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Ask Alan #140 – “Holding a Stock Through an Earnings Report”

Alan answers a question posed by Frank, who asks:

Broadcom (AVGO) has been on a tear since January and I plan to hold it through next week’s earnings report (6/1 after market closes). Would it make sense to write a covered call after the report passes for the June contract or wait for the start of the July contracts?
Thanks,
Frank

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It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#140, “Holding a Stock Through an Earnings Report”

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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.

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14 Responses to “Ask Alan #140 – “Holding a Stock Through an Earnings Report””

  1. Alan Ellman November 8, 2017 8:12 am #

    Premium members:

    The entire library of 140 Ask Alan videos can be accessed on the member site…scroll down on the left side as shown in the screenshot below.

    CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG

  2. Alan Ellman November 8, 2017 5:42 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:

    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

  3. Carl November 8, 2017 7:10 pm #

    Alan,

    I bought your $499 package at the AAII event last weekend. I did sell my first call already!

    Question – Many BCI passing stocks are high priced, which means I need to use margin. I can safely borrow up to $200,000 (my limit is $2M in Interactive Brokers). When buying on margin, being more conservative is probably the way to go. How does that alter the BCI strategy? My current holdings are primarily very conservative providing a stable dividend income stream, and a stable margin cushion.

    Carl

    • Alan Ellman November 8, 2017 7:24 pm #

      Carl,

      The BCI methodology is a conservative approach to conservative option strategies so there is no change in the methodology whether the underlying has a low or moderate implied volatility. When you activate your premium membership, check out our Blue Chip and ETF reports for more conservative underlyings and see if you prefer these over the eligible stock reports.

      Alan

  4. Robert November 8, 2017 7:16 pm #

    Hi Dr. Ellman,

    I bought your Encyclopedia on Covered call writing and I just want to say how much it has helped but I do have a question regarding my recent trade. I bought 900 shares of Micron at 39. I sold 9 contracts at the 42.50 strike price for .80. The stock went up to $44 with two days to expiration. I bought the option back at 1.65 because I didn’t want the assignment to take place. The intrinsic value is $1.50 and I assumed time value was .15. Based on this assumption I thought I would be paying .15 x 900 = $135. At the time I had about $185 in my account available for trading and in my mind i Subtracted 185-135. However my trading account turned to -1300 and I have no idea how that happened. I am not sure If i missed the concept and I watched your older videos about what happens when a stock skyrockets past the strike price but at this point I am truly confused and I have no idea what to do. Please help and Thanks. I am from Long island also btw

    Robert

    • Alan Ellman November 8, 2017 7:36 pm #

      Robert,

      You are correct that the time value cost-to-close is $0.15 but that is quite different from the actual cost-to-close ($1.65). Here’s how it works:

      When we sell a $42.50 call, our shares cannot be worth more than the strike price during the contract obligation. If we buy-to-close at $1.65, our share value moves up from the “restricted value” of $42.50 to current market value of $44.00…a net share value gain of $1.50. Therefore, the net cost-to-close is $0.15 but we must first spend the $1.65 to get the $1.50 in additional share value.

      Review pages 264 – 271 of the Complete Encyclopedia (classic edition) for more information and examples of calculating time value cost-to-close.

      Alan

  5. Alan Ellman November 9, 2017 7:35 am #

    Premium members:

    Blue Hour webinar #7 has been uploaded to your member site. Login and scroll down on the left side as shown in the screenshot below.

    CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG

    Alan

  6. Marion November 9, 2017 8:23 am #

    Alan;

    On November 6, 2017 I purchased 100 shares of ATVI at the stock price of $60.34. On November 6, 2017 I sold 1 contract of ATVI December 8, 2017 call $61.00 strike price. Today ( 11/08/2017) after checking my account, I noticed that ATVI closed at $64.55.

    Should I close out ( Buy to Close) , wait it out since I have plenty time (12/08/2017 expiration) left on the contract or roll-up immediately?

    Please advise..

    Thank you
    Marion

    • Alan Ellman November 9, 2017 10:57 am #

      Marion,

      As I type my response, ATVI is trading at $63.30 and the cost-to-close the $61.00 call is $3.60 (see screenshot below).

