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Ask Alan – Selecting Securities for Covered Call Writing During Earnings Seasons

Alan answers a question from Edward of Fruitland, Delaware. Edward asks:

“I’m a brand new member (Welcome Edward!) without much experience in the market. I’m looking at this month’s running list and I noticed that the majority of the stock have earnings reports due this next options period. My question is whether this is normal, and whether an earnings report due 3 days before the new option period is sufficient to clear the stock.”

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About Alan Ellman

Alan Ellman loves options trading so much he has written three top selling books on the topic of selling covered calls alone. He is a dentist by day, a personal trainer, successful real estate investor, but he is known mostly for his profound stock option strategies.

8 Responses to “Ask Alan – Selecting Securities for Covered Call Writing During Earnings Seasons”

  1. Stan October 18, 2012 8:08 am #

    Alan,

    How do you decide on which strike price to use for exchange traded funds? Any guidance appreciated.

    Stan

    • Alan Ellman October 18, 2012 2:18 pm #

      Stan,

      Since all securities on our Premium ETF Reports have RS ratings > 65 and are outperforming the overall market, the degree of aggressiveness we are willing to take depends on our personal risk-tolerance and overall market assessment. The more bullish I am regarding the market in general, the more likely I am to favor OTM strikes.

      Alan

  2. Alan Ellman October 18, 2012 4:09 pm #

    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.

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

    http://www.thebluecollarinvestor.com/member/login.php

    THESE SECURITIES ARE PARTICULLARLY USEFUL DURING EARNINGS SEASON.

    NOT A PREMIUM MEMBER? Check out this link:

    http://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

  3. Dave October 18, 2012 9:47 pm #

    Hi Alan

    Recently I heard about Geometric vs. Arithmeticrate of returns…

    What are your thoughts on this?

    Thanks Alan

    Dave

    • Alan Ellman October 19, 2012 8:05 am #

      Dave,

      When viewing portfolio results over a long period of time, the geometric calculations are more accurate because the arithmetic approach assumes that each event (investment and period) is independent of the others. For example, if you invested $100 and lost 50% in period I and gained 50% in period II, the arithmetic formula would result in a 0% return and no loss. However, if you lost 50% you now have $50 and a 50% increase of that investment is $25 leaving you with a total of $75, not $100. The formula for a geometric return is a bit complicated (add one to each number to avoid any problems with negative percentages.Then, multiply all the numbers together, and raise their product to the power of one divided by the count of the numbers in the series. Finally subtract one from the result). This is the better way to calculate portfolio returns over the long haul as it assumes a series of events which ARE dependent on one another.

      If you are calculating a single event over a short period of time the arithmetic approach is fine.

      (Feel like I’m I’m back in college taking advanced calculus!)

      Dave, this is an important question because mutual fund managers report the average annual rate of return (arithmetic) on the investments they manage and these stats can be inflated.

      Alan

  4. Dave October 18, 2012 10:11 pm #

    Also, here is something I thought about when investing in stocks…

    When investing, say one had 20K to invest with…

    They broke the 20K into 5 parts (5 x 4K)

    Piece 1 -4 are used for investing in sererate stocks…

    Piece 5 is used as cash to subside any losses from pieces 1-4 that may occur…

    So say I put pieces 1 -4 to work in seperate stocks…

    Piece 1,2 and 4 did ok and made profits…

    Piece 3 made a 10% loss… (-$400)

    So, instead of piece 3 now being “weakened” and only being worth $3600 (which once put to work on a stock would need to make about 11% profit in order to recover) I can simply subside it with some of the cash from spare piece #5…

    With this method in place I would never have to play “catch up” with my losses…

    When ever I do research on the topic of recovering from losses, this seems to be a huge downside of investing…

    I mean, what if a piece was to be cut in half and lose 50% due to some unexpected bad news from a company. For that piece to ragin its original value it would have to make 100%. But, if we were able to subside the loss from peice 5, we would not have to play this “catch up”… In this case, to be at the level we were before (on a whole) we only have to make 50%..

    Any thoughts on this topic would be great…

    Im sorry for the long post guys!

    Dave

    • Alan Ellman October 19, 2012 12:39 pm #

      Dave,

      I encourage and appreciate posts like this one. If I fully understand your strategy it has two of the most important components inherent in the BCI methodology:

      1- Portfolio diversification

      2- Cash set aside for exit strategy execution (is this what you mean by “subside” a loss?)

      I agree that these are two of the most important aspects of almost any investment strategy.

      Alan

  5. Alan Ellman October 19, 2012 7:32 am #

    Running list stocks in the news: IACI:

    IAC InterActictive Corp. (leading internet company) published an impressive 2nd quarter earnings report on July 25th with earnings beating estimates by 20% and revenues rising 40.2%. The quarterly cash dividend also was doubled to $0.24. Since that announcement, IACI acquired About.com and DateHookup.com to help boost traffic. Earnings estimates for fiscal 2013 has increased by 8.1% in the past 3 months and up 6.9% for fiscal 2014. Shares are up in price
    28.6% year-to-date, double that of the S&P 500. IACI is scheduled to report earnings next on October 24th.

    Our premium “running list” shows an industry segment rank of “A”, a beta of 0.84 and a % dividend yield of 1.80%.

    Alan

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