Wait a minute! What if I buy a call option instead of the stock and then sell a call option on that option? I’ll be spending less money than outright purchase of the equity and still generate cash from the sale of the call option! This idea has come to many of you and as a result of your inquiries, this article had to be written. Although not a true covered call write, purchasing a long-term option (more than one year out), called LEAPS, and then selling call options against that position, is an alternate strategy similar to CC writing. Technically, these trades are known as calendar spreads so perhaps we should start off with some definitions:
LEAPS- Long-Term Equity Anticipation Securities. These are option contracts with expiration dates longer than one year. Not all stocks and ETFs have these type of options associated with them.
Calendar Spread- Simultaneously establishing long and short options positions on the same underlying stock with different expiration dates. For example, you buy the December, 2010 $20 call and sell the April, 2010 $20 call on the same equity.
Horizontal Spread- A spread where both options have the same strike price as in the above example but different expiration dates. The terms calendar and horizontal spreads are interchangeable.
Diagonal Spread- A long and short options position with different expirations AND strikes. For example, you buy the December $20, 2010 call and sell the April, 2010 $25 call.
Concept behind this strategy:
The investor establishes the long option position by purchasing (usually) I-T-M LEAPS and then selling a near-term, slightly O-T-M call, the short position. Trades are constructed such that, if assigned, the difference between the spread ($5 in the above case where the $20 call was bought and the $25 call was sold) + the short premium collected, exceeds the cost of the long option. If unassigned, where the price of the stock does not exceed the strike price of the short call, we then continue to write calls and generate a monthly cash flow. The problem in this second scenario is that if the stock price falls, the premiums generated from the short call drops unless we write for a lower strike, which may result in a loss for this long-term strategy as the spread (difference between the two strikes) declines.
Let’s take a look at the options chain for a highly traded equity, INTC:
INTC currently priced @ $20.43
With the stock priced @ $20.43 let’s look for a deep I-T-M LEAPS:
INTC- Deep I-T-M Calls
The January, 2012 $10 strike is purchased for $10.60, $10.43 of which is intrinsic value and only $0.17 is time value. Minimal time value is a characteristic of deep I-T-M LEAPS options.
Next let’s check the near-term, slightly O-T-M strikes:
INTC- Near-Term, O-T-M Options
The next month, $21, slightly O-T-M strike can be sold for $0.43.
Let’s do the math, if assigned:
We collect the difference in the spread ($21 – $10 = $11) + the short option premium = $0.43 for a total of $11.43. We deduct the cost of the long call ($10.60) for a profit of $0.83 per share or $83 per contract. The percentage return is $83/$1060 or 7.8%. All calendar spreads are constructed such that there is a profit if assigned.
If the shares are not assigned (price of stock NOT greater than the strike of the short call ($21), our profit is $43/$1060 = 4.1% and we’re free to sell another option. As noted above, this works well as long as the share price does not dramatically decline thereby reducing the returns on the short options. We also must bear in mind that the long call (LEAPS) is a decaying asset and there will become a time when we no longer own the right to purchase INTC at the $10 strike (when the option period expires). If we continue to generate monthly returns of $43, how long will it take us to retrieve the $1060, if never assigned? Here’s the math:
$1060/$43 = 24 months, not counting any difference in the spread.
Our option is good for about 22 months, so if the option ultimately expires worthless and the spread has decreased, we lose! Diagonal spreads work best for rising stocks where we can take advatage of the difference in the original strike prices.
Advantages of using LEAPS:
- Less costly than purchasing stock; remaining cash can be used to generate additional cash
- A declining stock will have time to recover
- Low time value of deep I-T-M LEAPS make option ownership similar to stock ownership where intrinsic value changes dollar-for-dollar.
Disadvantages of using LEAPS:
- You do NOT capture stock dividends
- To stay active, you must sell options in cycles that report earnings, taking on additional risk
- LEAPS have a delta of approximately .50 to .60 making it difficult to close a position at a profit for A-T-M and O-T-M strikes (option value has not moved up in step with share value). This is less of a factor for I-T-M LEAPS.
