We know to avoid earnings reports when writing covered calls or selling puts. This is easily accomplished because we have a reliable idea when those reports will become public. Premium members can access these dates directly from our weekly reports here:
Premium Stock Report: ER Dates
Those who are not premium members can access this information from free sites like earningswhispers.com.
However, there are times when a company will pre-announce estimates of forecasts weeks or days prior to the actual announcement. This tactic can be viewed as a “mid-course correction” giving the investors a “heads-up” so there aren’t extreme negative surprises on the actual earnings report date. Pre-announcements can be either positive or negative but most tend to be geared to pessimistic forecasts. This article will highlight, explain and categorize the reasons why companies may choose to pre-announce earnings reports.
Regulatory
Companies that trade shares on US exchanges are subject to the rules and regulations of the SEC (Securities and Exchange Commission). The SEC serves to protect investors and requires corporations to share and disclose meaningful information to all investors. In other words, all investors should have the same information within the same time frame. As soon as meaningful information is obtained, companies are required to share that information with the entire investment community.
Cynical
Skeptics may feel that pre-announcements are more manipulative in nature, avoiding the embarrassment of competitors positive reports during earnings season. As analysts use the mid-course correction to re-analyze report consensus, there may actually be a positive tone when the reports are actually made public.
Marketing
The hope is that their investors will focus in on the openness of the early disclosure rather than the disappointing results. When earnings season arrives, companies that pre-announce may out-perform those that did not, attracting future investors rather than losing current ones.
Legal
Shareholders can sue companies that have information that is not shared with their investors claiming that money was lost as a result of not having information which the company was aware of. For example, investors who purchase the stock after the company had access to the unfavorable report can claim a lack of transparency on the part of the corporation. These lawsuits may not decide favorably for the investor but can prove to be expensive and time-consuming for the company.
Discussion
Next live events
- Dallas Texas: October 5, 2017
- Palm Beach Gardens Florida: October 10, 2017: Information to follow
Market tone
Global stocks set record highs this week in an environment of moderate growth and accommodative central bank policies. European shares have been laggards impacted by the recent rise in the euro, which hurts export competitiveness. The price of West Texas Intermediate crude oil remained unchanged at $46.35. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), was steady at a historically low 9.32. This week’s economic and international news of importance:
- Equity prices continue to rise, buoyed by a solid start to earnings season and steady interest rates. Among the indices setting records this week were the S&P 500, the MSCI World, the Russell 2000 and the Nasdaq Composite
- For the year ended March 2017, foreign investment in US residential real estate hit a high, according to the National Association of Realtors
- Efforts by Senate Republicans to repeal and replace Obamacare went down to defeat this week, and work to repeal the 2010 health care law and replace it later has been complicated by news that Arizona senator John McCain was recently diagnosed with an aggressive form of brain cancer
- The Bank of Japan postponed by another year the date it expects to achieve its 2% inflation target
- European Central Bank president Mario Draghi said the bank did not discuss tapering asset purchases at its meeting on Thursday but would address the issue this fall
- With 21% of S&P 500 companies having reported, the Q2 earnings season has gotten off to a solid start. Seventy-six companies reported an 8.6% rise in earnings on 5.4% revenue growth
THE WEEK AHEAD
Monday July 24th
- Global July flash purchasing managers indicies
- US existing home sales
Tuesday July 25th
- German business sentiment
- Wed, July 26th
- United Kingdom Preliminary Q2 gross domestic product
Thu, July 27th
- US Fed interest-rate decision
- US Durable goods orders
Fri, July 28th
- US Preliminary Q2 gross domestic product
For the week, the S&P 500 rose by 0.54% for a year-to-date return of 10.44%
Summary
IBD: Market in confirmed uptrend
GMI: 6/6- Buy signal since market close of July 13, 2017
BCI: I am fully invested in the stock portion of my portfolio currently holding an equal number of in-the-money and out-of-the-money strikes. Planning to move to a more bullish position for the August contracts favoring out-of-the-money strikes 3-to-2.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a bullish outlook. In the past six months, the S&P 500 was up 9% while the VIX (9.32) moved down by 20%.
Much success to all,
Alan and the BCI team
Premium Members,
This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member site and is available for download in the “Reports” section. Look for the report dated 07/21/17.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
http://www.youtube.com/user/BlueCollarInvestor
Since we are in Earnings Season, be sure to read Alan’s article,
“Constructing Your Covered Call Portfolio During Earnings Season”. You can
access it at:
https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/
Best,
Barry ([email protected]) and The BCI Team
Justin,
Yep, I’m a dinosaur on the DOS side of the equation. While it may be possible to duplicate the automated database upgrading that pulls closing quotes out of my Metastock program and parses them into various spreadsheets, it might take me weeks or months to duplicate and debug it in Excel. Why fix what ain’t broken? I use Excel for everything else since the real time connection is a major plus.
IB is great on commissions, particularly with free assignment and exercise. They also pass on liquidity rebates – better fills and sometimes, even negative commissions! They platform is fine for basic buying and selling but it can be a nightmare when it comes to configuring the more complex aspects of the platform. I avoid upgrades (occasional new bugs) until I’m forced to do so because I do what I do and upgrades don’t enhance that. So I’m not at all surprised that you had issues pulling down the option quotes from them. It’s above my pay grade so please don’t explain it to me because understanding it will only confuse me :->)
Spin
Well my dull and boring, plain vanilla mostly ITM covered calls portfolio earned 2.85% this month – you other guys with your Titanium Butterflies and Reverse Strangled Budgerigars must have trounced that right? 🙂
Hi Justin,
my exciting and entertaining, near the money covered call portfolio did almost the same.
“July expiry weekend report”
Total account value : Up 3.2% – Very happy.
5 positions exercised
4 positions gapped down early in the contract. I applied the BCI 20/10 guideline successfully.
Now I am aprox. 60% in cash, and was waiting for the new Stock Screen to complete my August trades this week.
Note : I am not bragging. I owe this result to the BCI team and the BCI community. Thank you all.
