beginners corner

Covered Call Writing and Stock Option Expiration Cycles

When studying option trading basics, we learn that options expire on the third Friday of the month. In the BCI methodology we sell mainly 1-month stock options. When we view an options chain we see several other expirations available. However, they are not the same for each security Everyone likes when things make sense. Understanding why things are the way they are it has a calming effect on us. When we look at the different expiration months available in our stock options, an explanation is required and demanded by the curious investor. It makes no sense at all! Different stocks have different expiration months! How can that be? We want uniformity, not chaos. Like most things, there is a reasonable explanation.

All options are defined by an expiration month and date (the 3rd Friday of the month except for some quarterly and weekly expirations of some securities) after which the contract becomes invalid and the right to exercise no longer exists. When options began trading in 1973, the CBOE (Chicago Board Options Exchange) decided that there would be only four months at a time when options could be traded. Stocks were then randomly assigned to one of three cycles:

  • January cycle– options available in the 1st month of each quarter (Jan., April, July and Oct.)
  • February cycle– options available in the middle month of each quarter (Feb., May, Aug., and Nov.)
  • March cycle– options available in the last month of each quarter (March, June, Sept., and Dec.)

This proved to be a workable concept until options gained in popularity and there was a demand for shorter-term options. In 1990, the CBOE decided that each stock (with options) would have the current and following months to trade PLUS the next two months from the original cycle (hope your head isn’t starting to spin). Let’s simplify things by looking at the chart below:

Current (Front) Month Next Month Third Option Fourth Option
January Cycle
January February April (1st month) July (1st month)
February Cycle
January February May (2nd month) August (2nd month)
March Cycle
January February June (3rd month) September (3rd month)
       

Stock Option Expiration Cycles

 

If the current month is January, we see that all options are available for both the current (January) and next month (February). The last two option expiration months available will depend on their original placement in one of the three cycles:

  • January cycle- will also have April and July expirations (1st month of next 2 quarters)
  • February cycle- will also have May and August expirations (second month of next 2 quarters)
  • March cycle- will also have June and September expirations (third month of next 2 quarters)

Now if your head has stopped spinning and you’re feeling a bit better, I ask you NOT to put away the Tylenol, at least not yet! Here come the LEAPS (Long term Equity Anticipation Securities) which are options with longer term expirations. Only heavily traded securities like Microsoft have these types of derivatives. These equities will have options with more than four months of expirations, some up to seven months. LEAPS can further complicate these cycles but that’s a discussion for another day. Suffice it to say that a vast majority of stock options will fall into the four month cycle.

Those of you following the Blue Collar System of selling predominantly 1-month options need not be concerned about those dates further out. However, intelligence does breed curiosity and many of you have “peaked” ahead and wondered what was up. Now we know so it’s back to generating cash by selling covered call options.

Expiration Cycles- Additional Months Program 

Additional Expiration Months Pilot Program

On Monday, November 1, 2010, pursuant to SEC Approval, ISE introduced additional expiration months on 20 actively traded option classes listed on the ISE on a pilot basis until October 31, 2011.  Under the pilot, the ISE added up to two new expiration months in addition to the expiration months the exchange already listed.  Pursuant to the pilot, ISE listed four consecutive near-term expiration months plus two months from the quarterly expiration cycle.  After the additions were made on November 1, ISE maintained the pilot by adding a single new expiration month at expiration.

Classes selected for the pilot were made available throughout the pilot period.  Any class that was delisted at the ISE was not replaced.  The pilot program allowed ISE to also list additional expiration months for option classes selected by other exchanges if another exchange adopted a similar pilot program (assuming the option class selected by another exchange was listed on the ISE).  

Below are the 20 classes selected for the pilot along with the expiration month(s) that were added: 

 

Symbol

Additional Months

AAPL

Feb, July

BAC

Aug

C

Feb

CSCO

Feb, July

EEM

Feb

F

Feb

GE

Feb

GLD

Feb

INTC

Feb, July

IWM

Aug

JPM

Feb

MSFT

Feb, July

PFE

Feb

QQQ

Feb

RIMM

Feb

SPY

Feb

T

Feb, July

VALE

Feb

VZ

Feb, July

XLF

Feb

The pilot program ended and was NOT extended. However, the securities that were originally part of the program still maintain those additional expiration months.

