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Is Covered Call Writing a Zero Sum Game? Let’s Do the Math

Many assume that covered call writing is a zero sum game because we have traders executing equal but opposite trades using the same underlying security. As a covered call writer, we may sell 5 contracts of AAPL which means there is a buyer out there who just bought our contracts. If we win, they lose and vice-versa, right? Well, let’s examine, the Blue Collar way. We will set up two hypothetical scenarios, first for naked options and then for covered call writing and see if either can be viewed as a zero sum game.

 

Hypothetical trade scenario

  • BCI is trading at $50.00
  • The $50.00 at-the-money call is priced at $1.00
  • The stock price moves up to $53.00 (scenario I)
  • The stock price moves down to $47.00 (scenario II)

 

Naked option trading: Stock price moves up to $53.00 by expiration

The call buyer paid $1.00 for the option which is now worth $3.00 in intrinsic value resulting in a profit of $2.00. The call seller generated an initial profit of $1.00 and now is required to either buy back the option for $3.00 (plus a small time value premium) or buy the shares at $53.00 to deliver them at $50.00. Either way, there is a net loss of at least $2.00. This scenario does appear to be a zero sum game given no exit strategy execution and leaving both positions until contract expiration.

 

Naked option trading: Stock price moves down to $47.00 by expiration by expiration

The call buyer paid $1.00 for the option which expires worthless resulting in a loss of $1.00. The call seller generated $1.00 from the sale of the option which expires worthless resulting in a net profit of $1.00. Once again, given no position management maneuvers and allowing the trades to last until expiration, this does appear to be a zero sum game.

 

Covered call writing: Stock price moves up to $53.00 by expiration

Assuming no exit strategy executions, the call writer generates a profit of $1.00 on the sale of the option and shares are sold at $50.00, the price paid for the stock, netting a profit of $1.00. The call buyer paid $1.00 for the option which is now worth $3.00 in intrinsic value resulting in a net profit of $2.00. This does not appear to be a zero sum game.

Covered call writing: Stock price moves down to $47.00 by expiration

The covered call writer generates an initial profit of $1.00 on the sale of the option and has an unrealized share loss of $3.00, resulting in an unrealized loss of $2.00. The option buyer paid $1.00 for the option which expires worthless resulting in a loss of $1.00 again telling us that covered call writing is not a zero sum game.

 

Is it possible for one position to make money and the other to lose money?

Yes, if share price moves down less than the option premium originally generated, the covered call writer will make a profit while the naked option buyer will be in a losing position. Let’s say share prices declines to $49.50. The covered call writer will have a net credit of $0.50 per share or $50.00 per contract. The option buyer will lose the $1.00 paid for the option which expires worthless.

 

is covered call writing a zero sum game

Comparing Covered Call Sellers to Call Buyers

 

Discussion

This article was inspired by several of our members who inquired about zero sum games and offered different perspectives on their opinions regarding the topic. This article offers a mathematical perspective. Most options are closed and so only a small percentage actually last to expiration. Also, many option traders have an arsenal of position management techniques that will mitigate losses and enhance gains. A fair takeaway would be that naked option trading with positions left until expiration can reflect a zero sum game while covered call writing does not.

 

Next live event

American Association of Individual Investors

Washington DC Chapter

Saturday July 15, 2017

9 AM – 12:00 PM

“Using Stock Options to Buy Stocks at a Discount and to Bring Portfolio Returns to Higher Levels”

Co-presenter: Dr. Eric Wish, Finance Professor, University of Maryland

Northern Virginia Community College
Annandale Campus
Richard J. Ernst Community Cultural Center
8333 Little River Turnpike
Annandale, Virginia 22003

Registration link to follow

 

Market tone  

Global stocks were little changed on the week withstanding presidential elections in France and South Korea and political turbulence in Washington. West Texas Intermediate crude oil rose modestly to $47.50 a barrel from last week’s $45.50.   This week’s reports and international news of importance:

