Rolling-Down On a Sharp Market Decline at the End of a Contract

Exit strategy opportunities may be created when there is a substantial 1-day market decline and we must be prepared to take advantage of these occasions. In June 2020, there was an 1800 point decline in the Dow 30 due to coronavirus concerns and national unrest related to police shootings. Many members of the BCI community had their buy-to-close (BTC) limit orders executed as a result of this precipitous decline. This article will highlight such a scenario with an exchange-traded fund.

Real-life example with Health Care Select Sector SPDR Fund (NYSE: XLV)

5/16/2020: Buy 200 shares of XLV at $101.70
5/16/2020: Sell 2 x 6/19/2020 $103.00 calls at $2.07
5/16/2020: 2 x BTC limit orders were placed at $0.40 (20% threshold) and then changed mid-contract to $0.20 (10% threshold) on June 8th
6/11/2020: 2 BTC limit orders were executed at $0.20 due to market decline
6/12/2020: 2 sell-to-open 6/19/2020 $98.00 calls were sold at $1.10 (rolling-down), creating a net rolling-down credit of $90.00 per contract [($1.10 – $0.20) x 100]
6/12/2020: Enter a BTC limit order of the rolled-down options at $0.10

Comparison chart of XLV and the S&P 500 in June 2020

XLV-S&P 500 Comparison Chart in June 2020

Brokerage account screenshot of the 3 trades

Broker Statement Showing XLV Trades

Discussion

Mastering the skill of position management will assist in elevating our returns to the highest possible levels. By placing BTC limit orders after entering our covered call trades, we can automate this aspect of our trade management. If, and when, a BTC limit order is executed late in a contract, we can roll-down to generate additional time-value premium to assist in mitigating losses or turning losses into gains.

To learn more about the rolling-down and other exit strategies, see the exit strategy chapters in the following books/DVDs:

Complete Encyclopedia for Covered Call Writing- Classic Edition

Complete Encyclopedia for Covered call Writing- Volume 2

Covered Call Writing Online Streaming DVD Program with Downloadable Workbook

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Alan,

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