beginners corner

Covered Call Writing Using The Blue Collar Methodology

Fundamental analysis, technical analysis, common sense principles and calculations are all critical considerations when selling stock options the Blue Collar way. Since this is my first article written on our newly enhanced web site (hope you like it!) I thought it appropriate to use a real-life example to review the basic tenets of our BCI methodology.

Although we screen our database of over 2000 stocks weekly for our premium members we ALWAYS include the IBD 50 stocks in that screen. I have selected SWI, a stock ranked #3 in the IBD 50 in the February 6th edition of that resource. The screening process begins:

1- Are options associated with this equity: Yes

2- Does the stock report same store MONTHLY retail stats? No

3- Does it rank at the highest level of all 6 SmartSelect screens? Yes

4- Does it pass the risk/reward Scouter screen with a 5 or better? Yes

5- Does it average a daily minimum trading volume of 250,000 shares? Yes

6- Is there an upcoming earnings report? No

Next we move on to technical analysis. Below is a chart showing a bullish picture, passing all of our technical requirements:

SWI- bullish technical chart

At this point, we are quite satisfied with the fundamental, technical and common sense requirements of this security. Now let’s find out if it will generate enough cash to meet our monthly goals (2% – 4% per month for me). Let’s view the options chain for March 16, 2012:

SWI- options chain

With SWI currently trading @ $37.03, we will look at the following strike prices:
  • $35- In-the-money
  • $37.50- Near-the-money (slightly out-of-the-money)
  • $40- Out-of-the-money

We look in the “bid” column (sell at the “bid”; buy at the “ask’) for premium returns and make sure the open interest is at least 100 contracts and/or the bid-ask spread is $0.30 or less.

Now we are ready to feed this information into the Ellman Calculator. You can use the single or multiple tabs (I prefer the multiple tab). The information is entered in the “white cells” on the left and the results are found in the “blue” cells on the right (I colorized them for discussion purposes):

SWI- The Ellman Calculator- Multiple Tab

In the red rectangular box at the top, note the following:
  • ITM $35 strike generates a 5-week return of 2.3% with 5.5% protection of that premium
  • Near-the-money $37.50 strike generates a 3.7%, 5-week return with upside potential of an additional 1.3%
  • OTM $40 strike generates a 1.5%, 5-week return with the possibility of an additional 8% for upside share appreciation

The strike price that is selected is based on your personal risk tolerance and your overall market assessment. ITM strikes are the most conservative, ATM (at-the-money or near-the-money) are bullish and OTM are the most bullish. One size DOESN’T fit all!

Once your positions are established look for possible exit strategy opportunities to mitigate losses or enhance gains. These will be addressed in future articles and are discussed in great detail in my books and DVDs.

Our new website:

Our goal for the enhanced website was to make a more organized, easier to navigate site that creates a great experience for beginners as well as experienced Blue Collar Investors. Included in the updated site are:
  • Easier blog navigation with consolidated Blog Categories
  • Added service for beginners with The Beginner’s Corner
  • Cleaner, easier navigation and flow (blog is not separate as it was previously)
  • 3 steps to success, easy to follow suggested progression for site visitors.
  • Links to our social networks (twitter, facebook & youtube)
  • Use the “subscribe to comments” at the bottom of any blog article to receive email updates to any article’s comments
This is OUR site (yours and mine) so we’d love to hear from you. Tell us what you like about the site and let us know if we can improve upon any aspect. Your feedback is critical and greatly appreciated.
Our new Facebook page:
Here’s what you can expect on a weekly basis:
• Latest Announcements
• Stock information
• Industry News
• Latest Blog Articles
Please “like us” on Facebook:
Market tone:

 This was an extremely light week for economic reports. The action will pick up next week:

  • The US trade deficit widened in December to $48.8 billion, a six-month high
  • Exports increased by 0.7%, the first advance for exports in 3 months
  • US consumer borrowing increased by $19.3 billion in December, greater than analyst expectations. This is a positive sign for consumer’s increasing faith in the economy

For the week, the S&P 500 declined by 0.2% for a year-to-date return of 7% including dividends.