  • President Donald Trump’s health care reform and tax cut agenda have faced significant legislative challenges and those headwinds stiffened considerably after the president removed from office Federal Bureau of Investigation director James Comey
  • Centrist Emmanuel Macron was expected to easily beat right-wing populist Marine Le Pen in the second round of the French presidential election, but his margin of victory proved to be even larger than expected. Macron received 66% of the vote to Le Pen’s 34%. He must now forge a governing majority in the National Assembly, with two-round parliamentary elections scheduled for June 11th  and June 18th
  • Newly-elected South Korean president Moon Jae-in took office on Wednesday and vowed to resolve the security crisis on the Korean peninsula as soon as possible, including by traveling to Pyongyang, under the right conditions
  • On the economic front, Moon is expected to push for the reform of South Korea’s conglomerate system, as well as to seek higher corporate taxes
  • Volatility, as measured by the Chicago Board Options Exchange Index (VIX), fell to its lowest level since 1993 this week amid unusually calm equity trading conditions. The VIX, at 10.40 is running at roughly half of its twenty-year average, according to Reuters
  • Concerns over the sustainability of Greek debt have caused in the International Monetary Fund to bypass the past several rounds of funding for the indebted eurozone member. But the IMF looks likely to rejoin the bailout in the weeks ahead, and continues to push European authorities to grant Greece debt relief. An agreement is expected at a meeting of Eurogroup finance ministers on May 22nd
  • US retail sales expanded at the fastest rate in three months in April, while prior months’ data were revised higher. Strong labor markets and modestly rising wages are supporting consumption
  • Consumer prices in the US remain subdued, rising 0.2% in April after falling 0.3% in March
  • Core CPI rose 0.1% in April, and was up 1.9% versus a year ago
  • The Bank of England left interest rates unchanged at their rate-setting meeting on Thursday but the Monetary Policy Committee slightly downgraded its economic growth forecast for 2017 to 1.9% from an earlier 2% outlook          

THE WEEK AHEAD

MONDAY, May 15th

Home builders’ index May

TUESDAY, MAY 16th

Housing starts April

Building permits April

Industrial production April

WEDNESDAY, MAY 17

None scheduled

THURSDAY, MAY 18

Weekly jobless claims 5/13

Philly Fed index May

Leading indicators April

FRIDAY, MAY 19

Advance services report 

For the week, the S&P 500 declined by 0.35% for a year-to-date return of6.79%. 

Summary 

IBD: Market in confirmed uptrend

GMI: 5/6- Buy signal since market close of April 21, 2017

BCI: I am currently cautiously bullish, 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 moderately bullish outlook. In the past six months, the S&P 500 was up 10% while the VIX (10.40) declined by 28%.

_____________________________________________________

Wishing you the best in investing,

Alan (alan@thebluecollarinvestor.com) and the BCI team

 

 

 

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

46 Responses to “Is Covered Call Writing a Zero Sum Game? Let’s Do the Math”

  1. Tim May 13, 2017 7:56 am #

    I am confused about the exit strategy when you have a covered call but after earnings the stock shoots way up and over your strike. this happened with me on NVDA . I bought NVDA long ago at 110. It closed at 102 Tuesday and I had a 110 May 26th call. Wednesday morning after earnings it shot from 114 to 120, and I rolled my call to June 15 115, with the thought that at least I’ll earn $5 per share in June. But Thursday it went to 130 (and closed at 126). I am trying to figure out how to calculate if I should buy the June 115 back and keep the shares, selling calls for 130 or more.

    Thanks,
    Tim

    • Alan Ellman May 13, 2017 8:05 am #

      Tim,

      For future reference, in the BCI methodology we never sell a covered call when there is an upcoming earnings report prior to contract expiration. This will cap upside from a positive report (as in this case) yet expose us to the risk of a disappointing report.

      When a strike moves deep-in-the-money as with NVDA ($115 call), we will have to pay intrinsic value to own the shares at current market value. This may make sense if our assessment moving forward on the stock is bullish. We have until expiration to make that decision. Use the “What Now” tab of the Ellman Calculator to make your decision at that time.

      The “earnings report rule” will avoid headaches like this in the future.