Upcoming events:

May 8th: I will be the keynote speaker for the Long Island Stock Traders Meetup Group. I will present a basic review of covered call writing and then proceed with an audience participation section where your favorite stocks are analyzed for potential covered call trades:

Place: Plainview-Old Bethpage Library (Auditorium)

Time: 7 PM

Thanks for coming:

I was honored to meet many of our BCI members when I was the keynote speaker for the AAII-Atlanta April meeting. Many of you traveled quite a distance. I appreciate your loyalty and support.

Market tone:

 This past week’s economic reports were generally positive led by favorable consumer spending stats:

  • Retail sales rose by 0.8% in March above the 0.3% expected
  • Sales are up 6.5% from a year ago
  • New home construction in March fell by 5.8%, below expectations, the 2nd straight monthly decline
  • Building permits, however, were up 4.5% (up 30.1% from a year ago)
  • Building completions increased by 4.2% (up 0.5% from a year ago)
  • Housing starts were up 10.3% from a year ago
  • Business inventories increased by 0.6% in February, ahead of expectations. The inventory-to-sales ratio shows that businesses are effectively controlling their inventories
  • Sales of existing homes fell 2.6% in March, the 2nd straight monthly decline and below expectations. Compared to a year ago, however, the rate is up 5.2%
  • US industrial production was flat for the 2nd month in a row, below analyst expectations
  • The Conference Board’s index of leading economic indicators increased by 0.3% in March, better than the 0.2% expected. This represented the 6th straight monthly increase
  • The coincident indicator (measure of current economic conditions) rose by 0.2%, the 4th straight increase  

For the week, the S&P 500 was up 0.6%, for a year-to-date return of 10.3% including dividends.

Last week, this site, although still bullish on our economy and overall market outlook, took a more conservative position (favoring in-the-money strikes) due to the increased volatility of the VIX. A 3-month chart of the VIX and S&P 500 shows that the market benchmark is up 5% while the VIX has calmed to an encouraging 17.44. However, in the current month, the VIX has had several swings of 10% -15% and that concerns this conservative investor. The chart below demonstrates these points:

The VIX and S&P 500 as of 4-20-12

 
Summary:
 
IBD: Market in correction.
 
BCI: Cautiously bullish favoring in-the-money strikes until volatility settles.
 
Wishing you a happy earnings season,
 
 
 

Tags:

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.

40 Responses to “Covered Call Writing and Stock Option Expiration Cycles”

  1. Stan April 21, 2012 5:10 pm #

    Alan,

    Have you considered weekly options for your covered call strategy? Thanks for another educational article.

    Stan

    • Alan Ellman April 22, 2012 11:53 am #

      Stan,

      There has been a definite interest among members for incorporating weeklys into the BCI methodology. I have begun discussions with my team regarding this issue. Look for this to become another premium member benefit later this year.

      Premium members: We currently have available in the “resources/downloads” section of your premium site a list of all securities with weekly options. This list is growing as the demand for these products has been strong.

      Alan

  2. Barbara April 22, 2012 6:54 am #

    Is there a way of telling which cycle a stock is assigned to?

    Thanks,
    Barbara

    • Alan Ellman April 22, 2012 3:07 pm #

      Barbara,

      To my knowledge there is no complete list that shows the expiration cycle for every security. There is a way of accessing a list of stocks which have LEAPS that will give this information but that list is far from complete. Here is how to access that list:

      Expiration Cycles For Stocks With LEAPS

      How to locate

      http://www.optionseducation.org

      • Trading tools

      • Market data

      • Product specifications

      • LEAPS

      • Complete LEAPS

      The best way to tell which cycle a stock has been assigned to is to access any options chain and look to the third or fourth month out. Then you can use the information in this article to determine the cycle.

      Alan

  3. Gary April 22, 2012 8:32 am #

    Alan,

    Do you have to be a member of the stock club to attend your May 8th seminar? Is there a charge? Hope to see you there.

