Stocks eligible for our covered call writing and put-selling portfolios are screened in a 3-pronged approach: fundamental analysis, technical analysis and “common sense principles” like avoiding earnings reports. One of the categories under the common sense umbrella is “banned stocks” due to monthly same store retail sales. This list, once 80-long, is now down to 8 companies as the others opted out of reporting on a monthly basis and reverted to quarterly reporting. Monthly reports like these create the same type of risk as do earnings reports. If they disappoint, share value can take a major hit and wipe out our profits for the month.
Recently, one of our members, Ryszard from Tempe, Arizona, was kind enough to share with me that airlines have analogous monthly reports that can create a high level of risk. These reports are known as capacity reports and are published in the first or second week of every month depending on the airline. Airlines report ASM or available seat miles as their maximum capacity and then these monthly capacity reports reflect the actual percentage of ASM used. Like earnings and revenues, analysts make predictions of these reports and if they disappoint, we can get hurt. I back-checked and found that disappointing capacity reports occur frequently enough where I felt the protection of banning these stocks was justified. Here is the updated list of “banned stocks”
Banned Stocks- 2015
For our premium members, these stocks are automatically screened out and will never appear in our watch (running) list. To those of you screening the stocks yourself, print out the list and keep in by your computer for reference. We will continue to update all our members should we locate additional securities that may not fit our risk profiles. Thanks again to Ryszard for sharing this information.
New seminar just added
I’ve been invited to speak at the AAII Investor Conference at Bally’s Hotel Las Vegas, Nevada. This is the American Association of Individual Investor’s national meeting and my presentation is scheduled for Sunday November 8th @ 4PM.
Next live seminars: Central Florida
Seminar on selling options
Watch my recent Money Show seminar on covered call writing and put-selling
First register for free with the Money Show (click above link)
Market tone
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295,000 new jobs were added in February, far surpassing expectations
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Unemployment rate fell to 5.5%, the lowest since May, 2008
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Wage growth, however, was unimpressive, up only 2% during the past y7ear
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Personal income growth increased by 0.3% in January
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Consumer spending declined by 0.2% in January
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New factory orders fell by 0.2% in January
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All 12 of the Fed districts reflected “moderate” expansion
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The ISM manufacturing index came in at 52.9 in February remaining above the expansion threshold of 50 now for 2 consecutive years
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The non-maufacturing index came in at 56.9, better than the previous 2 months
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Construction spending declined by 1.1% in January, declining for only the 2nd time in 7 months
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The trade deficit fell by 8.3% in january to $41.8 billion
Summary
IBD: Uptrend under pressure
GMI: 6/6- Buy signal since market close of January 23, 2015
BCI: Cautiously bullish using an equal number of in-the-money and out-of-the-money strikes. A great jobs report on Friday made investors nervous that the Fed may raise interest rates sooner rather than later.
Wishing you the best in investing,
Alan ([email protected])
Alan,
If I am already in a covered call with SAVE should I close it as soon as possible?
Thanks for the new information.
Susan
Susan,
Although I cannot give specific financial advice in this venue I can make some general statements that you should find useful.
Management techniques should be automatic when the 20%/10% guidelines are met. This stock has far out-performed the market over the past year but has been an under-performer since analyst downgrades in February (see chart below). This is now complicated by our concerns over these capacity reports.
In general, our decision whether to roll down or sell the stock, to a large extent, is based on its performance compared to the overall market as shown in the chart below. An unacceptable approach is no action at all.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Premium Members,
The Weekly Report for 03/06/15 has been uploaded to the Premium Member website and is available for download.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the BCI YouTube Channel link is:
http://www.youtube.com/user/BlueCollarInvestor
Best,
Barry and The BCI Team
Alan, while using your system although I have a fairly good idea about the order by which I could select some stocks, it is the returns that I have wondered first when to actually calculate them, so here are some questions about them.
1. Wouldn’t it be a good idea the day before putting on a trade to check the returns of all stocks in my price range, so that I can eliminate the ones with too low of returns – before starting to analyse the charts of them?(when I may have not needed to)?
2. Is your 2-4% goal only for the initial returns, or is this extended to final month returns as well?
3. If I wanted to buy put options on a stock then should my initial goal still be at the 2-4% return range? (and even too if I were to rollout the stock and then buy put options in the next contract?)
4. What is the percentage goal to use for buying put options on ETF’s with covered calls?
5. Also you have said that it is alright to buyback an option that is just above your 20% or 10% guideline values, but I have been thinking from what kind of circumstances would someone want to do this anyway?(good support levels, etc?)
I have an airline stock in practice too, and thinking maybe I should sell it and avoid any potential risk from it, I guess better safe than sorry later. Thank you
Hi Adrian,
1- Yes, absolutely…best time is just prior to trade executions.
2- 2 – 4% are my initial return goals…higher if I sold out-of-the-money strikes.
3- A fair goal when buying puts as a protective measure would be 1 – 2%/month…cutting your return goals in half. This is for a conservative investor with capital preservation and low-risk tolerance in mind.