      Alan

    • Geoff May 14, 2017 11:16 am #

      You’re going to be “buying up” the share appreciation if you’re to hold onto the shares. You do have a difference in extrinsic value as your DITM short call is no doubt almost entirely exhausted of its extrinsic value. So selling a new ATM or OTM option is should net a small gain as you will be gaining additional extrinsic value. However, do be aware that you will have committed a lot more capital into the position which doesn’t have any requirement to reward you for taking on the additional capital risk. You may “buy up” the appreciation only to find yourself watching the share price retreat a bit and put you into losses.

      I could easily make a case to go ahead and commit the funds and just as easily to tell you to just go ahead and move on. You’ll need to look at your technical analysis on the stock. It went through a long period of consolidation and definitely moved up as a result of a good earnings report.

      Two thoughts for you:

      1) Would you buy this stock today at the going price?
      2) If you buy this stock today with the additional capital investment, how comfortable are you with the percentage of your account that will be committed to that one position?

      Don’t beat yourself up for making a mistake. We all make them. Sometimes the best lessons are painful. Another thought, you got pretty lucky to be upset about opportunity cost.

      Food for thought: If we figure there was an equal chance that the NVDA “melt-up” was a “meltdown” due to an earnings report causing it to decline whatever it was 20%?–how happy would you have been to made 100% on your CC versus the capital depreciation on the stock?

      Closing idea: We’re in a low-volatility environment. There’s nothing wrong with a low-volatility environment as they happen and may persist for long spans of time. But it’s good to consider the risks in your portfolio. Vega risk: A low volatility will cause options pricing to contract (get cheaper) as a result of less uncertainty. The more a stock moves, the richer the premium. So if the market itself is not moving around much our take as premium sellers gets a bit smaller as we’re assumed to be taking on less risk and the buyer (of a call) doesn’t expect to be as richly rewarded by an upside move. So what happens to option pricing when volatility inevitably expands for a time? Well, option pricing gets richer and deltas move toward 50 across the pricing spectrum. Why does this matter? Well, net-net it may not at all as we’ve already determined price and performance targets on our covered call entry. However, it may be more expensive to buy-back options and “hitting a double” may be less likely. And, for instance, that 30-delta option you sold may now be a 37 or 40-delta option and may have tremendously more price volatility in response to movements of the underlying. In short, in an expanding volatility environment (we’re not yet in one) you may see your profit & loss look ugly throughout a contract month. The benefit for the patient is at expiration volatility price goes to zero.

      • Roni May 14, 2017 3:29 pm #

        Very well explained Geoff,

        I believe that “buying up” is not a correct trade.

        The gamble on NVDA could have gone either way.
        I did sell my shares on 05/08 to avoid earnings surprise.
        It turned out to be favorable, and I missed the opportunity of making a lot of money, :-( but that’s hindsight.

        Roni

        • Geoff May 15, 2017 12:12 pm #

          At my own admission, I’ve never done a call ratio backspread but this might be a different play if you do want to hold a stock through earnings. On the other and far more expensive side, you can also purchase a protective put (or a few depending on how you want to delta-weight the protection). This is sort of the “opposite” end of the BCI system though as you’re burning cash and paying for inflated volatility rather than conservatively selling volatility. I might tip my hat to a collar but I think that’s the wrong play as it still results in losing the stock (albeit at a potential extra small gain depending on the structure and premium credit/debit).

          • Roni May 16, 2017 4:13 pm
            #

            Very good advice Geoff.

            I must remember to use it next time when I feel good about a srock and want to take it through earnings, but need some insurance.

            Thanks – Roni

  2. Barry B May 13, 2017 11:47 pm #

    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 05/12/17.

    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:

    http://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

    Best,

    Barry and The BCI Team

  3. Justin P. May 14, 2017 8:41 am #

    Alan,

    Just a quick query – the latest stock report: Headwaters – HW – is that an incorrect stock Symbol?

    Justin

    • Roni May 14, 2017 11:20 am #

      Justin,

      HW shows up normally on Yahoo Finance.

    • Geoff May 14, 2017 11:21 am #

      A little sleuthing for you. I apparently have too much time on my hands. It is noted that it is merging with an OTC company. It may already have happened as it last traded May 5, 2017.