- A higher level of approval will be required by most brokerages to allow this type of trading
- The long calls will ultimately expire, stocks will not
- Forced assignment may not allow for a profitable trade
Conclusion:
Purchasing LEAPS and selling a call option on that position is NOT a true covered call write. It is an alternate strategy that has its pros and cons. For most Blue Collar Investors, covered call writing is the better path to take. But to some investors who fully understand the nuances of diagonal spreads, this may be a viable alternative.
The Premium Site:
Okay, here’s the deal…….The premium report, The Weekly Stock Screen and Watch List, has matured into an even better product than I originally envisioned and is anxious to get downloaded into your computers. My team and I have also downloaded additional content and resources for our premium members to support your investment decisions and education. I was hoping to launch this site this week (February 28th) but my web master advised me that there are a few MINOR technical glitches that need attention. I defer to him on these matters especially considering the wonderful job he had done with this site over the past few years.
I also asked him if it were possible for us to do something special for our charter members, those who will help launch this site and he is looking into this. In this regard, perhaps I am responsible for the 1-week delay. I am told that we will launch no later than Sunday, March 7th. Thanks for your patience and inquiries in this matter.
Cashing in on Covered Calls- Recommended Reading:
Thanks to “Farmer Ron” of www.coveredcallsfarm.com for highlighting my book, Cashing in on Covered Calls, for recommended reading. This is a site (still adding content) that, like ours, speaks to the average retail investor and I commend him and his site for helping to spread the word about this powerful investment strategy.
Last Week’s Economic News:
Last week’s reports were a mixed bag so we’ll start with the bad news and finish on a pleasant note;
- Consumer confidence declined sharply to 46.0 well below the predictions of economists and the lowest level since April of 2009.
- Existing-home sales fell 7% in January and new home sales dropped by 11%
- Fed Chairman Ben Bernanke told Congress that short-term interest rates would remain at record lows for at least several more months to help fuel economic expansion
- GDP grew by 5.9% in the 4th quarter, the fastest rise in six years. This stat is the broadest measure of our economic activity
- Durable goods orders rose 3.0% in January, a great sign for capital spending and industrial production
- For the week, the S&P 500 was down 0.4%, for a year-to-date return of -0.6%
Next Week’s Economic Reports:
- Monday: ISM manufaturing, personal income and construction spending
- Wednesday: Fed’s Beige Book and ISM non-manufaturing
- Thursday: Factory orders and productivity and costs
- Friday: Employment and consumer credit
Video now playing on the homepage:
Executing a Covered Call Trade, Parts 1 and 2
My best,
Alan,
Thanks for the Premium site update, but can you share a “ball park” figure for the cost ?
Thanks,
-T0ny
P.S. The Screening and Watch List Reports look great!
Tony,
Please give me a few more days to announce all the the details as I am trying to arrange for special pricing for “charter members”, those who were with me at the beginning, when this site was launched.
My web tech needs to let me know if we can integrate the shopping cart, web site, premium link such that we can offer a different level of pricing to those that sign up initially.
You have my promise that the pricing will be considered more than fair when you see the product and compare to other premium sites.
Thanks for your patience.
Alan
Hello Alan,
I’ve had your book, Cashing In On Covered Calls for a few months now and I’ve read it a number of times. Every time I read it I keep thinking the same question. Who is on the other side of these trades? Who is buying these options? When you look at the volume for the options some are in the thousands.
Thanks,
Ray
Ray,
There arer two sources of option buyers:
1- Market makers and specialists who are required by the SEC to provide a “market” for these options and buy or sell a certain # of contracts at the current bid-ask spread.
2- Traders who are using the leverage provided by these options to generate exceptional profits or as I sometimes say: “hit the grand slam homerun”. We are happy with our 2-4%, 1-month returns in normal market conditions, others are not. For example, if we sold 10 contracts of a $50 call for $1.60 on a stock we purchased for $48, our return would be 160/4800 = 3.3% for the month on an investment of $48,000 (1000 shares = 10 contracts).