Summary:

IBD: Confirmed uptrend

BCI: Moderately bullish selling an equal number of ITM and OTM strikes.

My best to all,

Alan (alan@thebluecollarinvestor.com)

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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.

51 Responses to “Covered Call Writing Using The Blue Collar Methodology”

  1. Todd February 11, 2012 11:43 am #

    Alan,

    Thanks for another informative article and overview of your system. I am curious how you came up with a requirement of 5 or higher for the Scouter and not a higher number.

    Thanks again.

    Todd

    • Alan Ellman February 11, 2012 1:45 pm #

      Todd,

      This was a matter of trial and error over a period of years. Money Central considers a ranking of 4-7 “average”. I started @ “8” and found that I was eliminating way too many great choices. The process continued until I found “5” to be the ideal rank. Remember, this screen takes place AFTER the IBD SmartSelect so the stocks have already met the extremely high fundamental and technical standards of that screen. The Scouter screen will eliminate certain equities that perform well but have volatile price action. Looking at the Premium Report dated 2-3-12, there are 10 equities eliminated because of this screen. In my view, the Scouter Rating is a fabulous tool for covered call writers.

      Alan

  2. Frank Kaplan February 11, 2012 11:57 am #

    I like the new look – well done

    Frank Kaplan

  3. Frank Kaplan February 11, 2012 11:58 am #

    I looked through the rest of the site – well done.

    • Alan Ellman February 11, 2012 3:43 pm #

      Frank,

      Thanks for your feedback both here and on Facebook.

      Alan

  4. Jean February 11, 2012 1:26 pm #

    Alan,

    How often do you check the fundamental and technical screens in your system? Love the new site!

    Jean

    • Alan Ellman February 11, 2012 3:51 pm #

      Jean,

      My watch list is the same as yours…The Weekly Stock Screen and Watch List which is re-screened after market close 4PM EST on Fridays. I will do an additional check if I use a stock mid-contract after it has just reported earnings because an ER could change the fundamental rankings. Our premium reports will reflect any change at the next weekly publication.

      Glad you like our new site.

      Alan

  5. Steve Z February 11, 2012 2:24 pm #

    Alan, I was curious about your planned Facebook postings that you mentioned above. Are you going to post things in Facebook that you are not going to post here, in the comments section of your blog? Same for Twitter? I hope the answers are no to both.

    I do want to read what you believe to be important enough to post but I definitely do not want to have to go to two or three different places to get all your BCI information.

    Steve

  6. Alan Ellman February 11, 2012 4:08 pm #

    Steve,

    I’m glad you raised this question. Everything related to the strategy of covered call writing and the BCI methodology will be found right here on our web site. Some of it will also be posted on the sites you alluded to so as to expose “The Blue Collar Investor” to those who may not yet be members. As you know (probably better than me) having a presence in the social media is essential to maximize exposure and we want to touch base with as many Blue Collar Investors as possible. We want to spread the word.

    My team and I may post a peripherally related item on Facebook or Twiiter not found here. For example, I have been contacted by a large investment group in Atlanta to do a presenation in the spring. I may update the progress. Once we have a firm date and venue, it will immediately be posted on the web site. ALL investment-related information will be found right here.

    Alan

  7. Barry B February 11, 2012 4:11 pm #

    Premium Members,

    The Weekly Report for 02-10-12 has been uploaded to the Premium Member website and is available for download.

    Best,

    Barry and The BCI Team

  8. Jean February 11, 2012 6:22 pm #

    Alan,

    Thanks for your last response. I have another question about CSTR. This is a stock I’ve been following for a while and I see it made your list today. Can you explain why it’s not in bold on your running list and would you avoid it because of the segment rank of C?

    Thanks a lot.