    Gary

    • Alan Ellman April 22, 2012 5:10 pm #

      Gary,

      The stock club does NOT charge an admission fee and you do NOT have to be a member to attend. Please introduce yourself to me before or after my presentation.

      Alan

  4. Frank Kaplan April 22, 2012 10:52 am #

    When I try to subscribe to this articles comments via RSS ?I get a page of HTML code instead of any action. This is in my default browser CHROME. It works in Explorer. Can your excellent team check and fix this problem.

    Thank you

    • Alan Ellman April 22, 2012 5:12 pm #

      Frank,

      I’ve contacted my webmaster about this issue and will get back to you as soon as I hear from him.

      Alan

      • Alan Ellman April 25, 2012 10:57 am #

        Frank,

        Still waiting for a response from my webmaster…didn’t forget about you!

        Alan

    • Alan Ellman April 25, 2012 4:23 pm #

      Frank,

      My webmaster’s response:

      I could not re-create the problem. I tried clicking on the RSS feed in Google Chrome and it worked fine.

      Alan

  5. Barry B April 22, 2012 6:07 pm #

    Premium Members,

    The Weekly Report for 04-20-12 has been uploaded to the Premium Member website and is available for download.

    Best,

    Barry and The BCI Team

  6. Don B. April 22, 2012 8:37 pm #

    Hello Alan,
    I am considering re-entering the options market, writing. It will help a lot if you will bear in mind that my questions are now more basic, due to that setback, than a beginner might ask you, but here goes.
    I am looking at your recent comment on SHFL. Cannot help but notice, tho, that it does not show up on the weeks just ahead of or after its entry of several weeks ago. It does not show up, to re-iterate, on the latest column of your chart. This causes me to wonder if I am reading something wrong into it. Sorry to have to return to actual basics, but necessary.
    Kindest regards,

    Don B.

  7. Don B. April 22, 2012 8:56 pm #

    Dear Alan,
    I should have also asked about the fact that SHFL showed up in the “Failed One or More Screens” column in your latest weekend publication. Clarification here will be much appreciated. Plus there is a difficult to understand caption re the 20-day moving average in the far right column of that same entry.

    Your kind enlightenment will be sincerely appreciated. Thanx again.

    Don B.

    • Alan Ellman April 22, 2012 9:23 pm #

      Don,

      It’s great to hear from you. We’ve missed you. Speaking for the entire BCI community we hope your recovery is progressing well. I’m glad you asked these questions because they are important especially for our new members:

      1- I mentioned SHFL in a recent blog commentary because it was on our running list at the time and a news worthy item was reported that I felt would interest our membership. I will do this frequently under the heading of “running list stocks in the news”. As a long time member you are aware of the fact that stocks whipsaw in price movement and may appear on our list one week and disappear the next. This does not mean that it is no longer a good covered call candidate if you are already in the position but rather it is not among the elite choices at that point in time. This is usually due to temporary technical bearish signals like the MACD histogram dipping below zero. SHFL will remain in the darker cells of the running list unless it either moves back into the white cell area (eligible) or does not pass our screens for 3 consecutive weeks. In that last case, it is totally removed from the report and needs to ‘earn” its way back onto our watch list. Since SHFL passed our screens last week, this is the first week it is located in the darker cells.

      2- The comment in the far right column says:

      Price @ 20-day EMA

      This is a red flag to watch to see if the 20-d EMA acts as support or if support is broken. See the screenshot below (CLICK ON IMAGE TO ENLARGE AND USE THE BACK ARROW TO RETURN TO BLOG). Don, let me know if you need further clarification.

      Alan

  8. Adrian April 23, 2012 1:58 am #

    Hi, I have some questions about margin loans, that is under the “investment basics” tab – of the “margin accounts” section.
    Just need to know if it is worth using or not. thanks

    • Alan Ellman April 23, 2012 6:23 am #

      Adrian,

      For most retail investors margin accounts are NOT appropriate in my view. Although potential returns are much greater so is the overall risk. These accounts are more appropriate for some experienced, sophisticated investors who are well disciplined.