The option buyer (holder) is controlling those 1000 shares for $1600 ($1.60 x 1000). If the stock appreciates to $54 by month’s end, the option will be worth AT LEAST $4, the intrinsic value. That’s a profit of $2.40 per share on an investment of $1.60 per shares or a 1-month return of 150%. Those on the other side are undertaking tremendous risk for the possibility of huge returns. Different strokes for different folks.
Alan
Tony says, “P.S. The Screening and Watch List Reports look great!” Where do we find these?
Doug and the entire BCI community,
A few weeks ago I produced a video describing the “Weekly Stock Screen and Watch List”. This is a major (but not only) benefit of your premium membership. The video sits out there in “youtubeland”. I was going to show it next week when the site will be launched but since it was brought up, I’m happy to provide a link for those who want a sneak preview:
http://www.youtube.com/watch?v=OaP_UyAG3yQ
Thanks to one and all for your continued interest.
Alan
I read your book two years ago and have improved my take from my unearned income considerably. I have even made up my losses from the recession and have given the book to my son to help him with his investments. My IBD subscription just expired and I’ve been waiting and hoping for a similar product that would be less time consuming. I think it may have just come my way. I await details on your premium newsletter. Thanks for all your advice. T
Terri,
I am so pleased to hear about the role my book played in your financial accomplishments. Congratulations and much success to your son as well.
Alan
Goldman Sachs puts out a list of recommended stocks for CC writing. Their system is based on longer term options usually O-T-M strikes only, much different from our BCI system. I decided to run this list of stocks through our system and most were eliminated due to poor chart patterns. The two that did survive were:
CTSH
CTXS
I also screened the top rated stocks from “The American Associaion of Individual Investors”. Here again, only two survived the BCI screens:
WRLD
CTSH
In my view, the reason for such a discepency in screening results is that the BCI system filters stocks SPECIFICALLY for 1-month, covered call candidates. Look for a journal article to be published within the next few weeks for a discussion why I am so adamant about using this time frame when writing CCs.
Alan
Good discussions this week. Keep it comin’.
As demonstrated in your viedo, you initiated two entries to establish a CC position. Would it be move convient to use one entry as a Buy/Write to establish the CC position?
Clarence,
Excellent point. Some brokerages permit use of a combination order form that allows for such transactions. Others you must “leg in” as per the video. Check out this journal article I wrote a few months ago:
http://www.thebluecollarinvestor.com/blog/buy-write-combination-order-form-plus-charts-of-the-week/
Thanks for pointing this out.
Alan
Re #11 and #12 –
Some brokerages will express it differently. Fidelity, for instance, has a place that one clicks on to Trade Options, and another to Trade Multi-Leg options. I note that the comm. is 7.95 for the stock plus .75 per option. If I execute with it all in one trade, a multi-leg/ buy-write, I get charged one basic 7.95 plus the .75 each option. But if I leg in, I would pay the 7.95 twice! This is because for the basic comm. nobody cares what you are buying. On my multi-leg exercise, I enter the total debit or credit. A $30 stock with a $2 option would be ordered as a $28 debit. There is a place to alter that, such as tho it were a limit order. If I entered, say, $27.80 debit, that is the most I could be debited. And one need not care if the .20 came from the stock side or the option side of the trade. Just FWIW.
Don B.
PS – I meant to say “On my multi-leg procedure”, not “multi-leg exercise”. Sorry.
Don B.
Alan
Do you consider insider trading in your system?
Looking at NETL I think it meets BCI system requirments, but many insiders are selling in Feb.
Your thoughts.
Thans JIM
Jim,
You did locate a great performer and a candidate for a CC write. The question is do we eliminate it from consideration due to insider selling in February. I do not.
Years ago, I attempted to quantify a relationship between insider activity and share price direction and could not. For example, for NETL, despite the insider selling in February, the stock is up in value over 20%.
For members of our BCI community who are looking for such information:
1- Go to the finance.yahoo site
2- Type in ticker and “get quote”
3- Click on “insider transactions” in the left column
I do not factor insider transactions into my choices but I have no problem using this information if it concerns you or any investor, but I would make it a minor factor in my decisions.
