Y’all know how I love my limit orders, so I figured out a new way to use them. Here’s the scenario:
I’ve got IWM stock at 202, and I had sold 202 calls a while back. Expiration is in four days. IWM is at around 204 today so I use the BlowOut Calculator and find that there is too much time value as of today to close out at my max profit. Remember, we can only make so much with a covered call, the strike price plus whatever premium we got. That’s it. In this case I have a 202 strike and I got 1.35 in premium, so the most I can get is 203.35 per share. The BlowOut Calc tells me if I’ve reached that point or not, and today, not. So I wondered, just what IS my max profit point? If I knew that number I could put in a GTC limit order that would close me out the moment IWM went high enough to reach my max profit point. (This is a function of the balance of IWM prices rising and time value eroding.) And at that point, why not get out? Waiting won’t make any more money, and once I’m out I can take a look at my choices again. There is now an updated version of the BlowOut Calc that does that calculation for you. Email me and I’ll send a copy. See the purple “Magic Number?” That’s the number you can input into a limit order and it will get you out at your max gain. This requires a two-legged trade. You would sell the stock using one leg while the second leg is a buy to close for the call. Now you’re back in cash and you’ve made all your gains for this trade without waiting for expiration. Of course, being a limit order, there’s no guarantee it will be filled and the trade may go to expiration anyway so like always you have to keep an eye on it. Any questions just ask!
Happy Trading!
