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Ask Alan 116 “Is Covered Call Writing a Zero Sum Game?”

Alan answers a question posed by Todd, who asks:

“Is it true that options is a zero sum game? If so, if covered call writers are more likely to make money in the long run, who are buying these options and taking predominantly losing positions?”
It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#116, “Is Covered Call Writing a Zero Sum Game?”

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

17 Responses to “Ask Alan 116 “Is Covered Call Writing a Zero Sum Game?””

  1. Alan Ellman November 11, 2015 5:25 pm #

    Premium members:

    This week’s 8-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.

    Note how all the high implied volatility (IV) securities from last week’s list were “bumped” this week confirming that high IV means higher option premiums but also greater risk. All ETFs on this week’s report have IVs under 24.

    For your convenience, here is the link to login to the premium site:

    NOT A PREMIUM MEMBER? Check out this link:

    Alan and the BCI team

  2. Carisia November 12, 2015 6:23 am #


    I enjoyed attending your St. Louis event in September thank you.

    Could you answer a question? What is the closest (in days) to the expiration date would you write a ITM covered call?

    Thank you

    • Alan Ellman November 12, 2015 8:20 am #


      This depends on the volatility of the underlying security. The more volatile, the more time value profit an ITM (or ATM and OTM for that matter) strike will generate and therefore we can go closer to expiration.

      The deeper ITM we go (moving further away from stock price), the lower the time value so strike selection is another factor to consider.

      Theta (time value erosion) devalues our premium profit as each calendar day passes so this is the final consideration.

      There is no single answer to your question (a good one by the way) because of all these factors. Generally, I would set a goal for the time value percent return you are seeking. Then, using the multiple tab of the Ellman Calculator check the returns for the ITM strikes you are considering from your high-quality watch list. If any meet your goal, you are good to go no matter how close to expiration.

      One final point: If we are using 1-month options, we are undertaking relatively short-term obligations so it is in our best interest to sell our options during the first few days of a 4-week contract or the first 5-7 days of a 5-week contract, the earlier the better.


  3. Jay November 12, 2015 3:53 pm #

    I love the spiffy new and polished “Ask Alan” videos complete with background music and fancy graphics!

    I was with you in your “Wayne’s World” days when the backdrop was your den/basement, Those were great too!

    We will know you have sold out to Wall Street and Madison Avenue when you ditch the tee shirts for coat and tie :) - Jay

    • Alan Ellman November 13, 2015 11:17 am #


      On the days I set aside to create an Ask Alan video it is generally produced after I return from my morning workout in the gym and I never exercise in a coat and tie…no worries of selling out.


  4. suki November 13, 2015 11:17 pm #

    Hi Alan, i am a newbie to your service, i have a question wasnt sure where to post, so i am posting it here.

    I subscribed to your premium report, read your articles on how to use the report.

    So based on that i filtered for paycom software.

    I bought 100 shares of payc for 43.66 and sold Dec 45 call for 2.06 around . Today there was a gap down in paycom due to secondary shares offered. My break even was supposed to be 41.6 but the share price is now 41. The price of the call option is now 1.05. So a loss of (2.66- 1) * 100 = 166

    What should be my exit strategy ? I am a conservative investor.

    Call option hasnt reached 20%
    Not sure of the impact of secondary shares at 42 ?
    but It broke 20 EMA

    thanks for your comments

    • Alan Ellman November 14, 2015 7:25 am #


      I cannot give specific financial advice in this venue but I can make some general observations based on the published BCI methodology:

      1- The gap down was due to a negative market reaction to the secondary offering but also to general market forces. This remains an outstanding company.

      2- We are 5-weeks away from contract expiration…so much can happen in that time frame.

      3- Share price has dropped by 6% and option price by 49% but hasn’t reached the 20% threshold which would be when it reaches $0.40 – $0.45.

      4- You can roll down to the $40.00 strike and put yourself back into a winning position right now but you will also be locking in a share value of $40.00 and that may represent an opportunity lost. Rolling down remains on the table if share price continues to decline.