Roni
Justin,
interestingly, all my tickers were different from yours
Justin,
Happy weekend to you in the “Down Under”! You made me smile with the “Titanium Butterflies……” comment :). Iron Butterfly was an old rock band and maybe Iron Maiden too :)?
I had a 4.4% expiry but that was luck since I bought extra Tech during the June dip days and it popped. I did not cover it but my covered calls on GLD, XLI, XLV and XLF all survived and I still have the shares.
I mentioned at the end of last week’s marathon thread that I don’t plan, yet, to sell any calls for August since VIX and many IV levels are very low. You have to be ATM or ITM to get anything. But I suspect the picture is different with individual stocks off the Premium List.
SPY was up 1.7% during the July expiry so we and Roni – and I am certain many other friends here – beat that important benchmark handily! It is equally important to beat it when it goes down. Covered call writers should have no problem doing that even without Reverse Strangled Budgerigars 🙂 – Jay
Hi Jay,
as Alan says, “It is like riding a bike downhill when the market is bullish”.
So let’s see how we fare when it is bearish.
I promise to report losses when they happen.
Roni 🙂
Hey Roni,
I am certain you will report your numbers truthfully. That eliminates you from any job on Wall Street. You may as well stay in South America :).
I face August with uncharacteristic indecision. I don’t know what the hell to do. There is no premium above and loads of risk below. A tough month to trade. – Jay
Nice going Roni & Jay! I was also looking at 4% Jay until MDSO changed their ER report date and HQY went into a tailspin in the last four days of the contract. HQY was a good demo though of the value of an ITM cc, since the stock lost 8.1% from my buy price but my cc position only lost 2.3%. An interesting stat: If you average 2% in earnings months and 2.5% in the other eight months you’ll make just under 32% annually compounded (assuming my math is correct.)
I’ve been watching lots of the Tasty Trade vids so I’ve been learning all the weird option strategy names – might have been even better though to get them renamed by the Monty Python team 🙂
Re the August contract my list of potentials is all the stocks from the BCI lists back to the start of the year (much easier since I’ve automated my option chain scanning system) – I reject the vast majority including bearish charts and stocks that have had a recent spike, but am still finding enough promising candidates, though I’ll probably open about half my new positions later in the week.
Justin
Hey Justin,
Most definitely watch the TastyTrade videos and get on their free daily e-mail list.You will get an option spread trade idea every day. Don’t take them all but at least read them so you get the sense of how options traders think. It is very educational. It can also be useful in strike selection and position management on CC’s and CSP’s. -Jay
Justin,
thanks, and same to you.
About MDSO, as I told you before, it does happen frequently.
Last week I had to exit MGM 07/28 call, ER rescheduled from 08/03 to 07/27.
No big deal, but still, gained 850.00 instead of 1,024.00. 🙂
Jay,
About August, just entered FIZZ and PANW 08/18 trades, and have VEEV and ADBE 08/18 placed last week.
Also planning to enter SWKS and AVGO this afternoon.
All buy/writes.
Roni
Thanks Roni,
My post was the first with a blue button under it so I hope this does not look like I am replying to myself 🙂
You have picked out some great tickers. I know you are a busy guy and buy/write has worked for you at the start of these new expiry months.
A suggestion I might make if you have the time is “buy/wait” legging in every now and then. SWKS is the perfect example. It’s a great stock down over 1% today. Perfect buying opportunity! But don’t cover until it bounces back :)! – Jay
Thanks Jay, will do.
Hey Roni,
Hope you had a good Monday!
Where I was going with my post in these low premium days is we have to be smart on every penny in our options selling. It makes a difference if you buy stocks on down days then cover them on up days.
That, of course, assumes you are Karnac like me able to see all market moves in advance :). Yeah, right…. – Jay
Looks like we were looking at some of the same stocks Roni – I jumped into VEEV too since the 60’s were offering 2% with 6.6% downside protection (and a bullish chart.) Also was looking at FIZZ but haven’t pulled the trigger yet. With the low VIX I may have to accept a bit less than 2% – will see what becomes available later in the week I guess.
Jay – actually I was looking at potentially doing some spread trades but couldn’t seem to find similar value to the trades the TT guys were claiming – no doubt due to the low VIX. Anyway I’m happy just doing cc trades for at least the next few months – the July contract period was the first time I’ve committed any real amount of cash to doing so.
Justin
Justin,
This is only my opinion but please take it slow. TT has great trade ideas every day. But please do not take them until you can explain them to a friend at a party 🙂
It is hard to go wrong with covered calls. You might lose opportunity but never real money unless the stock goes down and that would screw you anyway. – Jay
Jay,
“TT has great trade ideas every day. But please do not take them until you can explain them to a friend at a party.”
Good advice. If you can’t talk the talk and explain the ins and outs of it, you’re not ready to do the trade.
“It is hard to go wrong with covered calls. You might lose opportunity but never real money unless the stock goes down and that would screw you anyway.”
As a binary choice, that’s true. If you look beyond that binary choice, not so much. You may rethink the entire premise in a bear market.
Spin
Hey Spin,
Thanks for the kind words!
I am still long this week overweight Tech, Defense, Healthcare and SVXY. Let a bear in the room and I will be lunch :)!
How are you lined up for the week? – Jay
Picked up some FIZZ after all on Tuesday Roni as the 100’s were offering a ROO of 2.5% with a ‘DP’ of 3.2%, which seems a good deal on a good stock with a relatively gentle uptrend.
Justin,
I don’t know how serious I am but at times my positions can get there. Only here and there these days but in years like 2008-2009 I had some size, with size being relevant to what I normally do.
When you have a position like a covered call, with only two legs, it’s not hard to keep track of. As the number of legs increases, it becomes harder to keep track of. For the most part, generating spreadsheets on the fly means taking an existing spreadsheet and quickly adapting it to what’s needed if it isn’t an exact match.
There’s no question that Excel and VBA is far far superior but the reason I’ve stayed with the DOS is that I use a shell macro program and it functions in many different programs thereby enabling integration into batch files and automation. Don’t confuse me with a tech savant. I’m a Neanderthal-like throwback who is content with what I have. If it ain’t broke, why learn how to fix it?