      Here’s a link to some information on the formerly NYSE traded company:
      https://www.thestreet.com/quote/HW.html

    • Barry B May 14, 2017 4:32 pm #

      Hello Justin,

      HW is (was) an actual symbol. They are in the process of merging with Boral LTD. I noted this in the comments section of HW’s entry. In many cases, the stock syumbol shows up in some places and not in others when the merger is finalized. This week, HW appeared in StockCharts.com, Finviz, and Yahoo among others…but did not appear in IBD or Schwab.

      As best we can tell, it last traded between the last report and the current report. Since we were able to get some details, we placed it in the “Data Unavailable, Inconclusive, Or ER May Be Inaccurate” section to alert subscribers that there are potential problems with the stock. HW will be removed from the report next week.

      I hope that this explains the problem.

      Best,

      Barry

      • Justin P. May 14, 2017 9:07 pm #

        Ok thanks guys! A strange one – I’d just looked on Market Watch where HW is a completely different company, and Nasdaq.com where it doesn’t exist.

  4. George May 14, 2017 12:10 pm #

    Alan,

    Here are two questions I have on my mind.

    [1] “Sell in May and go Away.” What is your experience like here? Since volumes typically fall off until September or so, do you utilize any other strategies to continue to write covered calls or do you wait it out as well?

    [2] Current Bull Market – Although I’ve tried to be conservative, my ITM calls keep going further in the $. Even my OTM calls are getting gobbled up by these all-time highs. What are your thoughts here in this current market? Are you more heavily weighted OTM than ITM or come other combination?

    • Alan Ellman May 14, 2017 12:13 pm #

      George,

      I am fully invested almost all the time. rare exceptions (pre-election 2016) and pre-Brexit) do exist. When investing having mastered all 3 required skills, success can be achieved in may or any other month.

      I am currently favoring OTM strikes to ITM strikes 3-to-2.

      Alan

    • Jay May 14, 2017 3:44 pm #

      George,

      I can relate with any bull market frustrations our strategies may cause you!.

      A quirk I learned about my investing temperament when I started writing calls was it bugged me far more when a stock I covered went to the moon leaving me on the launch pad than almost anything else did :).

      Irrational as it sounds I would have rather seen the stock go down a little than up a lot when covered! I did not look at a fast riser and say “Great, I had a nice 4% return on that cash this month, what’s next?”

      I was more likely to be fussed about missing a breakout and mad at myself to have to pay all that intrinsic value to “keep” the gains on a stock I owned!

      That led to a couple changes I maintain today: I always let new buys run for a while first and I never cover more than half of any position.

      Those tweaks help with trending stocks in bull periods though you don’t have the same protection as when you cover everything and flex strikes. – Jay

      • Geoff May 14, 2017 7:12 pm #

        One thing I’ve considered but haven’t done is the following: Buy additional odd lot shares with the additional cash generated from the covered call (with the original purchase using the assumed cash return on the option sale). The reason I’ve not done that is that I feel that commission [to eventually sell a few odd shares] would be an unreasonable “tax” to eventually close a position. It is always worth considering what could be done but that would provide a small additional upside if the stock does “go to the moon.” You might still have 3 or 4 spare shares laying around to form a diversified portfolio of odd lots later on. I don’t prefer odd lots, though. Of course, if a stock remains in the portfolio long enough you might build a fair sized position over time, too?

        • Jay May 14, 2017 11:54 pm #

          Geoff,

          Thanks for joining our comment group – a belated welcome from an old buzzard who has been around here a while!

          Above you described adroitly why there is not much call premium for June. I’ll not write as many calls as usual on core holdings to see if they can stay afloat without water wings :).

          Options are cheap so I will speculate ITM on the buy side for calls, puts and debit spreads with trading cash for as long as this VIX lasts.

          I have some $10 VIX calls for June. Wish me luck with that – I am in sore need of intrinsic value! But it is a hedge and other things would go down if that goes up so we will just let the ‘ol roller coaster ride! – Jay

    • spindr0 May 14, 2017 5:15 pm #

      Sell in May and go away refers to the premise that investment gains are greater from November to April. While that may be true for long term index performance, good stocks perform well throughout the year. This adage is about as useful as the Super Bowl Indicator.