      5- It is important to have a structured system where investment decisions are based on non-emotional evaluations of sound fundamental, technical and common sense principles.

      6- We are a galaxy of time away from expiration of December contracts…the November contracts haven’t yet expired. Our exit strategy arsenal remains prepared and ready to go at the appropriate times.


      • Roni November 15, 2015 4:23 pm #

        Dear Alan,

        Suki’s question is exactly the most dificult situation we face when using the BCI covered call method.
        I have faced similar situations many many times, and lost on most of these trades.
        Especially when there is a correction, I am always too late to exit.

        My latest mistakes are: CELG, LCI, PANW, GIII, and LIVN.

        In the future, I am intending to follow your observation #4, and roll down to safety.

        Please give us some more observations regarding this very common issue.

        Thanks – Roni

        • Jay November 15, 2015 9:13 pm #


          The blog has moved on and I read your always kind forward post there. We may be the only ones left back here :) .

          I encourage you to never look at any stock purchase as a “mistake”. Particularly the great ones you picked. Time heals market wounds and if something is down today it is likely to change tomorrow.

          Plus I have never lost real money selling a covered call. I have lost money if my stocks tanked. But the covered call was additive to my account and cushioned the fall. The stock itself was the problem, not the call.

          I have lost opportunity money with covered calls if the stock took off and I had to buy back or just let it get called. But that was still a gain.

          We already had a Technical correction underway given 200 Day moving average break and likely Fed action. The tragedy in France will exacerbate that. But if it galvanizes international resolve to root out villains it will bolster markets and frustrate terror groups.

          Stocks will likely get clobbered in the days ahead. But it will have nothing to do with our writing covered calls.

          If anything they will keep us a step ahead of fellow investors, as usual – Jay

          • Roni November 16, 2015 10:11 am

            Thank you Jay for all the encouraging words.

            And also about the Paris horror.
            My Wife is French and was born in Paris. She is in very bad shape, although, fortunately, her family there is well.

            See you later, must run….


        • Alan Ellman November 17, 2015 12:47 pm #


          Rolling down is an excellent tool to mitigate losses. I normally roll down in the second half of a contract, when chart technicals are breaking down or when the stock is under-performing the overall market. It is an alternative to selling the stock. I always buy back the option when it meets our 20/10% guideline but may take a more bullish outlook earlier in the contract. Nobody can get it right 100% of the time but we can sure throw the odds in our favor.


          • Roni November 18, 2015 10:32 am

            Thanks again and again Alan.
            These guidelines are so very important to me.

            Very happy – Roni

  5. Jay November 16, 2015 2:48 pm #

    Thanks for sharing, Roni, there is never a sane explanation for the madness in the world. Glad your wive’s family is safe. – Jay

    • Roni November 16, 2015 4:21 pm #

      Thank you again Jay.
      You are so right.
      A buch of nobodys, cowards with Kalashnikovs, brain washed by power seeking religious fanatics.
      shooting defenseless, inocent young people.

      It gets worse all the time.

      Unfortunately we need allied boots on the ground, with tanks and armored vehicels to wipe them out in Siria and Iraq.

      Good luck – Roni

  6. Barry B November 18, 2015 10:50 pm #


    I share your concern about the on-going horror in Paris. Unfortunately, I have experienced this horror personally…I was in the towers on 9/11…i was one of the lucky ones..



    • Jay November 18, 2015 11:49 pm #


      I suspect you were heroic that day helping others.

      If possible emotionally and if enough time has passed will you please post your 9/11 story as a stand alone blog article here?

      Thanks, – Jay

      • Barry B November 19, 2015 12:28 am #


        I’d be happy to share my experinces with you, but i’d prefer to not post them here…not the appropriate venue. Please send me youe email address and i’ll share my experiences in a personal email. You can send your email address to:

        I was in survival mode that day,..luck was on my side.



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