“Can you download option chains from IB using DDE? ”
Yes and no. Last I knew, there’s a quote limit which is based on account size and trading activity. I’ve never run foul of it so I don’t know what the actual number is. Let’s say it’s 300 symbols. That allows you to have 300 quotes live in Excel. You can change them at any time. But it’s your 300 selections. If so inclined, you could craft a spreadsheet that captures them at time intervals if you want to build an intraday database. But AFAIK, there’s no searchable database that you could scan as you do with nasdaq.com. The winning answer would be to check out IB’s web site (or call) and see if what is available to retail like us might suit your needs.
Spin
Spin,
That’s good if you can handle the complexity of all the legs in a trade – personally I’m trying the KISS approach with CC’s currently and see how that works out. The last time I remember people talking about DOS shells was about twenty years ago in the computer course I was doing part time while working. I got into computers in ’89 and was accessing the net via my BBS using UNIX commands and a 1200 baud modem, and getting the latest DOS version and games from friends, so I was there in the dinosaur years too 🙂
I made a few attempts with IB support to d/l option chains but gave up as it seemed like it would be too much work – the gwebcmd program does the job well enough however. Gwebcmd btw uses DOS batch processing to grab the data from nasdaq.com.
Justin
Hi Jusrin,
it seems like you did a better trade than mine.
I bought FIZZ @ 105.00, and sold the 08/18 105.00 call for 4.10.
As I write, FIZZ is at 102.00, getting near my break even.
Let’s see what happens.
Roni
Roni,
You probably know this but while you are nearing your BE on an expiration basis, your position is already in the red because the 50 delta call sold only partially hedges the drop in the stock. It will take time decay to reverse that. The reason I mention it is that very often, people don’t realize that the losses begin immediately and they wonder why when the stock gets to the expiration BE long before expiration, they have a sizable loss. None of this is important if you are willing to hold FIZZ long term and reduction of cost basis is your objective.
Spin
Roni,
Yes FIZZ lost a bit ‘last night’ (9:10 am here in Oz) – hopefully ‘The trend is your friend’ will apply with them 🙂
Still adding positions one at a time – got some EDU 80’s at a ROO of 2.2% and some more VEEV (65’s this time) at a ROO of 3.6%.
Spin,
I don’t know if RONI uses the DCCC worksheet, but if so he can immediately see when positions are in the red. I find it quite useful myself, though I’ve added some major modifications of my own, being a spreadsheet junkie from way back.
Justin
Justin,
The only reason that I mentioned the difference b/t current BE and expiration BE, is that if unaware of the difference and looking to cut losses after futther drop, there may be an unpleasant light bulb moment. If the stock drops prior to expiration, one only has to look at the price of the stock and the price of the short call to see that the position is in the red.
If the expiration BE is $101 and the stock drops to $101 now, given that it’s was a 50 delta call that was sold, a $4 stock loss might only be mitigate by about 35-40%.. What happens if the stock keeps dropping? There will never be a BE opportunity because the position will never be in the black. I’m not suggesting any course of action. I’m just explaining that if one is unaware that the BE will never be seen,then if one decides to take any kind of defensive action, one will find a larger loss than expected and will be muttering, “Wha wha wha happened?”
Spin
Spin,
I fully agree – you want to know where your positions are at all times, as well as where they can go when things go awry. Do you use spreadsheets to keep on top of things, or maybe some special
software?
Justin
Justin,
Because I’m a DOS spreadsheet freak, I run two computers. I subscribe to Thomson Reuters for EOD quotes as well as historical data for 25-30 (?) years if the issue traded that far back. Once my data is downloaded, I have an automated routine (batch files and macros) that updates about 50 spreadsheets in under 5 minutes. Macros are my second language (g) so I can create spreadsheets on the fly in DOS faster than in Excel which while being a gazillion times faster and better, just takes to much time to create and debug quickly during trading hours.
Interactive Brokers offers a DDE connection which enables my Excel to be live in real time. This is particularly useful when there are complex positions involving multiple legs. One can then see the performance (P&L, delta) of the individual legs as well as the overall performance, good or bad. It displays the data any way you want if you can spreadsheet it.
I also have some old DOS software. It’s not better than what online brokers offer but that it’s quick and easy to use and can be operated with macros to speed things up. Sometimes, time is money. The programs DOSBOX allows me to use it on a 32 bit computer but I haven’t been able to figure out how to run it on a 64 bit. If only I had a few tech wizard-like grandkids :->)
Nothing guarantees success but quick access to the information I want helps me to be decisive, right or wrong. Being the deer in the headlights when it’s hitting the fan isn’t a good look.
Spin
Spin,
You must be doing some serious trading if you need to generate spreadsheets ‘on the fly’ with DOS. I used to do a lot of programming with DOS macros back in the early 90’s, but soon switched to Excel and VBA. Can you download option chains from IB using DDE? I asked them about that a while back but they told me it was for pro’s only and I’d need to write a program to do so. Currently I’m using something called ‘gwebcmd’ which I found free on the net to grab option chains from nasdaq.com so I can quickly scan for options with good ROO’s.
Justin
Spin,
you are perfectly correct, and I do know this.
As I write, FIZZ has hit 102.00, and my paper loss is 300.00 while the 105.00 call is “gaining” 150.00.
So, if I would unwind now, my loss would be 150.00 per contract..
I am not planning to hold this stock, but, in accordance with the BCI methodology, the goal is to make consistent, and relatively small gains each month.
If FIZZ continues to drop in the next few days, and the call reaches 80.00, I plan to buy it back, and wait a couple of days for a comeback, and a possible new CC sell to mitigate the loss or even make an extra profit in the same contract cycle.
If FIZZ does not come back, I will exit and take the loss, 🙁 mitigated by the call premium retained, (approx. 330.00 per contract), and will look for a better ticker.