      Alan

  9. Alan Ellman April 23, 2012 6:32 am #

    Running list stocks in the news: TSCO:

    TSCO is scheduled to report earnings on April 25th. On April 12th the company pre-announced that sales rose by 22%, passing the $1 billion mark for the first time. Same store sales rose by 11.5%. The company also raised its guidance moving forward and as a result the analysts raised guidance as well. For the full year, 16 of the 19 analysts have raised guidance in the past month. Earnings growth is projected to be 21% for 2012.

    Our premium watch list shows that this equity has been on our list for 10 weeks, has an industry segment rank of “A” and a beta of 1.32.

    Alan

  10. Barbara April 23, 2012 11:01 am #

    Alan,

    Many of my stocks were assigned over the weekend (CSTR, LULU, QCOR to name as few) so I have a significant amount of cash in my account. With the market down significantly today would it be a good idea to buy stocks today and sell otm strikes figuring a bounceback?

    Thanks for any thoughts on this.

    Barbara

    • Alan Ellman April 23, 2012 3:25 pm #

      Barbara,

      Although I know of no one who can consistently time the market your idea is a good one if you are bullish on the overall market and have a decent level of risk tolerance. For those with less risk tolerance, purchasing shares on a down day and selling ITM strikes is a more conservative approach. If you had purchased shares from our watch list late morning today,a majority of them would have been up by the end of the day. Let’s see about tomorrow.

      Keep up the good work.

      Alan

  11. Adrian April 24, 2012 10:18 pm #

    So I will assume that you won’t have needed to see those questions I posted about margin loans, as you don’t think it is recommended to use anyway! But, I can’t help but ask how we would know that we are so experienced at this strategy, to be able to go and use them?

    • Alan Ellman April 25, 2012 10:25 am #

      Adrian,

      In my view, most retail investors should not use margin accounts especially for a relatively conservative strategy like cc wriitng. If you have any doubt as to whether you are sophisticated and disciplined enough to use margin accounts, I would avoid them until you are.

      Alan

  12. Bob H April 25, 2012 12:05 am #

    CPRT seems to be paying almost nothing on the option charts. Is that due to it’s low Beta?
    This stock closed 26.22 at end of Tuesday. The $25 strike option value is all intrinsic. And the next higher choice $27.50 slightly out of the money is showing a bid of 0.00 and ask 0.10 for the May call option.

    • Alan Ellman April 25, 2012 2:46 am #

      Bob,

      This was the first stock I check after I received this week’s report.

      This will occur when the market is aniticipating almost no price change by expiration Friday. Option liquidity may play a role as well but not in this case. When viewing option chains, if the returns don’t meet our goals, and they certainly don’t with the May options on CPRT, we simply move on to our next underlying. You can check back from time to time as this can change but equities with betas of 0.88 will normally have decent returns.

      Now option chains will frequently tell a story. Take a look at the June calls. No open interest. The May and November $27.50s have no time value but the August $27.50s have huge open interest (relatively) and finally some time value. The market is anticipating some type of price volatility prior to the August expiration.

      Alan

  13. Alan Ellman April 25, 2012 7:16 am #

    CPRT (cont):

    In keeping with the theme of this week’s article you will note that CPRT has been assigned to the February expiration cycle:

    Current contract month: May

    Next month: June

    2nd month in next 2 quarters: August and November

    Alan

  14. Todd Linahan April 25, 2012 9:26 am #

    In the last two contract cycles I have written calls on stocks that have changed earnings dates to the current contract cycle. During the last contract cycle I exited VMW for a small profit before the earnings announcement and again have to make a decision during this contract cycle. In your opinion what is the best method to handle this pesky issue?

    Todd

    • Alan Ellman April 25, 2012 10:55 am #

      Todd,

      One of the biggest challenges for my team when formulating our weekly premium reports relates to these ER dates. A LOT of time is spent in an effort to get our members the most reliable information. Even when projected dates are published, companies can change the dates as you alluded to. When a date moves into a current contract cycle where you hold a position your choices are as follows:

      1- Close the short option position and hold the stock through the ER. Then sell the option after the report if the equity still meets your requirements.

      2- Close the entire position as you did with VMW.

      When issues come up that are out of our control we simply deal with them the best way we can…”pesky” is a great way to describe changing ER dates.

      Alan

      • Steve Z April 25, 2012 3:01 pm #

        Alan, I’m responding to your first option of buying back the call and holding the stock.