      At this point it’s all about the TIME VALUE cost-to-close. Our shares are currently worth $61.00 and can be valued no higher as long as the option obligation remains in place. If we close the short call, our shares are now worth $63.30, a credit of $2.30. The cost-to-close is $3.60 leaving a net debit of $1.30. On a cost basis of $61.00, this represents a 2.13% time value cost-to-close. The question we ask ourselves is: can we generate more than a 2.13% return by 12/8 by closing this position and entering a new one? If not, no action is required at this time.

      Use the “Unwind Now” tab of the Elite version of the Ellman Calculator for these calculations.

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG

      Alan

  7. Jay November 9, 2017 6:40 pm #

    I hope everyone had a successful week and has a nice weekend ahead!

    There are few, if any, more often discussed topics in this community than stock earnings reports and how to manage them. I hear no debate about whether to sell CC’s during earnings reports – Alan’s message has gotten through on that one :). After that there is no right answer.

    If you are a long time stock holder protecting a cost basis and have no interest in selling the stock it’s a non question: you ride out the expiry month or week uncovered And overwrite OTM the rest of the time using over writing exit strategies.

    If you are comfortable with frequent portfolio turnover, have no emotional or tax based attachment to any stock and use them as temporary vehicles to grow your account it is a similar non question: close open calls and sell before earnings then start again or put the cash to work in a different stock.

    I am more in the first camp these days. But I was once in a third camp where I had stocks I liked, the last ER was fine, news was benign and price action going into earnings was stable. Those were the ones I hedged selling half and keeping half uncovered through earnings.

    Then, of course, there is a 4th camp in ETF’s where ER’s are not a factor. Plus any and all combination of the above :)!

    From my experience there will always be a “feel” element to this game. You have to keep learning and trying things until you find what feels right for you. – Jay

    • Roni November 10, 2017 9:50 am #

      Hi Jay,

      as you know, I am in the second camp, and agree with you 100%.

      I embraced this method because I am older than you guys, and want to have consistent low risk yield, above the other available investments such as mutual funds or Tresuries.

      Also, I have trouble sleeping at night, and when I hold a stock, I get worried if it drops, and I get exited if it goes up, and it makes me sleepless in both situations.

      And finally, trading monthly CCs is so much more fun.

      Roni

      • Jay November 10, 2017 11:02 am #

        Good morning Roni,

        Happy Friday!

        You are the kind of investor I look up to because you have been around the block, you know yourself, you know what your risk tolerance is, where your comfort level is, what works for you and then decided on a method you are true to and have fun with in your investing/trading. Nothing better than that in this game!

        My hunch is few people ever get all those pieces of the puzzle in place. So they flounder around rudderless and frustrated. I was like that. I had a pile of trade services, I attended a different on line webinar “info-mercial” every week and tried everything under the sun :).

        All that time I under performed my parent’s and my significant other’s accounts they entrusted me to manage. No acrobatics in those accounts: just meat and potatoes index funds!

        That got me thinking I would do better if I simplified and stayed a steadier course with my money. I started to look at options selling more from a risk mitigation than an income generation point of view – though clearly they do both. I started looking for market themes and direction and trading less. In short I found what felt right for me.

        And I too sleep better now :). Have a great weekend! – Jay

    • Barry B November 10, 2017 11:13 pm #

      Jay,

      If there is a reason that you want to (or need to) trade the stock during the ER month, there is another alternative that you can use, the Collar. With the collar, you buy a protective put below the current price and pay for the protection by selling an OTM call. After the ER passes and the stock is OK, you can sell the put and the remaining trade is a covered call. If there is a negative ER, then the stock is protected below the strike price of the put.

      The collar is a very flexible conservative strategy. This trade is allowed by most brokers in IRA/401K accounts. If you want to learn more about the collar, BCI will be covering it in detail in our new upcoming book, “Covered Call Writing Alternative Strategies”. We’re hoping to have the book out by the end of the year or early in 2018.

      Best,

      Barry

  8. Roni November 10, 2017 11:29 am #

    Jay,

    thanks for your kind words.

    Me too, I suffered five years before finding the BCI method and learning to use it.

    Take care – Roni

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