The 20 Cent Rule

This rule is a defensive measure that can be used when the option contract is within the last two weeks before expiration. Along with a holistic covered call investing methodology, this rule is presented in Hooper and Zalewski's book Covered Calls and Leaps.

The 20 Cent Rule: If you have a negative called return when an option contract has 2 weeks or less to expiration, take the strike price of your call, add the cost of buying that call back (the ask price) and subtract the market price of the stock:

Call Strike Price + Call Buyback Price - Stock Price

If the resulting value from this formula is $.20 or less, then you are in danger of being called out and need to take defense ... using the TSS for defense.

The Tethered Slingshot With the 20 Cent Rule

1. Implement the TSS for defense if the 20 Cent Rule indicates that you are in danger of being called out and this call out will be unprofitable.
2. Immediately buy back the existing call (this results in a temporary loss.)
3. Select the same call strike price but move the expiration date out to the second to last expiration.
4. You now have generated additional covered call income as the price your received for selling the TSS for defense call is always higher than the cost of buying back the near month. You no longer have a temporary loss.
5. Buy back this new call when the net gain is at least equal to the temporary loss generated in rule 2.
6. You now have a stock with no call obligation, did not get called out, and made additional income every step of the way.
7. Now wait for an upswing in stock price that will allow 4% called/uncalled return.
8. If the stock reaches 75% of the price cycle and does not allow for application of rule 7, go back to the rules for secondary call sales given in Chapter 4.