Alan
Re: Posts 15 & 16
In many technology companies, a substantial portion of executive compensation is in the form of stock options. High level execs usually have to file some sort of stock disposition plan (I”m not sure of the legal term here) with the SEC. These plans are filed months in advance (sometimes longer) and in many cases have no specific relationship to current operations.
Barry
BUCY:
This stock has been a cash-generating machine for BCIs for the good part of a year now. On February 18th, it reported a positve 4th quarter ER where the earnings per share grew by 21%.It also announmced a dividend of $0.025 per share.
CEO Tim Sullivan expanded its potential market from $15 billion to $30 billion by purchasing Terex (TEX) for cash and stock.
What a trifecta! Positive earnings, bullish guidance and business expansion through acquisition.
Check to see if this equity belongs on your watch list.
Alan
THE PREMIUM SITE HAS BEEN LAUNCHED!
Check out the link on the upper right of the homepage.
Click on ” more info” to learn about this _________product. You fill in the adjective after you’ve viewed the video.
Now is your chance to be part of a select group of BCIs who become charter premium members and will receive a LIFETIME 10% discount for this enrollment.
I appreciate all the emails asking about when this site will be launched. Once you view the video, you will understand the time and effort that had to be invested to create a product like this.
Thanks for your patience, NOW GO CHECK IT OUT!
http://www.thebluecollarinvestor.com/membership.shtml
Alan
Alan:
I just watched the video and signed up for the first month of premium membership. On just a cursory inspection it appears to be a real timesaver and potential money maker for us BCI’s. I look forward to giving it a try this week. Thanks!
Steve Q.
Alan:
I too have signed up for the first month of the new Premium service. Admittedly, to date I have not put it together in the fashion you provide but have probably done many of the details. This should provide something of a confidence factor. Looking fwd to the first screen with interest. Thank you.
Don B
Don, Steve and fellow BCIs,
There are currently 5 reports downloaded to the premium site. Check out the most recent and you can start seeing the benefits RIGHT NOW.
Alan
Unwind mid-contract?
Many of you have purchased great-performers and sold strikes that are now deep I-T-M. This may be an opportunity to unwind or close your positions and use the cash to execute another CC write before the current contracts expire. For example, if you sold the $43 call for ANR, the cost to buy back the option and the intrinsic value is the same. This means that your share value appreciation and B-T-C cost is the same so you unwind “for free”. This cash can then be used to establish another position and perhaps generate another 1 to 1 1/2 % this cycle. The key is to have little or no time value remaining on the current option. I will be writing an article on this subject in the near future.
Alan
Alan,
Stock screen is great! Makes life easier for sure.
One suggestion. Can you put the screen in an excel format or csv so it can be imported into charting software?
I could create a watchlist with this weeks info and then look at the charts easily without having to enter each symbol.
Thanks again and have a GREAT day!
Tony
Tony,
Thanks for your suggestion. The premium site, as is this general site, will be a fluent product, responsive to the needs of our members. Our team is currently working on adding even more resources to the member resource center and refining the “Elite Calculator”. I will bring your idea to their attention.
I welcome and appreciate all ideas from our general and premium members.
Alan
I’ve had several inquiries from those who have become premium members as to what action they need to take to maintain the discounted “charter” membership after the trial month. For those who opt in by March 16th,
the answer is NO ACTION AT ALL. The site will recognize you as a charter premium member and as a result will receive the lifetime discount.
Thanks for all your kind and supportive emails about our new premium site.
More info:
http://www.thebluecollarinvestor.com/membership.shtml
Alan and our BCI Team
Hi Alan,
You don’t take into account transaction fees when calculating returns, but it seems that it can have a big impact. I’ve been working on paper for a while and am about to dive in to the real thing. I’ve been using Scottrade as my brokerage for a while. The fees, as I calculate, is $7 to buy a stock, $7 + $1.25 per contract to sell a covered call, and $17 for assignment, for a total of $32.50. If I did this for one contract of 100 shares, the per share total transaction fee is 32.5 cents per share. That amount is usually a very large percent of the time value of a contract and would have a huge impact on the compound returns. It seems that either Scottrade is way too expensive for writing covered calls, or I would have to write a minimum of 3 contracts on a particular stock to bring the per share cost down to a more reasonable 11.6 cents, though that is still not small enough to ignore in return calculations.
nog,
Scottrade does seem a little more expensive. I use tradeking at 4.95 per trade and 65 cents per option. There are some other cheaper ones out there too.