4- 1/2 – 1%/month again cutting return goals in half…the price to pay for insurance.
5- If your stock is under-performing and you want to create an exit strategy opportunity sooner rather than later, if the cost to close is “in-the-ballpark” of our 20/10% guidelines, it’s okay to close. This gives us a bit of flexibility rather than a hard-and-fast rule like no earnings reports.
Alan
Alan,
You have banned a majority of retail companies and virtually all U.S. airlines simply because they report monthly volume statistics? I understand your fear of surprises, but aren’t you over-reacting? in general, I prefer investing in companies who are more transparent with their data than those who are not.
Most importantly, we know that the uncertainty associated with these monthly reports is reflected by higher option premiums — which we receive as income since we are the option sellers. In short, somewhat higher risk, but higher potential returns. Take United Continental Airlines (UAL) for example:
http://coveredcallsadvisor.blogspot.com/2015/03/established-new-position-in-united.html
The implied volatility was 45 when this position was established. Their monthly passenger-related statistics do not vary much from last year to this year. Yet they are benefiting greatly from the approximately 50% reduction in their fuel costs (which is 30% of their total expenses) — so their earnings will be substantially higher this quarter and next. Tell me another industry with such attractive fundamentals and where we can receive 30+% annualized returns along with 6% downside protection on monthly covered calls positions? If there are any, please share them (so we can invest there along with you).
Jeff
Jeff,
One of the reasons I don’t give specific trade recommendations is that we are fortunate to have thousands of members with many different trading styles. Some are more conservative than I am, others much more aggressive, some similar. To a great extent, the stock and option selected should reflect that style.
For me, covered call writing and put-selling are conservative strategies for conservative investors, generally speaking. By seeking high implied volatility underlying securities, we are then re-designing these strategies to higher-risk strategies…nothing wrong with that if it meets one’s trading style and personal risk tolerance.
The reason I banned the 8 retail companies (used to be about 80 but most opted out of monthly reporting) was because from time to time I got hammered by a disappointing report, just like the lessons I learned about avoiding earnings reports. I am happy to share my experiences with our BCI community and each member can make their own decision if they share those same concerns.
I have calculated the risk involved in stocks that return high monthly premiums based on 1 standard deviation and even 2 standard deviations and made a decision that for this (and most in my view) retail investor, I am not willing to undertake that risk. I want you to know that I respect your point of view and understand that my way is not the only way.
I also feel that capacity reports from the airlines represent unnecessary risk. There are thousands of underlying securities out there to choose from. It’s great to have the ability to select based on our personal trading styles.
For more aggressive option-selling securities check out biotech companies, especially those awaiting FDA approval.
Alan
Picked up this tidbit this morning from MarketWatch. Stocks to watch: McDonald’s Corp.(MCD) will release monthly sales ahead of the market’s open on Monday, while Urban Outfitters Inc.(URBN) reports after the close. Could this be another banned stock?
To follow up on my previous comment (#5), MarketWatch later wrote during premarket “McDonald’s Corp. shares (MCD) fell 1.3% in premarket trade Monday, after the fast-food giant reported another decline in monthly same-restaurant sales.”
Hi Allan,
i purchased your books a month or so ago
and have a question
you calculate your return %
Premium/(Stock Price – Premium)
the question is why
(Stock Price – Premium) my first instinct would be Premium/[Stock Price]
and a number of other sites do the same including Montreal Options Exchange from a description on the screener. I did find Wikipedia calculates as you do. I just want to understand the proper reasoning in case i had to explain it to someone else.
joe
Joe,
The general formula for selling call options is:
Time value of premium/Price of stock
For ATM and OTM calls, inital profit is:
Total premium/stock price
For ITM calls, there is an intrinsic value component to the premium (amount strike is in-the-money). This means we will lose that amount if and when thye stock is sold so we can’t can’t that component as profit. We can use it, however, to reduce our cost basis. So, the formula for ITM strikes is:
(Premium – intrinsic value)/ (Stock price – intrinsic value)
The calculation segments of my books and DVDs go into greater detail with numerous examples.
Alan
Hi Alan,
volatility seems to be the norm of the day. So what should one do. Sell covered calls or sell cash covered puts and should the calls be ITM, ATM or OTM?
Please suggest a way.
Thank you
Tom
Tom,
In bear and/or volatile markets, I favor in-the-money calls and out-of-the-money puts. The deeper you go in or out of the money, the more protection you have but the lower the % returns will be.
Using the PCP strategy (Chapter 16 of my latest book, Selling Cash-Secured Puts) should be given strong consideration as well.
Alan
Four months I have been trading using your strategy of covered call writing Alan, and I have made close to 15,000. on a 200,000.00 portfolio in a paper money account. I have yet to be challenged with an exit strategy, early on yes I didn’t know what I was doing but here as of late my strike selection has been so “on the money” there has been no need to implement. I’m getting some real confidence doing this to the point I am ready to pull the trigger, retire and roll over my pension in July to a brokerage firm and as you put it “Be the CEO of my financial future”
I have a quick question though. Is it true that one of the best and maybe the only options strategy for capitol preservation is the credit spread? If the stock market crashes I mean or if we have another 9-11 type event. Is this because of what they call a defined risk?
