The Blue Collar Investor WeBlog

11 responses so far ↓

• 1 admin // Sep 1, 2008 at 7:36 am

  EMAIL QUESTION AND RESPONSE
  __________________________

  Hello Alan,

  I read your Cashing in on Covered Calls book and had just started “paper trading” and wanted to run what I did past you, just to make sure I’m on the right track, if you have time to eyeball it.

  The prior week’s IBD100 was sifted, accepting only optionable stocks priced at or below $70/share (that I could afford), used the stock checkup, scouter,etc. and all that to be sure it passed the first screens. The list rapidly narrowed to the following few. Only one of these (KNDL) looked like it was ready to hatch for a Sept call.

  KNDL ER 11/4 <<< indicators looked pretty good
  URBN ER 11/13 << not quite ready
  WAB ER 10/21 << not quite ready

  Putting the KNDL through the ESOC spreadsheet with a stock price of 49.45, I considered an ITM call (strike 45 selling for 530 per contract) and an OTM call (strike 50 selling for 160 per contract) and found that the ITM call gave an ROO of 1.9% with a huge 9.0% downside protection (super safe) and the OTM call gave an ROO of 3.2% but with no downside protection (and the upside was limited to 1.1%). With the market overall being as downward as it has been, I chose the safer 1.9% ITM call as a first ever paper trade option to sell against a fictitious 100 shares of the stock.

  Did you come up with something similar or better?

  Dave

  MY RESPONSE:

  David,

  I’m really impressed with your command of the approach to my system of investing (try out some of the terminology on your friends and relatives!).

  When going through the IBD 100, you will always find more than a couple of equities that belong on your watchlist. ERs, mixed chart patterns, and calculations may discourage you
  from using them that month but many more will qualify for your watchlist. By the way, if you have a stock you really like but it has one confirming indicator slightly negative (eg:stochastics) you may want to look at the I-T-M strikes.

  My wife, Linda, locates all my stocks. Here are a few she gave me from the current IBD list:

  QSII
  BRKR
  OIS
  PRXL
  SYNA
  KNDL (low volume but did meet our requirement of 250k per day).

  Check these out and see if you agree that they should be on your watchlist.

  Finally, when you do your papertrading (I commend you for that), have a portfolio of at least 5 stocks in 5 different industries with equitable financial distribution. For example, if your hypothetical portfolio has 50k, devote about 10k per equity, each in a different industry. This will get you into sound, low risk habits.

  Best of luck,
  Alan

• 2 admin // Sep 1, 2008 at 2:10 pm

  Another email question from……

  Patrick // Sep 1, 2008 at 11:44 am

  Alan,
  I am interested in your Webinar, but I travel home on Thursday evenings. Will this webinar be available in a cd or dvd for purchase at anytime?

  Also, I have another Biotech Company: Bruker Corp (BRKR). It is on the IBD 100 w/ excellent fundamentals and technicals. Let me know what you think.

  Thanks for all your knowledge sharing,
  Patrick
  Leave a Comment

• 3 admin // Sep 1, 2008 at 2:17 pm

  Patrick,

  BRKR is a stock I JUST added to my watchlist (see my comment #1 above).

  The content of the webinar series is available NOW on both CD and DVD @ the store link of my website:

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

  All slides, graphs and charts are also available in the Companion Workbook which is also available at this same link.

  Alan

• 4 admin // Sep 1, 2008 at 2:49 pm

  Yet another great email question…….

  Hi Alan,
  I purchased your book, and have begun using your ideas in my covered call writing. I have been writing covered calls for the last 2 years, and enjoyed picking up some new insights from your book.

  I have a question: Do you look at the Open Interest on an Option when you consider writing a covered call? As a rule of thumb, I have always set a minimum of 100 open contracts on an option position before I would write a call. Do you have any thoughts on that?

  Thanks,
  Steve G

  My opinion:

  Steve,

  Your question tells me that you are a sophisticated options trader. Let me first define the term for those of my readers who are unfamiliar with it:

  Open Interest is the total # of options contracts that are NOT closed or put another way, are outstanding. It is NOT the same thing as volume of options.