        Since Todd is accidentally holding over earnings, i.e., he didn’t invest in the stock to try to take advantage of an earnings jump up, wouldn’t it be better to keep the call as a conservative strategy?

        If the stock goes up, he’s in the basically the same position he was when he invested. But if the stock goes down, the call buffers the loss.

        • Alan Ellman April 25, 2012 5:43 pm #

          Steve,

          As always an excellent question. I instituted the rule of avoiding earnings reports after having been hammered way too many times from disappointing releases. The rule is in place to avoid extreme losses which will occur (not frequently but) from time to time and can ruin an entire month’s profit. Let’s take an example from today and from our premium watch list: GNC:

          This stock is on our “running list” but in the “gold” cells making it ineligible until after earnings release. I will make the following fair assumptions:

          An ATM strike could generate a 4%, 1-month return

          An ATM strike for another stock not reporting could generate a 3%, 1-month return. I am reducing the return by 25% because the implied volatility prior to an ER is greater.

          Today GNC released earnings and the market was disappointed. GNC price per share was down 12%. I am not saying this is typical just showing that it can happen as it did today, the same day of your inquiry (not to mention Apple in the other direction). Let’s assume it could have gone up 12% had the report exceeded expectations. Let’s do the math:

          1- Positive surprise: We keep the 4% premium but miss out on the 12% rise in share price…lose 8% potential profit by selling the option.

          2- Negative surprise: Share price down 12% but 4% is mitigated from the sale of the option. Net loss is 8%.

          Had we held the stock through earnings we would have lost more in the second scenario HOWEVER in most market conditions there will be far more positive than negative surprises especially with the quality of stocks on our watch list. Our strategy is cc writing so I am not here to encourage holding stocks through ERs. That’s for another portfolio and another strategy. However, if you choose to keep the stock I would not sell the call until after the report. It simply throws the odds in our favor.

          Finally, let’s take today’s example and assume it was in a $50k portfolio of 5 stocks and $10k devoted to each equity. A loss of $800 ($10,000 x 8%) represents a portfolio loss of 1.7%. If our original profit generated was 3% that represents an erosion of more than one half of our monthly profit on one trade. For covered call writing earnings reports are NOT our friends!

          Alan

          • Steve Z April 26, 2012 8:42 am
            #

            Alan, thanks for the thorough answer.

            I agree completely with the risks associated with holding over earnings and I agree with your analysis about possibility 1- of a positive surprise.

            On possibility 2- of a negative surprise, I think there’s a different (better?) way to look at that one. Recall, this is a scenario of a mistake was made to buy the stock & sell the call over earnings and so he’s trying to decide what to do as a result. The 4% is already done so the 4% does not help in deciding what to do next. It’s water under the bridge.

            I’d argue if he buys back the call and the stock goes down 12% he loses the whole 12%. However, if he keeps the call and the stock price goes down 12%, won’t the call value increase roughly 50% of that amount? I say this because an ATM strike should have a negative delta of about 0.5 versus the stock with a positive 1.0. So shouldn’t the option gain about half as much as the stock loses? This is why I’d argue keeping the call mitigates the downside risk.

            I’m being picky about this because I think it’s an important point to understand and I want to make sure I really do understand it.

            Thanks for the time you spend to help us understand covered call investing.

            Steve

        • Alan Ellman April 27, 2012 12:14 pm #

          Steve,

          Let me premise my response by saying that there are many ways to approach this and other scenarios. My way isn’t the only way but rather the approach that works best for me and I’m happy to share it with our BCI community. I have respect for those who would take a different track.

          That being said, let’s analyze this situation. The hypothetical is that we inadvertently entered a cc position due to a changing ER date. Our original intention was to generate a 2-4%, one month return with a stock that had a reasonable implied volatility or was a low-risk candidate. We now find ourselves in a position of high risk having generated a 4%, 1-month return but with the possibility of a total 8% loss.