Thanks for the alert – Roni
Roni,
At this point in the cycle, these are hopefully, just fluctuations and they won’t mean anything in the long run. I’m not criticizing or suggesting a better way of managing covered calls. If you’re going to do them, it’s good to have a disciplined plan that you’re going to follow. They’re not my cup of tea anymore so I’m just sharing my experience with them. Inhale whatever makes sense, ignore the rest :->)
Spin
Thanks Spin,
that’s exactly my game.
Your observations are very, very welcome.
I am still quite inexperienced, and trying to learn all I can about this business.
As I told Jay, I have nobody here in Brazil to teach me, and no friends to exchange opinions with.
Therefore this blog, and you guys are extremely important to me.
Roni
Roni,
I was in once the same situation as you. Until recent years, I didn’t know anyone who utilized options to any great extent. What helped me the most was reading a number of books (anything you can find), simulating different possibilities with option software, participating in any blog that I could find where participants knew more than me and virtual trading a variety of strategies on a legitimate brokerage account that truly simulates B/A and volume. Virtual trading is no substitute for the real thing since there’s no emotion involved but it’s a step closer. It’s like learning a second language. It takes time and effort.
Spin
Thank you again and again Spin.
I did exactly what you recommend for a few years, but always traded with real money, because, as you say, without the emotion it’s not the real thing.
I tried several kinds of trades. and some worked, while others lost, and I was unable to find a good method until I found Alan Ellman’s videos on YouTube in late 2013.
I bought the books, first on Kindle, an then on paper, and signed up as a member in Jan 2014.
The BCI methodology seems easy, but it took more than 2 years for me to learn it and make less mistakes.
Finally I decided to focus exclusively on monthly near the money Covered Calls, and for the past 12 months my portfolio has performed consistently.
Meanwhile, I wish to learn more and more, and make less and less mistakes.
Also, I am curious to see how it will perform when there is a correction. (let’s hope not too soon).
Have a nice weekend – Roni
Roni,
There’s no need to thank me again and again. It’s all part of my parole agreement ;->)
Congrats on your portfolio performing consistently for the past 12 months. It good to achieve regular profits but don’t confuse brains with a bull market. For 18 months we’ve had the perfect market for being long and for writing covered calls..
There’s no need to be curious how this will perform in a serious bear market. Just look back at 2000 and 2008. In 2008, Dividend Aristocrats like PEP, CVX, KO, T, PG, and JNJ were down 35-45%. Others, especially financials were down even more. What are you going to do if you buy a stock for $100, sell a covered call for a few bucks and by the time it expires, the stock has dropped to $90? Will you write a $100 call for peanuts or will you chance it and write a lower strike price, locking in a loss? Either way, what will you do at $80? How about at $70, if it’s that deep a correction?
Some may say that they’ll cut losses but that sounds much better on paper than actually doing it. Will you admit defeat at 10% down and go to cash? At 20% down? I’ve done it (2008) and I can tell you, it’s not an easy decision.
With such a drop, covered calls will be out the window and you’ll be married to Buy & Hope, holding on for that recovery 18 months out (see 2000 and 2008). But what if god forbid we ever experience a really unlikely but very prolonged recovery? Think Japan which has yet to recover to it’s late 1980’s highs (technically, if you were reinvesting dividends, you would have broken even sooner but that’s a different story). I don’t want to be a Debbie Downer (the clothes don’t fit) but you might consider evolving a Plan B for the inevitable correction or deep bear that may occur – especially if you’re older and time is not on your side. And if you really evolve and learn your lessons, Plan C is learning how to make money in that deep correction.
Spin
Spin,
Just re your point of being prepared for calamities, I’ve found so far that carefully chosen ITM covered calls can actually give you quite a bit of protection while also offering good returns. My stocks for the last contract period for instance would have needed to lose an average of 7.2% each to break even, yet still managed to return me a profit of 2.85%. All were good quality stocks chosen by Barry and his team (some from previous months) with gently rising uptrends (I avoid stocks that have recently spiked up or aren’t in an obvious uptrend.) I think too that good quality stocks would lose less than the average in a sudden downdraft, so that if there was a market plunge of say 10%, the quality, uptrending stocks might only lose an average of about 7-8%. Stocks that have spiked or are in downtrends of course tend to have the biggest falls. Just my take but then I’m new to CC’s and chances are I’ll have refined my strategies a lot in another year or two.
Justin
Justin,
It stands to reason that if you are selling ITM calls that provide 7% downside protection and the market corrects 10% then you’ll be treading water nicely and at worst, you’ll have lost some time. If it corrects more than 10% then not so much. For the average retail guy selling ATM or OTM covered calls it will be a very different story with a poorer outcome.
In 2008-2009, the average Dividend Aristocrat lost about 50% from peak to trough. The best of the best! But let’s frame this properly. If you wrote a 7% ITM CC and the stock dropped 7% then at expiration you could write (or roll to) another 7% ITM CC at the new lower price and you could stair step your way to the bottom, offsetting most of a 50+ pct loss.
But stocks do not behave linearly nor do they run on the same timetable. For a real example, take MMM in Sep ’08 at $72. Suppose you wrote a 7% ITM CC for $5. Cost basis is now $67. Within two weeks it down 20+ pct to $58. Suppose it was $58 it’s expiration. What do you do then? You are no longer able to write a 7pct ITM call because that locks in a loss. What will you get for a $65 to $67.50 call for a month? Peanuts. To get some premium, will you sell a CC at a lower strike, locking in a loss if it rises? Or will you go out many months in order to get a better premium but a lower ROI, tying yourself to something long term, trying to dig out of the hole?
Regardless of what you chose to do, MMM dropped to about $41. How’s that ITM covered call writing game plan working for you now when you have a cost basis in the $60’s ? You’re definitely married to Buy & Hope now.
Covered calls is a neutral to mildly bullish strategy. In your case, because you are writing ITM, it’s mildly bearish to neutral. You’ll be fine in a mild correction but in a full blown bear, nuh uh. I’ve seen it in 1987, 2000 and 2008 and mildly bearish to neutral OR neutral to mildly bullish just doesn’t cut it in a massive correction. All you have to do is look at historical data and this is quite apparent. So make hay while the sun shines but as some say, “Winter is coming” so work on Plan B and Plan C should winter arrive. You need to know when to hold em and when to fold em.