Thanks so much for your invaluable weekly running list. I brag about your service all the time.
Johnny,
There are many ways to trade options. Buying protective puts (the collar strategy…pages 233 – 236 in the Complete Encyclopedia) will “define” the maximum loss but also reduce your returns. Nothing wrong with that. I prefer to generate higher returns (but not too high) and use the myriad of rules and guidelines in the BCI methodology to reduce and manage risk. With the collar, our max profit is defined by the call strike and max loss by the put strike.
Alan
Johnny, it’s great that you’ve done so well in four months. If I look at the market since early November it’s been very range bound so the easiest possible time to trade covered calls. I’d humbly suggest that you start with a small portion of your real money in covered calls. You really don’t want to learn how to use all of Alan’s trade management strategies with a significant portion of your retirement assets. Most experienced options traders believe that the worst thing that can happen to someone who is learning how to trade option strategies is to be successful early on.
Good luck.
Steve
Members,
I’ve been out-of-town the past 5 days and just starting to catch up with emails and the blog.
Alan
Alan,
in building your CC portfolio, do you subscribe to the William O’Neil philosophy of approximately 6 positions up to 1 million dollars or do you diversify further in terms of number of
positions and money.
I have refered several friends to your web site and they are very pleased
Thanks,
Kevin
Kevin,
The number of positions an investor can manage comfortably and capably varies from person to person. Also, recommendations from other venues may not be specific to the strategy we are employing.
For me, a portfolio specific to covered call writing and put-selling will generally have many more positions than 6 in a portfolio valued at $1 million. My comfort level (may not be yours) is 15 – 20 positions. Beyond that, management becomes a job…and I don’t want a job!
ETFs are another story because there you are well-diversified within each security.
Thanks very much for your support and referrals.
Alan
Hi Alan,
I enjoyed meeting you, however briefly, last weekend at the Trader’s Expo in Manhattan. I was happy to finally shake your hand and tell you what a great job you’ve done educating the BCI community. You are to be commended!
I have a question about which I would appreciate your insight. The selection of strikes in the strategies that you teach is done based on the extrinsic value and the computation of ROO. You look to have 2-4% return in a bull market and 1-2% in bear market. Of course in a bull market we can also profit from OTM calls when the spot price increases but primarily it’s the extrinsic (time) value that we are looking at as our profit at the time that we put on our position. Your strike selection is based on that as I understand from reading 3 of your books and watching your videos. Certainly correct me if I’m missing something.
The question I have has to do with another way to select the strike price when selling either puts or calls. The delta is very close to the value for probability of expiring ITM and therefore the inverse, 1-delta, gives you the probability of expiring OTM. Expiring OTM is obviously very advantageous when we are premium sellers. I wish all my options would expire OTM.
So, why not incorporate the delta in the process of choosing a strike? Sometimes the premium available for those strikes with a 70-80% probability of OTM will be very unattractive and then we move on to another underlying but at least we’re considering it. After all, given enough occurrences over a long enough time frame, probabilities work out as they’re supposed to. That’s statistics. If I choose strikes with a 20 or 25 or 30 percent probability of ITM then I’m getting 80 or 75 or 70 percent probabilities of those options expiring OTM. The small (relatively small) number of trades that are going to go against me can be managed using all of your strategies, of course.
Thanks for any comments or insight.
Greg
Greg,
Thanks for your generous remarks and I’m glad we had an opportunity to meet and get to know each other in NYC. Your comments regarding delta are important and spot on. Many investors do view delta as a percentage window into the probability of an option expiring in-the-money. In the BCI methodology we do factor in delta. We just don’t have to look up a specific delta stat. By definition, ITM strikes have deltas > .5, ATM at .5 and OTM < .5. The deeper we go OTM, the lower the delta and the greater the chance of an option expiring worthless. The downside of going deeper OTM is that we will generate lower initial time value premiums and become more dependent on share appreciation to reach our goals. The deeper ITM we go, the higher the delta and the greater the chance of exercise. The upside is that the time value component of the premium initially generated has protection if share value declines. In the BCI methodology we select a strike based on 3 factors: overall market assessment, chart technicals and personal risk tolerance. You have an aggressive aggressive approach to cc writing and so OTM strikes are most appropriate, those with lower deltas. Therefore, rather than start by looking up a specific delta, we first decide on the type of strike (ITM, ATM, OTM). We know, by definition, the ballparks these deltas reside in. Next we define our goals for initial returns (mine are 2-4%). Find the strike that meets your initial goals and “moneyness” requirements and you have located the most appropriate strike for your trading style. That is the best strike if the delta is .35 or .41… I wish you well in your retirement…you’ve earned it! Alan
Premium members:
This week’s 6-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options.
For your convenience, here is the link to login to the premium site:
http://www.thebluecollarinvestor.com/member/login.php
NOT A PREMIUM MEMBER? Check out this link:
http://www.thebluecollarinvestor.com/membership.shtml
Alan and the BCI team