    Jean

    • Barry B February 11, 2012 7:24 pm #

      Hello Jean,

      To answer your questions…

      [1] Reason that CSTR did not pass all screens (and be shown in bold) is that it had mixed technicals…MACD is strong but the stochastic was below the trigger line and heading down.

      [2] As for the segment, ideally we would like to see a higher segment rating, but there can be strong individual stocks in any segment. In the case of Coinstar (CSTR), there was an announcement of a joint venture between CSTR and VZ (Verizon) for video-on-demand services. CSTR also had a strong earnings report.

      Best,

      Barry

      • Jean February 12, 2012 7:21 am #

        Thank you Barry. So this would be an example where you would favor an in the money option. Its starting to all come together!

        Jean

  9. Ron W. February 12, 2012 9:17 am #

    Hi Alan,

    Like the improved site. Thanks!

    Looking at the first 3 symbols in this week’s Watchlist that failed the Slow Stochastic screen, EXXI, AAPL, BEAV, it did not appear their charts showed a confirmation of a down slow stochastic for purposes of the BCI method (two decreases, with the final decrease crossing below the 80 line). Am I reading the charts incorrectly?

    Thanks,
    Ron W.

    • Barry B February 13, 2012 6:10 pm #

      Hello Ron,

      The answer to your question is a bit long, so bear with me…

      If you take a look at the “technical”side of Alan’s system, there are actually six components that help us decide if a specific stock . The components are:
      – Price
      – The 20 EMA and price’s position relative to it
      – The 100 EMA and the position of price and the 20 EMA relative to
      it
      – Volume
      – MACD
      – Slow Stochastics

      Ideally, we would like to see all of the indicators point us in the same direction . However, technical analysis is as much of an art as it is a science. So we look at the six components and derive a sense as to what is happening with the stock via the confluence of all of the six components. Any of the stocks that pass the weekly screen are good candidates…including the stocks with mixed technicals. In a perfect world, the stocks in bold would tend to be the strongest choices. Rarely do bold stocks remain bold week after week…although it has happened on a few occasions over the years.

      In the case of the rule that you cite in regard to the stochastics… pages 64-65 in Alan’s new book….”a more reliable transaction signal occurs when the oscillator moves from overbought (above 80%) to below 80%….” A strong stochastic signal occurs….2nd time”. In our reports we alert our members as early as possible to a negative divergence even before it becomes a “strong” one. In the case of AAPL, BEAV, and EXXI, the stochastic line was below the signal line…hence the mixed technical rating.

      Best,

      Barry

  10. Terry February 12, 2012 10:50 am #

    Alan,

    I was running some calculations for BWLD a stock you have in bold on this week’s list. There are 3 really good choices for March. The 80, 85 and 90 strike prices all are appealing. How would you decide which strike is best in the current market environment. Thanks.

    Terry

    • Alan Ellman February 12, 2012 4:44 pm #

      Terry,

      You are absolutely correct. Each week you will usually find several candidates with multiple appealing strike choices. There are several others on this week’s list like FFIV, GILD, EXXI, CSTR and others. Your decision is based on your market assessment and personal risk tolerance. You can also “ladder” your strikes if you are selling multiple contracts. This means you can sell some ITM, ATM and OTM favoring the strikes based on the above criteria.

      BWLD: I placed the information from the options chain into the multiple tab of the Ellman Calculator as shown below.

      $80 strike (yellow): 2.1% initial profit with 6.7% protection OF THAT PROFIT. The most cautious of the 3 strikes.

      $85 strike (green) : 4.1% initial return is the highest initial return with only slight protection of that profit. This is a bullish trade.

      $90 strike (purple): 2.3% initial return with a possibility of another 5% for a possible 5-week return of 7.3%. This is the most bullish trade of the three.

      See the spreadsheet below. It’s also a great example of how this tool assists us in our cc decisions. ***Click on the image to enlarge and use the backarrow to return to this blog.