Spin,
that’s exactly what I mean by “curious”.
I know winters will come, and tsunamis do happen now and then.
And I wonder how bad my losses will be when they come.
That is why I am sooooooo careful. (you probably noticed by my posts).
If a stock keeps going down after I bought back the calls at 20% or 10% of the premiums, I will NEVER hold on to it or write a roll down CC.
As you said in one of your previous posts “it’s time to get out of Dodge city”
My plan B for a severe market correction is: Go to cash, and write off my losses.
My plan B for a market crash is : I have only aprox.10% of my net worth in the stock market, and I NEVER trade on margin.
Alan’s books are very clear about exit tactics and avoiding big losses, and I try to follow these guidelines religiously.
See you on the next thread – Roni
Ah yes Spin, ’87, 2000 and 2008 – been through ’em too myself (started trading/investing back in ’85.) In ’87 I was holding October expiry puts in a big Australian stock (rather lucky, I was gambling more than trading back then.) In the tech boom I was trading breakouts, selling them after they started to falter, then staying out entirely after the market crunch. As for 2008 I’d been playing breakouts again and did a bit of shorting (not nearly enough) when the market started to slide. However back then I was focusing on online poker, grinding out $10k a week on the Party Poker NLHE 5/10 games (I’m pretty sure I know better than most when to hold ’em and when to fold ’em.) If/when it plunges again no doubt I’d put on some more shorts. However with the VIX hovering around 10, how likely do you think a big fall is likely to happen anytime soon?
1987? Fond memories… NOT! For every stock that I sold short puts on, I basically owned all of them on Monday afternoon, most with paper losses. I had a small margin call and I ponied up the cash. Since the DJIA ended the year flat, I incurred no losses and many of my newly owned stocks went on to do quite well. That day began my learning process about risk management as an investor.
Not long before 2000, I began trading as well. By 2000, I was able to get out of the way but I wasn’t experienced enough or even brave enough to short very much. that changed by 2008. Plan B was hedging positions better. Plan C was profiting from the collapse. That took time but I got there.
If you were grinding out $10k a week on the Party Poker NLHE 5/10 games back then, what are you doing here?? (g)
Spin
Roni,
It’s logical to say that at some predetermined point, you’ll exit the market and take the loss. That sounds good on paper but human nature flies in the face of that. Most people are not willing to admit that they are wrong, accept defeat and move on. Hope is a powerful emotion and it is hard to give up. Breakevenitis has an incredibly strong grip on people. This isn’t a criticism but a reflection of behavior.
Spin
Premium Report just posted on member site/Earnings season:
Premium members will note that a majority of the stocks that passed the BCI screens are located in “gold cells” because they are reporting earnings in the August contract month. This makes these securities ineligible until the earnings reports pass. These dates are listed in the report.
32 of these stocks (less the 8 that lack adequate open interest as of last Friday) report in the first week of the August contracts, leaving 3+ weeks of time value remaining after these reports pass.
Eligible securities for the August contracts include those stocks in the white cells with adequate open interest, the stocks that report in the 1st week of the contract and all ETFs in the recent ETF report…plenty of choices.
Alan
I just found out that my broker charges a $15 fee for option assignment. This seems to be a high cost when selling covered calls. Is this a fee that most brokers charge?
If so, would I be better off buying back the call if it is in the money rather than letting it get taken away and paying the $15 fee?
Thanks,
Brian
Brian,
A $15 exercise fee is unacceptable in my opinion.
I would call the broker and ask them to change this fee to a standard stock sale commission with the understanding that if the fee stands you will be looking for a different broker. Then check our online discount broker file in the “free resources” section of our web pages.
Alan
Brian,
Take a look at Interactive Brokers. Low commiissions and free assignment and exercise. The newcomer Tastyworks is fairly competitive as well.
There’s probably a video on this but I’m not seeing it. So what happens or what should one do if you execute a covered call trade and in the next day or 2 price shoots up and your short is way in the money. Doesn’t that make the the short call way more expansive ? If it gets exercised what happens to the “I guess” the intrinsic value of the short call ? Maybe I’m worried about nothing. I haven’t found a clear explanation about this yet.
Thanks,
Ted
Ted,
The first strategy that should come to mind in this scenario is the mid-contract unwind exit strategy (MCU). Here is a link to an article I published on this strategy several years ago:
https://www.thebluecollarinvestor.com/mid-contract-unwind-exit-strategy-a-real-life-example/
More detailed information is found here:
Complete Encyclopedia Classic edition: Pages 264 – 271
Complete Encyclopedia Volume 2: Pages 243 – 252
In the worst case scenario, you allow assignment where your trade is maximized and shares are sold at the agreed upon price.
Alan
Ted,
If the stock rises sharply and is exercised, you don’t have to do a thing since the entire position is removed from your account and you have achieved the maximum profit from the position. Count your blessings and find another hopefully profitable position.
Ted,
Let me make some points as to what I do when I see a stock gap up and how I quantify it.
* When stop gaps up, the Intrinsic increases and the Time Value or Extrinsic Value approaches zero. With the Mid Contract Unwind strategy you calculate how much your loss is and it is recommended that you unwind only if you can find a new position to make up that loss, otherwise you stay in the trade till expiration.
* If you get assigned, that is no loss to you. You can then take the released cash and start a new position for more income.
* Back to the gap up, no matter what the intrinsic value is, the time value will tell you what your loss will be if you unwind (Close entire position, option and stock). In order to quantify this, what I do is wait till the time value decreases my ROO% by 0.1%. A $7 commission to unwind may add another 0.1% or so loss as well, depending on the number of shares in your contract.
I use 0.1% as the threshold because it give me a reasonable loss which I can make up with my new position, even sometimes up to the 3rd week of a 5 week cycle.
Example:
** $55 Stock, 400 shares, Strike 50 (ITM), Premium 7, Intrinsic 5, Time value 2, ROO Cost Basis = Strike =50/share (or net $20,000 (50×400), ROO% 4% (2/50 or 800 / 20000). (Note: Total net investment is $55 x 400 = $22,000 but your cost basis is reduced to $20,000.by the intrinsic value.