  5. spindr0 May 14, 2017 5:10 pm #

    My take is that every trade in the option market is zero sum because the seller receives the money from the buyer. Ignoring B/A slippage (if any) and commissions, every penny is deducted from one account and credited to another.

    Now if an investor/trader is hedging, perhaps the covered call discussed, he involves a second market. A covered call is:

    “Stock Market + Option Market”

    How can you use “Stock Market + Option Market” to conclude that “Option Market” is a zero sum game?

    • Alan Ellman May 17, 2017 9:28 am #

      The point of the article (titled “Is covered call writing….”) is that the call writer and call buyer can both make money, lose money or one or the other. Even buying and selling options without the stock component may not result is precise inverse results as position management opportunities will influence outcomes.

      Alan

  6. Todd May 15, 2017 2:14 am #

    Alan,

    with the option premium on the low side and the vix hovering around 10 or below, and being that its the month of May. Its hard to sell covered calls with these factors….

    your thoughts? Todd

    • Alan Ellman May 15, 2017 8:21 am #

      Todd,

      Good points. My perspective:

      I view a low VIX as a positive in that it, historically, is inversely related to the performance of the S&P 500.

      Our current stock list has over 50 eligible candidates and our ETF list has another 20. Most of us will find option returns that meet our initial return goals for the June contracts.

      Alan

  7. Justin P. May 15, 2017 4:17 am #

    I’ve worked out how to automate the downloading of option chains using a small program called gwebcmd, as explained on this site:
    https://www.stock-data-solutions.com/kb/how-to-load-option-chains-from-yahoo-finance-to-csv.htm

    You can then quickly produce a report such as this one, which shows the data sorted for ITM calls, and a couple of other sorts to remove wide spreads and options too far OTM or ITM. Currently I’m getting the data from Nasdaq.com since Google Finance seems to be missing a bunch of options and Yahoo seems to be blocking gwebcmd (if anyone can get Yahoo working please let us know, since Nasdaq.com’s data is delayed by fifteen minutes.)

    Anyway it’s certainly light years better than typing data in one option at a time :) (I also omit stocks with upcoming ER’s from my input list btw.)

  8. Ken May 15, 2017 8:10 am #

    Alan

    If I sell a covered call with the following stock price $100 strike price $102.50 premium $1.50 one month option and the stock price goes to $120 Do I care how much the value goes up if I’m satisfied with a 4% one month return( $2.50 value increase plus $1.50 premium recd) and I don’t care if someone exercises the option and calls the stock from me.
    The only time I lose if the stock goes below $98.50 excluding commissions.

    Thanks,
    Ken

    • Alan Ellman May 15, 2017 3:05 pm #

      Ken,

      Your assessment is 100% accurate on all fronts…

      The reason we don’t care if share price rises dramatically (and we plan to “allow assignment”) is that we know our cost basis by owning the shares before selling the option. This is why we are “covered” or protected before entering the short call position.

      Breakeven is $98.50.

      Alan

    • Jay May 15, 2017 4:15 pm #

      Ken,

      Fantastic question well stated!

      The scenario you describe would have driven me up the nearest wall or tree :)! If I buy a stock at $100 and it goes to $120 I want a bigger piece of that than 4% :). But that is my issue. There are less emotional ways to play this game!

      As you explain if the goal is return on cash month to month you don’t care which stocks you own, you don’t care how often you flip them and you don’t care how high they go.

      That requires a mindset I am not entirely capable of which is why I do what I do described above to George! – Jay

  9. Ken May 16, 2017 4:12 am #

    I have ordered your book Exit Strategies and it’s on its way.
    In the meantime just to clarify

    Stock price $100 strike price $105 June 16 call Stock goes to $95 to exit the strategy I need to Buy the June 16 call at $105 correct?

    I can then sell the stock if I feel the market has turned bearish to minimize my loss.

    Your videos say to buy back the call I just want to clarify that I buy back the exact same call I sold.

    Thanks,
    Ken

    • Alan Ellman May 16, 2017 7:51 am #

      Ken,

      You are 100% correct. If we sell the $105 strike (STO-sell-to-open) and want to close the short call, we buy-to-close (BTC) the exact same option. Now we are share owners with no option obligation and free to sell the stock or sell another option. In the scenario your describe with stock price declining, the cost-to-close will be much lower than the premium originally generated.