      Alan

    • Steve Z February 12, 2012 5:54 pm #

      Terry, to me, Alan’s comment about market assessment is critical. We “know” a gap like this on earnings is a very bullish sign. However, Steve Nison, of candlesticks fame, teaches that the entire gap becomes support. So for BWLD, this means it could pullback anywhere between roughly $71 and $79. In addition, we “know” the markets are overdue for a pullback.

      I think one could conclude that the market is bullish and over the next few months the odds are in our favor that BWLD will go up. What I don’t know is how to predict where it will be in a month.

      So given the market is due for a pullback and given the pullback range for BWLD is as low as $71, I think conservatism is well warranted. However, who knows…

      Steve

  11. DougM February 12, 2012 2:11 pm #

    Hi Alan & Team,

    Seems a good time & place for a basic question. Nice job on the new site by the way! The question is about the weekly list. In an ideal setting of being fully invested and planning on being fully invested, it just seems like one weekend out of the month would be a busy one. Options expiration. That Friday you might be busy with a few that you are rolling, Saturday & Sunday researching and choosing your positions for the next period, and Monday placing all positions. Now, for my part, I know that if I have unused cash, I can start a week ahead of time, or if I have doubts about the market or something, maybe hold off a week. But can you elaborate upon how lists generated far from expiration day are best utilized? Thanks.

    • Alan Ellman February 13, 2012 7:06 am #

      Doug,

      Your assessment of when our busiest times are is spot on. You also make a great point that there are other situations when we may enter a position mid-contract. Let me add one more scenario to the two you mention. When executing certain exit strategies (mid-contract unwind, convert dead money….) we may also enter a new position mid-contract. I recently had a question from a premium member asking why we generate these reports on a weekly rather than a monthly basis and these situations are precisely why we re-screen well over 2000 securities EVERY week.

      If you are entering a position mid-contract, give more weight to the most recent report simply because it is based on the latest data….fundamental, technical and common sense principles.

      As far as starting a week earlier: Because of the logarithimic nature of time erosion of our premiums, there is only a small amount of ADDITIONAL premium generated by this extra week. You must weigh this versus the extra week of risk the option obligation requires.

      Alan

  12. Sonia February 12, 2012 2:46 pm #

    Hi Alan,
    I am very new to covered calls and have been trading credit spreads and iron condors for a while (about 4 years). I stayed away from covered calls thinking that this strategy involved more risk and more capital to begin with as compared to credit spreads.

    After reading your 2 books and paper trading for about two months, I have come to realize that you have a very sound scanning system and a very effective exit strategy. In my last couple of months of paper trading (includes Dec 2011 as well), I have not had a loss (wish it were true forever ). So my question is
    1. with so many strict rules and disciplines do you ever get a loss?It seems as though its too good to be true. I was planning on back testing these strategies, but I cannot actually get the retro Scouter ratings and IBD issues.
    2. I read in your book that one can still use this strategy with ETF’s if the invested capital is less. But even with ETF’s if one were to own at least 5 underlying for the purpose of diversification, one still needs to invest at least $25000. Dont you think?
    3. What is the main difference between covered calls and credit spreads in terms of the risk profile? Both seem to be directional trading to me.
    4.Do you offer autotrade with any brokers or have a newsletter recommending stocks/ETF’s?

    PS:loved your books. Didnt get a chance to read the encyclopedia yet though!!

    Regards

    • Alan Ellman February 13, 2012 11:19 am #

      Sonia,

      Although I firrmly believe that the BCI methodology is the soundest approach to covered call writing available there will be some losses. Overall market forces alone can upset the most well-thought-out investment decisions. What we are all about is using sound fundamental, technical and common sense principles to maximize the probability of a successful outcome. Then we use our exit strategy arsenal to bring our results to an even higher level.

      When we use ETFs, we can circumvent the rule of 5 different securities because we are owning many shares with each ETF. For example, with QQQ we own a piece of 100 of the largest non-financial equities in the NASDAQ. Some of our members use the top-performing Select SPDR ETFs which will get you exposure to the favored sectors of the S&P 500.