** When time value reaches 0.1% of $50 = $0.05, when I unwind, my total loss is $0.05/share or for the net position 0.1% of $20,000 = $20.00 (no commission)
* A $7 commission will add $0.07 / share if you contract was for 100 shares. With 400 shares it is $.0175 / share. You net loss will the example is $27.00.
* To guarantee I close my position with a time value of 0.05, I initially monitor the time value on the screen till it reaches some low value, then I place a Reverse Buy-Write combination order for a credit limit of $49.95 (Strike 50 – Time Value .05 = 49.95). (On your screen in the order ticket, the credit limit is also the Price of the stock – premium paid.)
No matter what the price of the stock is when the order is fulfilled, the time value will be 0.05. The premium you spent adjusts to make this true. I have proven this in a post in last week’s log. Important: This relationship is only true for ITM positions)
* With the new cash, if you make 1% on the next position, that is 1% of 20,000 or $200, less $27 loss, and an additional $7 commission cost for the new contract, net is $166.00 additional income possible in the same contract cycle.
Mario G.
If placing a Buy/Write order when the stock is $55 and the $50 call is $7, ignoring commissions, your net out of pocket is $48 so that would be the number to base yield on. And while it is technically correct that you are executing a Reverse Buy-Write combination, you are “selling the B/W”. Whenever possible, always use combo orders to unwind or roll positions because they insure that you won’t be penalized by legging in/out of individual legs and getting penalized if the market moves b/t executions. Legging in/out is only for experienced and brave traders :->)
Portfolio results for my Covered Call stock portfolio through July Expiration Friday 7/21/17:(Portfolio of 4 accounts at 2 Brokerages).
My performance for this last month was a 3.1% increase in Account Value using published Account Values as the metric.
For Expiration Friday, I let 8 positions be assigned because of Earnings Reports (CDNS, ATHM, MGM, ATVI, PAYC), .
I rolled 5 positions (QQQ, KWEB, EWY)
I performed a Mid-Contract unwind on 2 positions (GLW) after gapping up to 0.1% time value loss point. invested the released cash in ATHM.
I closed the Option leg on 11 positions which gapped down to the 20% rule. Five position later “HIt a Double” on return to original price for additional income (QQQ, ATVI, MGM).
I sold, because of Earnings Reports, stock positions in HLT and MGM at a small loss or at the Breakeven point.
**************
YTD Performance Table::
To add more significance to the performance over the year I created a table in my Portfolio Spreadsheet for my YTD resultsfor each starting with Expiration Friday 12/16/16.
See image attached for the table.
All months I have been 90% invested. All months used the used the published Brokerage Account value at the end of the day on Expiration Friday.
Analysis of Data:
Per Month Gains:
The difference in gains between each month are as follows: (Jan-Feb) 3.4%, 1.0% -0.7%, 3.6%, 2.0%, (June- July) 3.1%. Average is 2.1%.
Annualized Gains:
Annualized Monthly gains for each month were: Jan 19%, 30%, 24.2%, 16%, 21.3%, 21.9%, July 24%. Average is 22.34%.
Comment: At the current rate, my annualized gain for 2017 will end up around 20-22%.
Mario G.
Mario;
Thanks for sharing and congrats on the outstanding returns!
Terry
Allen
1. What is your routine when trading options i.e. What sites do you read, how does premarket numbers effect your trading what type of news are you looking for.
2. Do you ever place a trade after hours?
3. If you owned 800 shares of a stock what would your strategy be to trade 2 contacts over 4 weeks or 8 in one week?
Dan
Dan,
1. Most of my trades are set up in the first few days of a new contract, usually on Monday. I roll options on expiration Friday afternoon if possible. Otherwise Wednesday or Thursday if I’m not at a computer on Friday (although I usually have my laptop).
2. The sites I follow are the ones we use for our screening and market assessment (IBD, finviz.com, stockcharts, wishingwealthblog.com etc.). When writing books, articles, responding to emails and preparing for videos I usually have CNBC and Bloomberg on in the background. I hold 15 – 20 positions in my covered call portfolios and sell 50 – 100 contracts per month (plus a few in my mother’s portfolio). The time spent on managing these positions is approximately 3 – 5 hours per month (stock screening is done by my team, a big time-saver). My market assessment is determined on a weekly, not daily, basis. Pre-market news or any new positions is not acted on before 11 AM or after 3 PM (generally, there are exceptions) to avoid early and late trading day volatility.
3. I never place a trade after-hours unless it is a buy-to-close limit order as in the 20/10% guidelines. these can even be placed immediately after entering a covered call trade.
4. If my intention is to sell 8 contracts, I would sell all in the first couple of days of a new contract. I may ladder strikes (use different strike prices) based on market assessment. For example, if mostly bullish, I may sell 6 OTM and 2 ITM.
Alan
Alan,
Good reply. Tells the whole story.
Mario G.
Yes very good reply. Also wondering when Dan’s going to spell Alan’s name correctly 🙂
Premium members:
The August edition of the Blue Chip (Dow 30) Report has been uploaded to your member site. Look in the “Resources/Downloads” section (right side) and scroll down to “B”
Alan
Alan and Barry,
This was a great add to the subscription. Many of the stocks on the Premium List are trendy. You have to watch them – which is the idea and I get that entirely :).
Blue Chips are a nice compromise between those and the ETF’s.
Something for everyone! – Jay
Jay,
Barry and I and my team consider ourselves extremely fortunate to have members like you and many others who provide us with the feedback that allows us to provide the most comprehensive information that meets the needs and trading styles of our expanding membership.
Alan
I just became a member. I have placed 3 covered calls using your sheet yesterday and today I realised that I selected stocks from the gold area – earnings coming out tomorrow EOD. What do you suggest I do? Wait it out or exit if I can before EOD tomorrow? Would you suggest I place protective puts?
Your help is appreciated.