          My approach would be to buy back the short call and sell the stock in most scenarios. Once in a blue moon I’ll hold onto the stock through the ER. I highlighted such a time on the back cover of my latest book and PII might be such a candidate as I alluded to in a comment further down. However, that is NOT part of the BCI methodology for cc writing. So, let’s say I’ve unwound my total position. Here’s why:

          1- One major earnings disappointment can negate your entire profits for the month. It’s happened to me and believe me it’s no fun. That’s why I instituted this rule to begin with.

          2- The premium (as you know) consists of intrinsic value and time value. Any intrinsic value spent on the buyback is retrieved from the increase in share value generated by the call buyback. So let’s look at the time value which includes time to expiration and implied volatility. Time value has only eroded since the option was sold. Most of the premium lies in the IV prior to an ER. That hasn’t changed. Chances are you can buy back the option at or close to the price you generated in the first place, probably a little less.

          3- Once the position is closed, the cash can be used to re-establish another cc position with a less risky underlying. Granted the loss in time value may change our 2-4% goal to a 1-2% goal but well worth avoiding the risk we would face from the ER (in my view).

          Finally, let me address your comments regarding the call value. Here I may not have fully understood your comments so please correct me if that is the case:

          1- ATM calls have deltas of about .50. Deep OTM strikes (if the stock is declining, the strike moves deeper and deeper OTM) have deltas of about .10. Option premiums decrease the further out a strike price is. Check any options chain and you will see that the further away a strike is from current market value, the lower the premium. That’s because there’s less of a chance of that strike ending up in-the-money.

          2- In our cc positions, we are the sellers of the options. Even if the option premium value did go up, we wouldn’t benefit from it and it wouldn’t mitigate losses although it would be quite inexpensive to close at that point in time.

          Alan

  15. Bob H April 25, 2012 10:09 am #

    Alan, thanks for the insight on CPRT. I understand.
    Adrian – Alan answered that margin accounts are NOT appropriate for most retail investors (due to the risk). If you have 6 months living expenses saved up, and have money to invest that you can afford to lose – and are OK with the risk – then only you can answer the question if you are experienced enough.

  16. Barry B April 25, 2012 12:55 pm #

    Premium Members:

    This week’s Weekly Stock Screen And Watch List has been revised and uploaded to The Blue Collar Investor premium member site and is available in the “Reports” section. The Running List Earnings Report section has been updated with a new confirmed ER date for VRX. Look for the report dated 04-20-12-REVA.

    Since VRX is not a US based stock we wanted to wait until our primary source for ER Date data, Earningswhispers.com, confirmed the change. That happened this morning. We have found with non-US based companies, the published ER date can change.

    We want to thank Peter Weiner, one of our Premium subscribers, for bringing this to our attention.

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

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

    Best,

    Barry and the BCI Team

  17. Alan Ellman April 25, 2012 6:35 pm #

    Earnings season:

    Just to follow up on some of the on and off site discussion about the current earnings season and why this site remains cautiously bullish:

    Earnings per share are up 10% compared to analyst expectations of 2%

    30% of the S&P 500 have increased dividends in the first 4 months of this year

    Alan

  18. Barry B April 26, 2012 12:15 am #

    BCI Community,

    One of our Premium members sent us some trades to review. After sending back our response, we asked that member if we could post the response for educational purposes for the rest of the BCI Community. The subscriber agreed, so the the following sequence is the actual trade followed by an alternative trade sequence that followed the BCI Exit Strategy methodology.

    Overall, it appears that a fundamental issue is over-trading the position. At this point in time, the BCI methodology does not use Puts for position management…only the use of Calls (although we will be adding this in the future). So let’s look at the CMI trade from a per share cost basis point of view.

    CMI – Original Trade:
    – 3/19: Initial cost = Bought stock at $127.42
    STO April 125 call at $5.28 credit
    > Cost Basis = $122.14
    – 3/20: Rolled April 125 call to April 120 call = $2,56 credit
    > Cost Basis = $119.58
    – 3/28: BTO May 115 Put at $4.90 debit
    > Cost Basis = $124.48
    – 4/03: STC May 115 Put at $3.50 credit
    > Cost Basis = $120.98
    – 4/10: Rolled April 120 Call to April 115 Call = $1.86 credit
    > Cost Basis = $119.12
    – 4/11: BTO May 110 Put at $6.00 Debit
    > Cost Basis = $125.12
    – 4/20: STC May 110 Put = $2.60 Credit
    > Cost Basis = $122.52
    – 4/20: CMI closed = $116.03
    Since stock closed at $116.03, which is higher than the open April $115 call, the CMI stock would have been exercised at $115.00
    > Cost Basis = $122.52
    > Final Value = Exercised Strike – Cost Basis = $115.00 – $122.52 = -$7.52/share for a position loss