  I am not a big fan of this indicator but respect those who are. My reason is that you cannot identify whether the activity is created by call buyers or call sellers. What we do know is that as volume of open interest increases, other investors are active. As you know from reading my book, I do set a minimum volume requiremnt of 25ok shares/day on the stock volume.

  I am most concerned about 2 things:

  1- The quality of the underlying asset (the greatest performing stocks in the greatest performing industries).

  2- Getting the greatest option returns while incurring the minimum amount of risk.

  Thanks for that great question.

  Alan

• 5 admin // Sep 3, 2008 at 4:08 pm

  Email Question:

  Alan,
  I just wanted to say that your book was probably one the easiest reads on trading stocks and options outlining covered calls. I only have a few questions. I could not find any information on when is the best time to place a trade. Should the trades be placed one 30-45 days before expiration? Also, what happens towards expiration to a ITM call. I am assuming it drops in value depending on the underlying and time decay. I can see where this would financially not be the best option to purchase. Especially deep in the money.
  Robert

  My response:

  Since I trade predominently 1-month options, the best time to place the trade is during the first week of the contract period. The reason is that if you wait longer there will be serious erosion of the time value of your option premium.

  Regarding ITM strikes near expiration Friday: Using the “What Now” tab of the calculator will give you the option return, upside potential, downside protection, and bought up value of the stock. This is a little tricky concept to get and so I have produced a DVD explaining how to evaluate these options. I am currently making this DVD available for FREE for those participating in the October webinars and subsequently will be available at the store link of my website (in November).

  In general, it doesn’t pay to buy back a severely deep-in-the-money option. But I also make a great deal of money buying back and re-selling slightly ITM options.

  Alan

• 6 admin // Sep 3, 2008 at 4:21 pm

  Question from Dave:

  Hello Alan,

  I’m a fairly new investor who has read only a handful of books….but I must say that your book did a lot more to inspire me than any other book I’ve ever read or seen on a book shelf at Borders. Your book is the only one that actually delivers on the promise of explaining what steps to take. Well done. With that said…I was looking at one stock and wondered if I could get your opinion on it for suitability for covered calls.

  Research shows…
  IBD Stocks On The Move, listed TWP (Trex Co Inc) at the top of the list (highest % gain).
  Stockcharts.com, the graphs looked pretty good: price above EMA20, EMA20 above EMA100 by wide margin, trend is definitely upward (not sideways). Volume spikes are unmistakable.
  On the other hand, Scouter was only a 5
  and Stock Checkup showed A’s except for a C- on Fundamentals (not quite a B we had hoped for).
  So that means the indicators are mixed.
  I could have passed on it due to the Fundamentals….but I was curious….maybe curiosity kills the cat but let’s see…is it too risky?

  Current stock price for TWP is 21.37.
  ESOC spreadsheet shows an October call ITM at a 20 strike could provide a 5.4% ROO with a 6.4% downside protection (Wow!). An OTM call at a 22.50 strike would only provide 2.6% with potential for 5.3% more but I’d play it safe with the OTM call.

  Knowing that some of this is an art but also that your stock screening limits help to keep us safe from harming ourselves too easily… I’m wondering how rigid you would be on holding ot the perfect Stock Checkup. I can see that a company fundamentally not great could drop in price eventually. But maybe there is great news backing up the recent interest that started at the beginning of August (and now it is Sept 3). Would it be too easy to get burned on this one or would it possibly be interesting to try it?

  Any feedback would be greatly appreciated, Alan.

  Dave

  Every investor, including myself, has gone through this dilemma. So tempting! But this equity has below average fundamentals and trades on a low daily volume (granted, within acceptable limits in our system).

  My feeling is this: If we have a quality watchlist (and we do) it will be easy to find another stock that looks just like TWP but with A or B fundamentals. So why settle?

  When selecting a stock, envision yourself like Donald Trump on the Apprentice. What would he do?

  Alan (Thank you for your kind words about my book)

• 7 admin // Sep 3, 2008 at 4:41 pm

  Great question from Anthony:

  On some options there are 2 different symbols for the same strike price with different premiums. IE. CELG has 2 options. PJXIM and LQHIM. Both 65 strike price. premiums are $4.50 and $17.20. Thanks for all the insight!