      Regarding credit spreads: We are considering adding protective puts to the BCI arsenal. This will reduce risk but also reduce profits. Although I prefer traditional cc writing, adding credit spreads to our system will meet the needs of many of our members. This is on the BCI agenda for this year.

      We do have a premium service that screens for the best 1-month covered call candidates and top-performing ETFs. These securities follow and meet the screens you have read about in my books. These are not recommendations per se but rather lists of equities and ETFs that have met the strict screens of the BCI methodology. A stock appropriate for one portfolio may not be appropriate for another (cost per share, other stocks already in your portfolio etc.) This is the list I use for selecting my cc portfolio stocks and ETFs. We report, you decide.

      At this time we are not working with any particular brokers but may establish these type of relationships in the near future.

      If your “no loser” success continues you MUST share your selections with our group!

      Thank you for your kind remarks about my books.

      Alan

  13. Alan Ellman February 12, 2012 4:32 pm #

    To our members:

    The last few weeks have been a whirlwind of hard work and fun as we re-developed our site. I can’t thank you enough for all the positive feedback and constructive suggestions. With your support we will continue to strive to meet the needs of our members and even exceed your expectations.

    I wanted to let you know about our on and off site responses to your emails and blog posts. As the BCI community has grown exponentially over the past several years (thank you again!) the number of contacts has done so as well. We continue to answer all emails as we know many of you are new to trading stock options and we want to offer as much support as possible. Our Director of Research, Barry Bergman will be responding to some emails especially those related to the premium report as he is in charge of producing this tool. My personal thanks to Barry for generating this report each week for all of us (its my resource as well as yours!) with such skill and accuracy.

    Your ideas are important to us. Keep them coming.

    Alan

  14. DougM February 12, 2012 6:06 pm #

    Hi Gang,

    I was curious to find TLEO on the premium list this week. I got some premium out of it a few weeks ago, but it dipped and I was holding it without a call for some recovery, using a tight trailing stop. Well, dumb luck struck this week when Oracle announced buying TLEO, and I got a nice windfall. But seeing as how TLEO was instantly transformed into ORCL in terms of how the price will move from here on, and since ORCL isn’t that attractive of a covered call candidate, I immediately sold it. The normal screens won’t catch buyouts until IBD pulls it from its 50, which I think it did this weekend. Just sayin’. :)

    – Doug

    • Steve Z February 12, 2012 6:26 pm #

      Alan, per the BWLD discussion above and the Dec-Jan chart for TLEO, how do you think about stocks that gap up? Do you view a gap up as a bullish sign or big watch out for a pullback given our timeframe is 4-5 weeks? Steve

      • Alan Ellman February 13, 2012 4:43 pm #

        Steve,

        A gap-up will occur after an earnings report as with BWLD or a positive news event like TLEO. Savvy investors like yourself know that this price increase is in large part due to a new market assessment of the company’s net worth and/or growth projections. That’s a positive. The concern that we all share is the chance of profit-taking and a quick price decline.

        There are two time frames where gap-ups require some decision-making: while we already own the stock in our cc positions or when we are considering owning the stock. In the former, I view the exponential price increase as an opportunity. I watch for the time value of the option premium to approach zero and then close my position. The cash from the sale of the stock is immediately put back to work creating a second income stream in the SAME month with the Same cash.

        If I am considering the stock as a new entry into my portfolio, I will wait for the price to settle, perhaps a few days. If it is holding well relative to the overall market and the calculations meet my goals, I will usually enter the trade with an ITM strike. Keep in mind that I am a conservative investor. Others may use OTM strikes.