Regardless, for my own piece of mind, I added my commission costs into the calculator (along with a lot of other things I wanted personally). You might want to do the same.
Thanks Rob,
TradeKing is cheaper: $4.95 to buy a stock, $4.95 + 0.65 per contract to write a call, and $4.95 for assignment. Total for 1 contract is $15.50, or 15.5 cents per share. Much better, but not insignificant. Anyone have a better brokerage?
nog;
I also use TradeKing. Fees are quite a bit lower that Scottrade and they still provide excellent customer service. I have been doing cc’s since June of last year and did a lot of research before I decided on TK. Good Luck.
Steve
nog and all,
I use USAA (800-227-1741) which charges $5.95 per trade and $0.75 per contract if you accept electronic statements. Commisssion impact is more significant for 1 contract than multiple How many of you remember when commissions were $50-$200 per trade! Trading commissions when doing even a couple of contracts is almost a “non-event”. For example, here is a trade I did 2 days ago, copied from my brokerage account:
03/01/2010 Sell BUCYRUS INTERNATIONAL INC-A (HIK 03/20/2010 C 65.000) (3.000) $2.05 $606.79 N/A
03/01/2010 Buy BUCYRUS INTERNATIONAL INC-A 300.000 $63.77 ($19,135.75)
Calculating without commisssions:
205/6377 = 3.21%
Calculating with commisssions:
$606.79/$19,135.75 = 3.17%
I would also make sure that there are no hidden charges like a fee if a minimum account balance or requiring a minimum number of trades.
Also, from time to time, you will need to speak to the trading desk, not for advice but other related matters (why isn’t my trade being executed? ). Service should be handled in an expedient and professional manner.
Alan
Hi Nog,
Yes, you are correct! Brokerage can have a BIG impact on option returns…
Prior to my new broker, I used to pay $14.95 to buy the stock, $14.95 to sell an option AND another $14.95 if I was exercised… Thats a MASSIVE $45!!! To say the least, I wasnt satisfied with that deal…
Now, with my new broker I pay a big “ZERO” to buy the stock, 4.95 (+ 50 per contract) for options, and $4.50 if exercised…
On 1 contract thats $9.50… (Beats $45)… Im happy with the service…
The brokerage is Zecco
Dave D
Thats zero to buy stock, 4.50 (+ .50cents per contract) and 4.50 if exercised… 9.50
Nog,
There are many brokers who specialize in options. I am certain you can find many charts using google comparing rates. In fact, many of the site themselves do this as a way to “sell” their service to you
I will back up Steve Q. Their customer service (particularly their online chat system) has been EXCELLENT for me.
Alan is also correct. The more contracts you sell, the less the impact. Of course, this mean little when first starting out and you may only be able to do 1 contract. But that is the nature of the game. You will just need to account for those commissions in you calculations if you desire.
Alan & All,
These postings are getting to be fabulous – interesting and informative indeed.
If you do not mind my somewhat repeating myself (post #13), I will say this. Using Fidelity, 100 shares online would be a comm. of $7.95, and one option .75. Total (8.70) But if it was a low cost (unsure how low) option, there would be zero option comm. Upon assignment, that would come to (another 7.95) $16.65. This comes to 17c per share overall. Using 300 shares as an example, it would be the same 7.95 plus 2.25 = 10.20. Then if called add 7.95, again zero for the calls, for a total of $18.15 which is 6c overall.
Their service is wonderful – they answer the phone with almost no waiting and they are totally knowledgeable. When they do not know, they say so and find out. (No, I do not work for them. ) Thanx.
Don B
Alan,
As volatility continues to decline, I’m having increasing difficulty finding option premiums which produce decent returns, particularly for the current month, and particularly for ITM strikes. For example, using the list of stocks from the premium site which passed all screens, virtually none offer more than a few cents of time value premium for the last 16 days of the current month, on the nearest ITM strike. This seems to force me to either next month’s strikes or to ATM or OTM strikes for the current month (and even those returns are meager). I’m not trying to be greedy, but I’m also not eager to take on risk without much reward, and with nearly all of these stocks at or very near recent highs, it seems the downside risk is disproportional to the reward. Can you offer any insight?