  Anthony,

  “Oddball” or seemingly duplicate option symbols can be due to a change in the business (merger, acquisition, spinoff) or the option (split), or the type of option (LEAPS are Long -Term Equity Anticipation Securities which have different option symbol roots than the more conventional shorter term options).

  Some of this can make your head spin so here are 2 easy solutions:

  1- Go to http://www.cboe.com
  Trading tools link
  Contract Adjustments
  Type in ticker of STOCK for the explanation:
  Try this for CELG to get an answer

  2- Call The Chicago Board Options Exchange and ask:

  1-888-678-4667

  They are usually very accomodating.

  Alan

• 8 Patrick // Sep 5, 2008 at 6:51 am

  Hi Alan,
  These last couple of days have been very challenging for me (and I am sure for many). I followed your technique for both for the fundamentals and technical indicators, but these few days seem to be an anomaly (hopefully) and my stocks have taken a beat’n.

  Please offer any advice and guidance for these challenging days.

  Thanks,
  Patrick

• 9 admin // Sep 5, 2008 at 7:40 am

  Patrick,

  You are asking one of the most important questions that can be asked of any investment strategy. In essence, the question becomes what do we do as investors when the economy is in a terrible downward spiral. This is not a typical stock market. We can thank our friends (he said sarcastically), the financial wizzards responsible for the sub-prime debacle for that. But our economy has always proven to be resilient, so we can expect things to turn around and normalize.

  That being said I have 2 comments:

  1- If you recently read my book and studied my system, I hope you are currently paper trading. I recommend 3-4 months of practice before trading your hard-earned money.

  2- We respond to these times by continuing to react unemotionally. If your option values are low (.20 or lower, not etched in stone), buy them back and look to institute “prior to expiration Friday” exit strategies. See pages 112-119 of my book, Cashing in on Covered Calls to review them. This actually would be a GREAT time to practice these procedures. We still have 2+ weeks left until Expiration Friday and a lot can happen, both good and bad. If the market recovers, you will be in a position to resell the same options and generate more income into your account. Rememebr, too, that if your neighbor purchased these same stocks but didn’t sell options, his(her) losses would be greater than ours. As investors, we have decided that we can tolerate risk. Although these difficult times are probably above and beyond the norn, sticking to sound fundamental principals should not change.

  Hang in there,

  Alan

• 10 admin // Sep 5, 2008 at 8:54 am

  Email Question from David:

  Alan,

  What will I learn in your webnar that you didn’t cover in your book?

  I’ve found quite challenging to set up stoploss for covered calls. Any insights on that? Thanks.

  David

  My response:

  Putting a stop loss on a cc option position is a tricky concept. When you put a stop loss on a stock you bought, you want to SELL it if the price declines to a certain level. There you put in a stop loss at that lower price.

  For a cc option, you already sold that option and may want to BUY it back to therefore free up the opportunity for an exit strategy or to simply sell the stock. We must reverse our thinking because now we want to BUY an entity at a certain price. Therefore, we put in a LIMIT order to buy to close @ ______. If that order is executed, your brokerage company should notify you and then you will have to take a secondary action on the stock itself.

  My brokerage company does not accomodate a “buy to close” of the option position with an automatic sale of the underlying equity. If any of my readers know of such a company, please let us know.

  Regarding the webinar: In addition to the material covered in my book, you will also get a more detailed description of the system concepts, real life examples, Q&A, and some new material I developed since the book was published. I am also giving away a free DVD I recently produced on Expiration Friday Exit Strategies to those who sign up early.

  Here is a link for more information:

  http://www.thebluecollarinvestor.com/blog/webinar-opportunity-plus-learn-how-to-get-free-dvds-and-workbooks/

  Alan

• 11 David Zhang // Sep 5, 2008 at 9:45 am

  Thanks a lot Alan. I’m using thinkorswim and they allow “buy to close” of the option position with an automatic sale of the underlying equity when stock reaches a certain price. That can be easily put in as a sell order.

  David

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