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Ask Alan 137 – “Can I Use Covered Call Writing to recover Losses on a Dog of a Stock?”

Alan answers a question posed by Sid, who asks:

Alan, Please help. I wrongly speculated that Westmoreland Coal (WLB) would flourish with Trump in office. I bought it for $18.14/share in December and it has tanked to $9.71 today (early May). Can I sell covered calls to get my money back? I will need downside protection in case it bombs further. I need to make something on this investment. Am I on the right track?
I appreciate any advice.

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It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#137, “Can I Use Covered Call Writing to recover Losses on a Dog of a Stock?”

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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.

16 Responses to “Ask Alan 137 – “Can I Use Covered Call Writing to recover Losses on a Dog of a Stock?””

  1. Marsha August 9, 2017 8:34 am #

    Alan,

    In the video wlb was declining for months. Shouldn’t we take action way before May?

    Thanks,
    Marsha

    • Alan Ellman August 9, 2017 1:11 pm #

      Marsha,

      Yes, at the very least Sid should have been closing the short calls and rolling down to mitigate these unrealized losses. The use of in-the-money strikes would also be useful in these situations if we decide to retain the underlying. Perhaps he was incorporating these concepts but he did not detail management information in his question.

      That said, my response to Sid was based on the current situation and offered some concepts as to how to manage the trade moving forward.

      Alan

  2. Alan Ellman August 9, 2017 5:37 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 as well as the implied volatility of all eligible candidates. For your convenience, here is the link to login to the premium site:

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    Alan and the BCI team

  3. Dan August 10, 2017 1:56 pm #

    Allen,

    if you new the market was going to drop 200 pts what kind of options calls would you be making the day before?

    Dan

    • Alan Ellman August 10, 2017 4:00 pm #

      Dan,

      Wouldn’t it be nice if we knew in advance!

      I would sell deep in-the-money calls and deep out-of-the-money puts.

      Better yet, buy a put…but only if we had a crystal ball.

      Alan

  4. Jay August 10, 2017 9:40 pm #

    I am both kidding and making an observation: perhaps Global Warming is impacting the market’s seasonality :)?

    It used to be “Sell in May and go away”. Yet the last few years have seen record pushes through July. August has replaced June as the new “culprit month” joining traditional villain September and occasional thief October :).

    August has developed impressive bearish credentials :).This year it’s Korea, in 2015 it was China’s currency devaluation, there was something in 2014 and there is often a US Budget squabble like in 2011. Europe hates to miss a party and they usually bring something too like a currency crisis!

    This can also be a fantastic time of year for bargain hunters. And cash secured put sellers to go OTM on down days on good stocks beaten up for no reason and maybe pick them up later for a song after premium if the beatings continue. Or just keep the premium if sanity returns ahead of schedule.

    So if any of us ever think at any time – including now – there is no opportunity in the market to make a buck my hunch is we are not looking hard enough :)! – Jay

    • Justin P. August 11, 2017 2:10 am #

      Yes, Jim Cramer says it’s only an ‘August correction’ though looking at the RUT, DJT, JNK, VIX etc it looks rather scary – hopefully we’ll just see again what we saw in May, where everything bounced again the next day. My conservative ITM
      cc’s are still clinging on to a 1.2% profit (if everything were to
      close next Friday at the current price) though obviously that would vanish with another day like yesterday. STLD held firm though I notice (finally sold some oppies on Tuesday when they jumped to 1.50) and CTRL is another interesting one that was offering attractive premium previously that I nearly jumped into – even now it’s still offering some value on the 22.50’s with six trading days left.

      • Jay August 11, 2017 10:57 am #

        Justin,

        Happy Friday!

        Cramer has his detractors because he is a Showman but he has made and saved me more money than he has cost me! I try to catch at least his opening monologue on his show every market afternoon.

        I hope he is right about this being a normal August correction. I have noticed in recent years August and September can be rocky. So while I was largely skipping the portfolio over writing in recent months I am going back to it on up days starting today for September closer to the money than usual. – Jay

  5. JayM August 11, 2017 11:36 am #

    It’s easy to want to hit the panic button over the last couple of days.

    • Jay August 11, 2017 1:44 pm #

      JayM,

      I suspect the market makers would love us to panic and sell our stocks to them after this dip only to sell them back to us higher on the next pop :)!

      It’s reasonable to assume the Battle of the Buffoons between Kim and Trump will not amount to anything now than China has taken a side.

      But you are right, the instinct to fold and run is strong right now. I can’t think of too many times that has worked in the past . – Jay

  6. Roni August 11, 2017 6:18 pm #

    Hindsight :

    Yesterday was a buying opportunity.

    I bought back some calls @ 10% value.

    The underlying came back today, but are still under water.

    Future : Only Cramer knows.

    Roni

    • Jay August 11, 2017 7:13 pm #

      Hey Roni,

      We will have a new blog in the morning so you may or may not see this reply. But good for you buying the calls back and locking in those options gains.

      When I saw the Index up but gold was up too and VIX hardly budged that told me the stock selling is not yet over. So I took advantage of an up day in QQQ to buy some ITM puts.

      We shall see how that turns out! Have a great weekend, – Jay

      • Justin P. August 11, 2017 8:36 pm #

        Personally I think with three whole days for the world to get bored of Trump and Kim comparing penis sizes it’s likely we’ll see some more recovery on Monday…

        • Jay August 11, 2017 9:38 pm #

          Justin,

          That is very funny and I hope you are right :)!

          In an awkward moment that may have doomed Rubio’s bid Trump lured him into a penis discussion during the 2016 Republican debates if anyone can remember back that far :)?

          Trump is unstable. I worry about the market. Though I may be a voice in the wilderness given results so far :)! – Jay

        • Roni August 12, 2017 2:21 pm #

          Jay and Justin,

          one of you may be right, and both have sound reasons.

          I am fully invested, except for 2% cash for call buy backs, and my finger on both triggers.

          Roni

          • Justin P. August 13, 2017 6:55 am
            #

            I wish I had a dollar for every time the media’s predicted imminent nuclear catastrophe since 1945 – I notice the Kim and Donny Show has already lost the headlines to a car crash in Charlottesville.

            Not many posts here in the last couple of days – could that be a valid market indicator? :)

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