And thanks much for the premium site. I’ve been following you for the past year, and love your approach, but have been too lazy to do the research myself. The premium site solves this dilemma for me!
Larry
Larry,
First, let me welcome you as a charter premium member. You bring out an excellent point about profit returns while at the same time highlighting one of the exceptional features of the “Weekly Stock Screen and Watch List”.
When selling 1-month options, time value will erode slowly in the first week or two of the contract and then “fall off a cliff”. That’s where we are now: declining time value which is our bread and butter, our profit.
To get any significant return at this point in the cycle, we would have to look at A-T-M strikes or stocks with higher historical volatility. In your comment, you seem to lean towards an I-T-M strike so we would seek out more volatile stocks.
Enter the premium report: The last column of the current watch list is headlined “beta”. Stocks with high beta will react with greater volatility than the S&P 500 and therefore usually have greater time value associated with their options. This is different from “implied volatility” which relates to the pricing of a particular option.
This is how you can approach this dilemma using the most recent report: Scan down the “beta column” for high ratings, say between 1.5 and 2. We see BUCY with a beta of 2.12 and ANR with a beta of 1.98. In a matter of seconds you have two potential candidates, given your guidelines. Run the numbers through the Ellman Calculator and make your decisions.
Alan
Thanks for the reply Alan. In your calculations you didn’t account for the cost of assignment, which (if I’m not wrong) would be the usual situation. I wasn’t able to determine the cost of assigment from the USAA web site, but let’s assume that it’s just $5.95 per contract (I’ve seen assignment fees as high as $20 [per contract] at some brokerages.) Then your total fees are $32 to buy the stock, sell the calls, and fund the assigment. So your profit is (205*3 – 32 / 19,135.75 = 3.04%. Of course, if working with smaller amounts, say 1 contract, then after-fee profit is 2.9%. Following this along, the % return for one contract on a $20 stock with everything else being relative, the return would be just 2.3% instead of the 3.2% return if fees were ignored. On a compounded anual basis (for 1 month contracts) that gives a 31.3% return (still not bad) rather than a 45.9% return (fee free). Finally, for a $20 similar stock and option for one contract, using the fee structure from Scottrade produces a return of just 1.36% … ouch rather that the “juicy” 3.2% return when fees are ignored.
nog,
I’m glad to follow-up on the calculations of the example I gave in comment # 31. First, before I get to the actual example, let’s assume I sold an A-T-M call with those calculations (returns would have actually been higher because time value is highest for A-T-M calls). If the shares are assigned, the fee would be $5.95, the same for any buy or sell order up to 1000 shares. So let’s deduct $6 from the $205:
Profit = 199/6377 = 3.12%, instead of 3.21%, a non-event.
However, this was NOT an A-T-M strike, it was O-T-M so let’s calculate the ACTUAL situation:
If the shares are assigned as in your hypopthetical, the stock value has appreciated up to or past $65, the strike, otherwise there would be no assignment. That would ADD an additional $1.23/share or $123 per contract ($65 – $63.77). Our profit now increases to $322/contract( $199 + $123). Our profit:
322/6377 = 5%, 60% annualized.
Now, if you decide to institute an expiration Friday exit strategy, your shares will NOT be sold and your profit for this month would be even higher, but not by much.
Many years ago, commissions were a major factor in our investment returns. Today, they are not. You bring out a valid point, that those who sell 1 contract at a time, are affected more than those selling multiple contracts. But even as you say, it still isn’t so bad.
Covered call writing isn’t for everyone. I say that time and time again. But one of the biggest mistakes one could make would be to eliminate it from consideration based on online brokerage discount commissions.
Finally, there was a time when I was selling one or two contracts at a time. Now I can sell a lot more because good success led to outstanding success.
My best,
Alan
Strange – I have a USAA acct using one of their mutual funds. YET, I have yet to figure out how to find out about their brokerage service. I have looked all over their statements & website.?? Alan?? Anyone?? TIA.