        Alan

    • Alan Ellman February 13, 2012 4:26 pm #

      Hi Doug,

      Corporate news may dissuade us from using a particular stock depending on our assessment of that news. We respect and encourage this. The Taleo/Oracle deal is projected to close in 4-5 months. In the interim, we will continue to screen the stock and see how it holds up against our rigorous BCI requirements. As of this past weekend it passed all screens. Today, the stock price was flat. It is probably moot because current options returns hardly spark excitement. However, if the returns met our goals, some members may evaluate the news in a favorable light and want to know that this equity has passed all our screens. Congrats on the windfall!

      Alan

      • DougM February 13, 2012 5:13 pm #

        Hi Alan,

        I agree that it is probably moot, but would bet a contract or two that it is moot because TLEO will be off the list next week, as it has alreade exited the IBD50.

        I just wanted to emphasize that a stock swapping buyout like this is a very different animal than are gap ups due to positive news like earnings, sales, FDA approval, etc. that impact an independent corporation. When a monster like ORCL swaps its stock with a newbie like TLEO, ORCL shares barely budge (as they didn’t), and since stock swap terms are usually quite favorable to the smaller enterprise, it’s shares will immediately jump to a value that closes that favor. From that point on, unless the terms change, the little guy’s price will simply track the big guy’s. From this point on there is nothing that will move TLEO other than the price of ORCL. Now, TLEO should be an asset, and support the price of ORCL in a remote fundamental sense. But the point is, TLEO is no longer it’s own stock. It is flat because ORCL is flat, and its option premium return has likewise sunk to that or ORCL’s. Extremely unlikely that ORCL will sweeten the deal unexpectedly, causing another jump. But just a slight chance that the deal could sour for some surprise reason, which would be disastrous to the TLEO price. All the above, why I’m out.

        Ah, muddy details for those interested, fwiw.

        – Doug

  15. David Swett February 12, 2012 6:59 pm #

    This is DJ’s “Newbie Report” for the trades that I have done this month.

    I started with the BCI newsletter in November and immediately placed an ITM trade on QCOR; it worked well. Then I did another one in December and gained some added experience with the TOS trading platform. So finally in February, I decided to jump into the deep end of the pool and did 12 trades. As of today, four or one third of them are not happy trades; four are neutral (about break even); four are into good sized profit.

    I did a pre-Expiry Friday evaluation and dumped two stocks with an option buy back. The technicals had reversed and I am not trained to do Puts—yet. Continuing on the downer side, my money making QCOR that seemed to be invincible, just simply tanked on me. Down $10 to its current $35 market.

    Here is what I did: I had done two sell and BTC options earning $4 premium during this plummet and when it stabilized at $35, I decided to sell a 35 July call at a $6 premium. Those option premiums would cover my loss and bring the deal back to zero profit. I figure that I have waited for months and years to start doing the BCI program and waiting five months to make the tax return and bank account a zero cost would be acceptable to me. Comments?

    But on the happy trades, my very well to do Buffalo Wings and Tractor Supply require some further evaluation. To my surprise, I discovered that it would be worth my time to BTC my BWLD 80 CC and simply sell the stock at current market. The time decay had exposed hidden profits in the option chain. What a nice surprise. As of Friday, it represented an added $1.40 profit to do the BTC. Now I understand why everyone is on full alert and monitor their portfolio on “Expiration Friday,” (EF).

    I can’t do anything about the lingo “Expiration Friday,” but I have developed a new word of “Money Monday”, (MM) to describe the trading that I have been doing after EF. My prepaid freebie trip to Italy is looking better and better.

    After seeing QCOR get trampled, I am shaking in my boots for the upcoming Greece budget conflict. I think I will stop reading the news for this week.

    DJ

  16. Alan Ellman February 13, 2012 10:44 am #

    Running List Stocks in the News: TSCO:

    This stock from our premium watch list recently caught my attention when on February 1st it reported another positive earnings surprise. Earnings were up 43.3% from the prior -period. The company is expecting year-over-year growth of 12% – 15%. Our “running list” shows an industry segment rank of “A”, a beta of 0.97 and a % dividend yield of 0.60. Check out the chart below for recent positive earnings surprises. Click on the image to enlarge and use the back arrow to return to this blog.