    If you just rolled the calls down without the puts…that is by following Alan’s exit strategies, the trade could have looked like this…

    CMI – Alternative Trade:
    – 3/19: Initial cost = Bought stock at $127.42
    STO April 125 call at $5.28 credit
    > Cost Basis = $122.14
    – 3/20: Rolled April 125 call to April 120 call = $2,56 credit
    > Cost Basis = $119.58
    – 4/10: Rolled April 120 Call to April 115 Call = $1.86 credit
    > Cost Basis = $117.72
    – 4/20: CMI closed = $116.03
    > Since stock closed at $116.03 is higher than the open April $115 call, the CMI stock would have been exercised at $115.00
    > Final Value = Exercised Strike – Cost Basis = $115.00 – $117.72 = -$2.72/share for a position loss

    In summary, by following Alan’s “Exit Strategies” the trade would have had a much smaller loss than it actually had by using puts. In this particular case….-$2.72 following “Exit Strategies” vs. -$7.52 using puts. The entire trade could have also been closed when you saw the chart and technicals break down. In either case, the loss would have been lower. You need to be careful using puts when the price is dropping. The increased volatility increases the cost of the puts.

    We hope that this sample trade will better help you understand some of the strategies in the BCI methodology.

    Best,

    Barry and The BCI Team

  19. Adrian April 26, 2012 12:47 am #

    Alan,
    I wrote these 2 questions under the ‘BC methodology’ title, and they are:-
    – As I was still finding out about the A/D line chart parameters, I am just not sure if I should use the same 20d &100d EMA’s on it, as I would a normal chart( I presume I would though)?
    – Also how often should I see this chart(each trade, each week, or quarter,etc)?

    • Alan Ellman April 26, 2012 4:21 pm #

      Adrian,

      The A/D line is not one of the technical parameters used in the BCI methodology but I’ve created a screenshot from stockcharts.com below to show one way to set it up. CLICK ON IMAGE TO ENLARGE AND USE THE BACK ARROW TO RETURN TO BLOG.

      When formulating our watch lists and assessing market tone charts are re-screened weekly. This is the service we offer to our premium members. This will provide an up-to-date list of securities that is currently at the highest level both fundamentally and technically. If a trade is about to be executed late in the week, I would quickly review the chart prior to entering the trade.

      Alan

  20. Alan Ellman April 26, 2012 3:57 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

    Not a premium member? Check out this link:

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

    Alan and the BCI team

  21. Alan Ellman April 27, 2012 5:45 am #

    Running list stocks in the news: PII:

    On April 18th PII reported its 20th consecutive positive earnings surprise with earnings up 27% over the same quarter a year ago. Net sales rose 25% as gross profit expanded to 28.9% of sales and operating income rose to 13.6%. As a result, management raised sales growth guidance from 5-8% to 10-13% and analysts raised EPS growth guidance to 27% for 2012 and 19% for 2013.

    Our premium watch list shows an industry segment rank of “A”, a beta of 1.27 and a % dividend yield of 1.9%, after a 64% increase earlier this year.

    The next projected earnings report is on 7-19-12.

    Alan

  22. Adrian April 28, 2012 2:41 am #

    Alan,
    I had thought of these 3 questions and already wrote them under the ‘VIX’ title a week ago, as it was from me now knowing that it was a good idea to see the market tone reports, so they were:-
    – Would you put on a trade, even if there is a major market report coming up (eg. next day or so)?
    – Do you think I need to know the “seasonality cycles” of the
    market. (‘sell in may’, etc,etc)?
    – Also would I need to backtest this strategy?, – if so then would you be able to tell me how I could this?
    I have a feeling that I should do backtesting and not just papertrade it first! thanks

Leave a Reply

Optionally add an image (JPEG only)