Thanks
Sylvain
Sylvain,
We all make mistakes, including me. When we enter a covered call trade and then realize that there is an upcoming earnings report prior to contract expiration, there are 2 choices:
1- Close both legs of the trade prior to the report
2- Buy back the call and re-write after the report passes. This will allow us to take advantage of a positive report but expose us to the risk of a disappointing report.
Most conservative investors will favor the first choice.
Alan
Sylvain,
If they were on the list in the first place and just in the gold field for earnings they were going in the right direction. It’s been a pretty good earnings season. Damn the torpedoes, take Door #2 :)! – Jay
I had a bad day yesterday with earnings from MMM and a good day today from BA earnings…all evened out.
Happy trading,
Marsha
Marsha.
Congrats on BA! It has been a fixture on the Blue Chip list. Between an aging airline fleet and a renewed emphasis on defense spending it’s fundamentals look solid.
It will not be immune to a seasonal pull back if we get one but should fare better than most. – Jay
Silvain,
Contrary to Jay, I I would take door #1 (conservative).
A lost opportunity is unpleasant, and soon forgotten.
A big loss hurts like hell, and haunts you forever.
Roni
Jay,
Does BA have a seasonal pattern or are you just referring to a general market correction?
I’m with Roni. It bothers me far less if something goes up without me than down with me.
Hey Spin,
I was just referring to the general market that tends to correct in the August to October time frame. I do not follow BA closely enough to know if it has a seasonality of it’s own. – Jay
Hi Jay,
I followed your advice and bought SWKS when it was down on 07/24 @ 105.90 – and waited.
Yesterday, SWKS was up, and I sold 08/18 106.00 calls for 3.07. very happy, thamks.
Hindsight: now, SWKS at 107.25, and the 106.00 calls are at 3.50.
Problem is, I get cold feet when a position is unprotected by covered calls, so in the end I miss lots of opportunity, but, as Spin says, it’s the SWAN syndrom.
Roni 🙂
Thanks Roni, I appreciate both of your kind notes above!
If any of us had all the answers wouldn’t that be a perfect world? I can not imagine how much that guy or gal would make :)! – Jay
How I feel:
I have 2 mango trees in my north side of the house here in Tamarac (near Ft. Lauderdale), FL. They are still dropping fruit. If you don’t go out and pick them up the Ducks, Squirrels, and what other animals are around enjoy them. Some drivers passing ask for some but some do not and I or my wife have to watch out for human thieves as well. My wife love and enjoys them and I give them out to my family and neighbors. See attached image.
Anyway, I feel like a mango fell on my head. After repeatedly seeing the same pattern several times I have come to realize I have been selling my Stock positions in some cases the wrong way. You never stop learning.
In two cases I have seen a stock climbing steadily back up from the 20% Rule point (the stock declined so I bought back at 20% of the original premium price, hoping to Hit a Double it the price recovered). As I have posted in the previous blog, I was able to Hit a Double on 3 positions last month but 2 stocks did not and they had earning report due right after Expiration Friday.
The two stocks were MGM (sold 7/18) and HLT (sold 7/24) with Earning reports on 7/27 and 7/26, respectively. Sold them near my Breakeven point, thinking that is the best i can do and satisfied with that. I was sort of mesmerized by my Breakeven point that I did not see the big picture. In both cases, I saw the stock rise up significantly after I sold them.
What dawned on me last night, is that, in the future, up to the day before Earning reports and if the stock is already at a good price point, I should place a Training Stop$ or a Trailing Stop% order to guarantee I would get a higher price it it kept increasing in value. If the stock retreated in price by the Trailing amount ($ or %), it would be sold automatically.
Does everyone else do that as standard practice?
Mario G.
Trailing stops are effective in an orderly market. If there’s a gap down, the stock might not trade at your stop loss point and you might not be able to achieve the stop loss sale price that you desire.
Now where did you say that those mangos were available for the taking??? ;->)
Spin,
Funny stuff as always :)!
I was about to write back to Mario that he is probably Alan’s neighbor these days. And maybe Jimmy Buffett’s too. Jimmy has a great song about eating the last mango in Paris:
https://www.youtube.com/watch?v=d1bbkyjCb2c
Janet did not raise rates today so there is a reasonable chance this summer rally may still have gas in it’s tank :)? – Jay
Spindr:
Great point… but I made sure I picked the order type that guarantee me a fulfillment.
Just to make clear:
A. The Trailing Stop $ or % becomes a market order as soon as the stock trades past the $ or % change from the highest price achieved.
B. If you use Trailing Stop Limit $ or % then after triggering past the $ or %, the price has to increase to meet the limit to fulfill the order.
I was using (A) and was assuming any gap down would be OK and not “likely” based on the recent history of the chart, which of course, is not a predictor of the future.
Mario G.
Mario G,
If you place any kind of order that becomes a market order, who knows what price your guaranteed fill will be at? Think Flash Crash. If such a fill is acceptable, no problem. If not, then avoid triggered market orders.
If it becomes more than a Flash Crash then it will be raining brokers (the weather report on Black Tuesday in 1929 😉
Spin
Hi Mario,
I do have a Mango tree in front of my home, and the fruits are delicious, in the summer (Christmas through Easter here in Brazil)
They keep dropping, and everybody gets plenty.
Also I have a long pole with a fruit basket at the top, so I can pick the best before they drop.
The 20/10 guideline only works well if your positions are well diversified.
If you stick to Barry’s tickers in bold each month you will normally have more gains than losses.
Losses are part of this game, so don’t fret about them, but keep them small, as Spin’s second rule for making money.
Roni
Premium members:
This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates. For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
NOT A PREMIUM MEMBER? Check out this link:
https://www.thebluecollarinvestor.com/membership.shtml
Alan and the BCI team
Alan;
While waiting for the ER to pass, how much time do you give until entering a position? Is there a number of days to wait after ER? Are we looking for the price to settle, and how to tell if it has settled?
Three ER possibilities:
– Surprise to the upside
– Surprise to the downside
– No surprise
Will you enter the position irregardless of which of the three possibilities has occurred?