    Alan

  17. Alan Ellman February 14, 2012 6:49 am #

    Running List Stocks in the news: CA:

    Recently reported a stellar 3rd quarter positive earnings surprise with earnings up 20% and revenues rising 10%. Operating income rose by 24%. Along with this news guidance was elevated for both 2012 and 2013. It is also fairly priced at 11x forward earnings below the industry average. Our running list shows an industry segment rank of “C” , a beta of 1.04 and a nice dividend yield of 3.70.

    Alan

  18. Fran February 14, 2012 1:58 pm #

    If a dividend results in fractional shares of stock in your portfolio how are those fractions sold without calling a broker? There are no provisions for fractional shares online.

    Thanks for any help.

    Fran

    • Alan Ellman February 14, 2012 6:50 pm #

      Fran,

      As long as you maintain the shares in your account, the fractional shares will remain. When you sell the all but the fractional shares most brokerages will sell those fractional shares after hours at the best price they can get usually with no commission. If any of our members have brokerages that approach this differently please let us know.

      Alan

  19. Barbara February 15, 2012 11:25 am #

    Any plans for live seminars in the near future?

    Keep up the good work.

    Barbara

    • Alan Ellman February 15, 2012 7:04 pm #

      Barbara,

      I will be speaking before the Atlanta Chapter of AAII on April 14th and on Long Island, NY on May 8th. I will post times and venues as the events approach. Thanks for your interest.

      Alan

  20. Paul, February 15, 2012 6:44 pm #

    Alan,

    I’m reading your latest book and on page 281 you write “As a rule of thumb, when we roll out, we always do so to an in-the-money strike”. However on page 290 you show an example of rolling to an out-of-the-money strike. Please explain. Thanks for this outstanding explanation and system for covered call writing.

    Paul

    • Alan Ellman February 15, 2012 7:26 pm #

      Paul,

      We invoke a rolling out exit strategy when the strike price is in-the-money (lower than current market value). If we roll out (by definition to the same strike price) the option will automatically also be in-the-money at the time the trade is executed. If on expiration Friday the strike is out-of-the-money, there is no need to implement this strategy. Simply allow the option to expire worthless and sell another the following week.

      On page 290 I show an example of rolling out AND UP. In these cases the strike can be ITM, ATM or OTM as you can see on pages 290-291.

      Alanj

  21. Fran February 16, 2012 3:36 pm #

    I used the rolling out strategy today for the 52.50 strike for GILD.

    Bought back for 2.35 and sold the march strike for 4.45. That is a 4% return and 4.1% protection of the return. Not bad!

    Thanks.

    Fran

  22. Alan Ellman February 16, 2012 5:34 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

  23. Steve Z February 17, 2012 5:42 pm #

    Alan, since a lot of what we do is play the odds, it has me thinking about the odds being high for a market pullback in the near future and when that occurs, the VIX will of course go higher. At that point we would be buying stocks at lower prices and selling calls for higher prices.

    How do you think about the trade-off between getting into our monthly cycle right now at high stock prices and low premiums versus waiting to get more favorable entries? I know we can’t predict the market but we are making a “bet” with either approach aren’t we, so how should we think about the “bet”?

    Steve

  24. Frank Kaplan February 18, 2012 7:39 am #

    Do you have a method yet of subscribing to the comments without adding a comment. When I click on the RSS feed I get a page of HTML source code.

    • Alan Ellman February 18, 2012 3:13 pm #

      Frank,

      I will speak with my webmaster and get back to you and our group once I have the information. I’ll post it with the next blog article as well as this one.

      Alan

    • Steve Z February 19, 2012 11:06 am #

      Frank, if you want email messages with the comments, don’t click on the RSS feed. Click on the word “subscribe” to the right of the blue box that says Submit Comment. Then you’ll get an email message every time a comment is posted.