Don B
Don,
Here is a phone number:
1-800-227-1741
Web:
http://www.usaa.com
Alan
NTY:
On January 28th this company reported its 4th consecutive positive ER surprise. Sales were up 14% year-to-year and appear headed up 18% for the first month in the next quarter. Analysts are jumping on board with recommendations and increasing earnings estimates, driving up share price. Despite the rising price, it is attractively valued @ 11.9 forward PE and 2.41 price-to-book ratio.
Our Premium Watch List Report shows that the company’s “cosmetics-personal care” industry is ranked # 19 and the stock has a beta of 0.97 which means it trades with a similar volatility as the overall market.
Check to see if this equity belongs on your watch list.
Alan
ARST:
Reported earnings AFTER the bell yesterday and disappointed the “Street”. It also gave bearish 4th quarter estimates. Shares are down 9% pre-market. Beware of ERs!
Alan
I use Just2Trade. They charge $2.50 for stock trades, $2.50 (plus 0.50 per contract) for options, and $20 if exercised.
Final input on commissions: I’ve been researching various brokerages paying special attention to fees especially as it applies to options and option assignment. The best I’ve found so far is MB Trading which charges $4.95 per trade and $0.95 for each option contract and $0.95 for each contract assignment. So, if I bought 100 shares, sold the covered call, and that contract was assigned, the total fee would be $4.95 + $0.95 + $0.95 = $6.85. The total cost for 2 contracts would be $4.95 + (0.95 + 0.95)x2 = $8.75. That does make fees an almost insignificant amount. Their web address is http://www.mbtrading.com/
nog,
Perhaps I missed it on the site, but I think you are not calculating properly for assignment. When assignment occurs, you are selling 100 shares. Therefore, they would charge 4.95 for that sale (the cost of buying stock).
And keep in mind, this system often employs exit strategies if the stock is still in good standing. You will find that you are assigned less than you might think.
I agree that what you say makes perfect sense and it’s what I would expect. But, I talked with reps on the phone twice about this and both times they said the fee was 1 cent per share, or $1 per contract. I’m signed up for a virtual account so I can practice with their system with play money. That will show all costs. I’ll update this when I can confirm through experience. I’ll know in 2 weeks when ITM contracts are exercised.
CAGC
This stock is headed for the moon!
I ran it through the BCI system and it has passed technical and fundementally…
I also checked out the returns for MARCH EXPIREY (only 14 days to go!)
If one sold the March 25 call they would get a nice return of 2.3% roo… Wait, theres more… They would ALSO get DFownside Protection of 9.5% All with 14 days to do…
This sounds too good to be true… I looked to see if they were releasing an earnings report, but they were not…
Can anyone find a reason NOT to trade this deal? Please let me know!
Dave
This does look like an interesting company, and it is certainly taking off. Of note, there is no MSN Stock Scouter rating. It’s also a Chinese agriculture company and hard to evaluate. What gives me pause is that I feel that it is a risky company. I think the spirit of the “method” is to sell covered calls ON STOCKS WE WOULD OTHERWISE LIKE TO OWN. I think the question to ask yourself is: if you weren’t going to sell a call, would you still want to invest in this company? If selling covered calls is a conservative investment, would you consider this company to be a conservative investment choice? I’m not sure I do, but your evaluation might be different. Remember, it’s a Chinese agriculture company!
Dave and Nog,
A wonderful assessment of both your parts! I congratulate you on making evaluations few average retail investors could make.
This is a great example that reflects the significance of ones risk-tolerance in CC writing (as in most forms of investing). A few points:
1- CAGC is an American Depository Recepit (ADR)…MSN usually does not give Scouter Ratings for these foreign companies. In my system we do NOT eliminate a stock for this reason as long as it meets all other system criteria.
2- With 2 weeks remaining to expiration, time value is “falling off a cliff” and the only stocks will will give a significant return are those with high volatilty, riskier stocks as Nog points out. CAGC has a beta of 2.5, very high.
3- A way of offsetting this risk is to sell an I-T-M strike and have a cushion, insurance, if you will which is paid for by the option buyer, not us. Good point by Dave.