Thanks;
Terry
Terry,
When a report shows earnings/revenues different from market consensus we will see price movement up or down. There will be an initial reaction to the bottom line numbers and then the fine print and guidance are factored in. When the report is fully digested and analyzed the price will settle. This may happen the day of the announcement or the next day. When there is a substantial; price movement, I like to wait at least 1 day to see if profit-taking or “buying at a discount” factors in.
Last night, FB report after the market closed. The initial reaction was to the downside but finished after-hours trading up $6. When the market opens this morning, we may see some initial volatility and most likely the price settling in a range (smaller whipsaws). If I were writing calls on FB, I would do it later in the day today (I rarely trade before 11 AM ET or after 3 PM ET) or tomorrow as the price movement returns to pre-report patterns.
A surprise to the upside or no surprise would not discourage me, quite the opposite. A significant surprise to the downside would motivate me to re-evaluate the fundamentals before “allowing” that security a spot in our portfolio. This re-analysis is one of the reasons the BCI team provides weekly updates to our eligible list of stocks and ETFs.
Alan
Terry,
AFAIC, there is no magical formula that will tell you what the best moment to buy or sell is because the future is unknown. Because of that, I take a simple KISSpin approach for buy and sell decisions. If XYZ is $65 and I want to buy it for no more than $60, and if an ER drops price to $60, then after re-evaluation, if I still like the stock, I’ll buy it for $60. It’s at my price and waiting some arbitrary number of says may change its availability.
Conversely, if I own XYZ and it’s $65, if the ER drives it to $70, I’m either going to sell the shares and book the gain or sell a covered call to start generating some income and lower my cost basis. Again, waiting some number of days may leave me wishing that I had acted when it was at $70. Murphy’s Law usually dictates that waiting doesn’t benefit me ;->)
IMO, trade when price reaches your targets not via some other metrics.
Spin
Spin,
Could not agree with you more. I don’t think days matter as much as price does. Earlier in this thread I suggested to Roni he try legging in.
It is just my style and it has at least as many flaws as any other style. But because my experience is the market is rarely linear I buy stocks and ETFs and I sell cash secured puts only on dips. I sell covered calls only on pops.
I am sure there are many times I would have been better off doing them same ticket. But that is not my preference. And since I use high liquidity tickers with weeklies I am in no hurry. I create duration of my choosing and wait for my pricing.
Some times that works great and some times not :). There are countless ways to skin this cat! – Jay
Jay,
Agreed: “I don’t think days matter as much as price does.”
While I’m no longer doing CCs and cash secured puts, I use the same approach as you. On up days I add short delta (or subtract long delta) and vice versa on down days. It may be from new positions or from rolling up/down, booking gains. Same game, different underlying position. You have your shtick and I have mine (g).
Here’s something that might be extreme for this crowd (g). Let’s say that I own XYZ at $47 and I sold $50 OTM calls on it. Due to an ER or good news, it powers up to $55, driving the short call to parity. If I think (hope?) that it”s going to reverse, I’ll use a short B/W combo order to turn it into a bearish call spread. IOW, I’ll sell the stock, booking that $8 gain and buy a strike at or slightly above the new current higher share price, say the $55 call. If wrong, I’m throwing away the cost of the $55 call but I’m still ahead. If I’m right and XYZ drops, I could book up to the $5 intrinsic of the short call (expiring worthless) while losing the cost of the $55 calls. Another variation might be to slightly ratio the number of $55 calls (overbuy) so if wrong, more calls $55 are working for you than the short $50 calls against you. Whatever you do, there are no guarantees. You place your bet and Mr. Market determines the outcome. But in either case, the loss is modest but the win “could” be much more. Good R/R odds.
Spin
PS I had a regressive moment in my previous reply (g). I said that “If I own XYZ and it’s $65, if the ER drives it to $70, I’m either going to sell the shares and book the gain or sell a covered call to start generating some income and lower my cost basis.”
Truth be told, that’s partially true. I’d most likely collar the position (covered call plus long put) to lock in some gains rather than sell a covered call.
Well, Spin, you picked a great log in name for our comment board because you certainly make my head “spin” with all your possible options trade combinations :)!
But that is a merit badge earned from over 35 years of experience and practice. I look forward to your every post….
Most of the options trading I do except condors is directional: I either get it right or wrong. I keep score. I win more than I lose or I would not fuss with it. What I would like to do in the next phase is get better at fixing broken trades and stacking odds more in my favor. – Jay
Spin;
Do you make these trades inside a tax sheltered account or a brokerage account?
Thanks;
Terry
Jay,
Given that my name is Nikko Spindropolous, I am a Spin (J/K).
Options give you versatility. AFAIC, the important thing is the ability utilize them in a fashion that offers a reasonable opportunity to profit from your outlook without accepting undue risk. I may bite off some size at times but there’s enough built in hedging to insure that broken trades don’t whack me more than I can tolerate.
Broken trades? Good defense is something that comes with time –> “Good judgement comes from experience and experience comes from bad judgement”. If you do enough of this, it becomes more reactive rather than when it hits the fan, heading off into your head to reason it out. Again, you make the best and fastest decision you can under the circumstances. How it plays out is another story but at least you’re not doing the deer in the headlights when it hits the fan. Not only is it a bad look but time can often be money and costly, at that.
Terry,
Everything I do is in a margin account because sheltered accounts have a strict limitations on being short (options or margin). In the U.S. if you executes 4 (or more) day trades in 5 business days in a margin account (provided the number of day trades are more than six percent of the total trading activity for that same five-day period, you are deemed a Pattern Day trader which just means that you must maintain a minimum equity of $25,000 on any day that trades are made. Violate that number and restrictions kick in. A benefit to being a PDT is being able to trade four times the maintenance margin excess in the account as of the close of business of the previous day (standard margin is 2:1 allowed overnight) though none of this should be attempted without adult supervision :->)
Spin
Just to let everyone no I accidentally posted my results for the last contract cycle (3.1%) as well as my month to month performance for this year (Average 2.1%, 22.34% annualized) in a reply to SpinDr above on July 29 on a thread TED initiated on July 24.
I meant to post it as a new thread.
I also attached as an image a TABLE nicely showing the results.
Mario G.