  25. Alan Ellman February 18, 2012 12:56 pm #

    Steve,

    I’ve had several offsite emails from members concerned about a pullback. My personal outlook is a bit more bullish but as you stated we are making our decisions (“bets”) based on current information, ,throwing the odds in our favor. I prefer to keep my money working for me full time in most market conditions (2008 was an exception). If I have a short-term bearish outlook I will sell ITM strikes as opposed to staying on the sidelines until the market trend changes. I am currently puttng the finishing touches on my next blog article where I share that I am selling an equal number of ITM and OTM strikes.

    We don’t have to be right 100% of the time but rather much more often than wrong.

    Alan

  26. Adrian April 19, 2012 2:25 am #

    When reading your methodology I know that you use the 20d and 100d EMA’s. But I wondering if it is possible for me to use the 50d and 200d EMA’s(along with the 20d), instead of the 100d EMA?
    – I am also thinking of using bollinger bands, but need to know if I should just ignore the “20d SMA” (that comes with it) if I am using the 20d EMA instead.(or use them both)?
    – And if I were able to use the 20d, 50d and 200d EMA’s, and the bollinger bands, then do you think this is too many MAV’s to use, or would it be about right?
    I liked the bollinger bands because they show the volatility within the share price and give price reversal warnings too. thanks

    • Alan Ellman April 19, 2012 4:53 pm #

      Adrian,

      Put 100 investors in a room and ask these questions and your bound to get dozens of different answers. I like the shorter term moving averages because I focus on 1-month covered calls. 50-d and 200-d moving averages are generally used for longer-term investing. I like EMAs over SMAs because you get a quicker change to more recent pricing. There are a myriad of great technical indicators and bollinger bangs are surely included in that group. Find the parameters that work best for you without over-evaluating and stick with those. Mine are:

      20-d and 100-d EMAs
      12-d, 29-d MACD histogram (9-d EMA)
      Stochastic oscillator (14-d)
      Volume

      These have worked best for me and may or may not be best for you.

      Alan

  27. Adrian April 21, 2012 1:09 am #

    So when you use say that you use the 20&100d ema’s because it is for the short-term, then how come you don’t just use the 50d instead of 100d ema, as it is in a shorter timeframe?

    I also sent you an email a few days ago titled “charts/indicators”, did you get it?
    If you can answer it then not only would it really help me, but I can post some questions here about the ‘volume’, that I am unsure of. thanks

    • Alan Ellman April 22, 2012 7:45 am #

      Adrian,

      The 20-d EMA gives me the short-term view of price movement I like for my analysis. I then want to compare it to a longer term moving average as further proof of positive momentum. That’s why I selected a 100-d or 5-month moving average. The information gleaned: Is the current trend accelerating higher from the longer term trend? These are the parameters that work best for me. They certainly are not the ONLY viable parameters to use.

      Please repost the chart you are alluding to on the most recent blog article (must use jpeg format).

      Alan

  28. Adrian April 23, 2012 1:24 am #

    I have been thinking that I might actually use the same EMA’s as you, and drop the the 50d&200d ones! It was just that I had already printed out some charts with all those EMA’s I mentioned, and was about to analyse them later.
    I still want to keep ‘Bol.Bands’ on my chart though.

    *Also I am not quite sure what you meant by:- “repost the chart you are alluding to on the most recent blog article”.(?) (I didn’t try sending any chart, but I did send you some questions titled “charts/indicators” about a week ago.)
    Because these are really important questions, I will now send it to your email again. thanks

    • Alan Ellman April 23, 2012 3:37 pm #

      Adrian,

      Your approach seems reasonable. Let us know how you’re progressing with your technical analysis.

      Alan

  29. Adrian April 24, 2012 10:52 pm #

    Yeah thanks, well actually I have left some new questions under the “CBOE VIX” heading for you, but I should have asked you these next ones below first.
    – 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)?
    – And how often I would see this chart(each trade, week, or quarter)?

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