4- Looking at a chart, we see a strong chart pattern with all systems GO. We also see 2-week time frames when the stocks declined in value $3-$4 and broke below short-term support (20-d ema). This usually occured as MACD turned negative.
5- If I entered a position like this, I would look to unwind if support and MACD dictated.
An extremely conservative investor would stay away. A more aggressive investor would take a position and be prepared to act if necessary. Different strokes for different folks. Thanks to both for such lucid evaluations.
Alan
Hi Alan,
Just a question about buying stock without selling options on it…
On more than a few occasions I will see an opportunity where all the technical indicators and price action are showing very bullish sentiment (at least for the short term)…
Do you ever sense that sometimes its best to just buy the stock, hold onto it for a short period (anywhere between 3 and 30 days) then sell it at a profit?
Also, what has your experience in doing this been like, and do you reccomend doing this?
Thanks Alan…
Dave
Dave,
It is impossible to accurately time the market short term. Too many things can go wrong. But stocks do go to the moon from time time especially when there is bullish sentiment to start with. In those situations one wished he hadn’t sold the call despite a 1-month return of 3-6% (if you’re talking about ANR, I have that one too!).
This initial bullish sentiment can be maximized by selling O-T-M strikes which I do all the time when chart technicals and market tone is pointing north.
Now if there is a stock you love long term, you may want to own it and not sell calls. I did this with GOOG a few years ago and still own those shares. This is not part of my CC system, just another way of investing.
Bottom line: When selling CCs, if the deal is there, take it. If all indicators are extremely bullish consider favoring O-T-M strikes, thereby throwing the odds in our favor.
Alan
Alan –
I re-read your comments on Splits in CCC just now. Very clear. But I must ask if there is anything in perhaps typical market behavior to watch for when a split is on the horizon, such as in the case of NETL. This stock has marvelous technicals, and is probably otherwise a good candidate for CC writing. TIA.
Don B
Alan –
A question: The 2/26 Weekly Screen has BCSI in the yellow section, with a ? under the MACD/Stochastic. Looking at a chart for that date, it looks to me like that stock is very positive on both counts. Will you please explain? Many thanx.
DonB.
Don,
I’m glad you brought this up because there hasn’t been much discussion of splits on this site in quite a while. That’s been a product of the market still recovering from the recession of 2008 and as a result there has been no split activity. I suspect that there will be a resurgence of “split talk” this year.
For those who own my first book, “Cashing in on Covered Calls”, chapter 17 covers this subject.
My response will assume the split is a legitimate one (usually after a run-up in share appreciation)and not one created to draw attention to a floundering company. Points to consider:
1- Even though company market cap remains exactly the same, investors LOVE stock splits. It’s psychology at work. Many think that the price will return to its original level quickly. Retail investors feel that they can now buy more shares because it is “cheaper”. For me, I like splits because it demonstrates that the Board of Directors have confidence in the company’s future.
2- After the announcement there is oftentimes a bump up in share price. That has already transpired with NETL. After the split has occured, the share price may decline slightly or consolidate and trade sideways. There is no guarantee that the stock will behave in this manner, but many more do than don’t.
3- I look at a split as another asset in that company’s column when making my decisions. I will not buy a stock soley due to the split but if I’m deciding between 2 stocks and one is splitting, I’ll go with that one. If I’m deciding on a strike, I’ll lean to the O-T-M.
Bottom line: I like stocks that have announced LEGITIMATE splits and have met all our system criteria.
Look for an article on stock splits within the next few months.
Alan
Don,
The premium report you are referencing will always show a “?” if there is any technical situation that can be of the slightest concern. By looking two columns over, under “comments”, you will see that MACD is positive (up arrow) and Stochastics is listed as neutral (sideways arrow). This will alert you to the fact that the stock has been in an “overbought” position for a while, and although it could stay there a lot longer, it bears watching. I feel that such a categorization of this parameter will give more information than a totally positive reading where the STO may have broken above 20% and heading up. The more information I provide to you, the more valuable these reports are.
This is just one example of why it took nearly a year to develop this product.
Alan