • Normal-to-bull markets
  • Bear or volatile markets
  • Low interest-rate environments

VOLQ (30-day implied volatility of the Nasdaq 100 index (NDX) will be introduced and applied with real-life detailed examples.

 

 

Alan speaking at a Money Show event

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