      Alan

  10. John May 16, 2017 7:30 am #

    Alan, If I have a 3-digit dividend then should it usually be rounded up/down accordingly? (eg. I had a dividend that was at 0.168c, so for 100sh’s that equals $16.80, then would you usually in cases like this round this value up to $17 or just leave it at $16.80?. suppose it might muck up the cost-basis’ a bit if just left?)

    I want to also ask about taxes, so when you said that you re-invest all your profits again, then how do you go about saving the profits to pay the taxes as they fall due? are you saving a certain amount or percentage each month so as not to lose it, or some other way?
    Thanks,
    John

    • Jay May 16, 2017 12:05 pm #

      John,

      If you have an IRA large enough to sell even one contract a month on something like QQQ I suggest strongly you consider that. Covered calls and cash secured puts are an automatic easy Level One options clearance in IRA’s with only an on line request required.

      I have never sold options in a cash account but I imagine they are a tax night mare when you do! – Jay

    • Alan Ellman May 16, 2017 3:00 pm #

      John,

      When factoring in dividends, I would round up or down to simplify.

      I re-invest profits as much and often as possible and leave it to my tax advisor as to how much estimated tax I pay quarterly based on previous year’s income.

      Since my covered call portfolios are mainly in sheltered accounts, tax is not yet an issue.

      Alan

  11. Dhavid May 16, 2017 2:46 pm #

    Hello Alan,

    I am a subscriber and have been following your letters for about a year now. I have a few questions for you if you don’t mind…

    1. When considering selling put options on your ETF reports and recommendations, what time frame do you usually recommend? The newsletter states weekly options, so are you just going out for the following week, or longer?
    2. How many strikes out of the money do you usually going with when establishing a position on the ETF recommendations?

    I follow your exit strategy of exiting if the stock price drops 3% below the strike price – but am not clear on the best method for establishing a position.

    Thanks,
    Dhavid

    • Alan Ellman May 17, 2017 11:05 am #

      Dhavid,

      My preference is to use Monthlys. The reason we include Weekly information in our reports is to accommodate members who prefer this shorter time frame.

      The deeper out-of-the-money we go with put options, the lower the initial returns but the more downside protection we have. In bull markets, I tend to use strikes closer (but lower than) to current market price. In bearish or volatile markets I tend to go deeper out-of-the-money while still meeting my return goals.

      Let’s say our initial return goal is 2-4% per month, I would target 2% in bear markets and closer to 4% or higher in bull markets. That range can be adjusted based on personal risk tolerance.

      Alan

  12. Barry B May 16, 2017 4:39 pm #

    Premium Members,

    The Weekly Report has been revised and uploaded. Look for the report dated 05/12/17-RevA.

    The report has been revised to include the latest Risk/Reward data that was received late yesterday. There were two stocks that were impacted:

    OLED: From Pass to Fail
    HW: Removed from the Running List.

    Best,

    Barry and The Blue Collar Investor Team

  13. Jay May 17, 2017 1:18 pm #

    It is spanking days like today that remind me why I sell covered calls on at least half of my positions.

    There is an old saying the market takes the stairs up and the elevator down. We are seeing that today.

    It presents a nice opportunity to go further below market price and sell OTM cash secured puts on things on your shopping list. If we bounce it is a nice income trade:)! -Jay

    • Geoff May 17, 2017 1:58 pm #

      It’s really not that bad. We definitely ran up quickly in the past week on the tech area. I *almost* closed my put against QQQ but did not. As things revert to the mean, I should have taken the $150 profit in 3-days (about 50% of max) and I decided that I would probably go ahead and execute today. I checked the markets before bed and recognized we were going lower and I missed my moment before 4 PM EST yesterday.

      Do remember the chart in context, though. We did bounce off the 50-EMA today–so far.

      • Jay May 17, 2017 5:21 pm #

        Hey Geoff,

        I have a pile of ITM covered calls for Friday that got easier to buy back today )!

        I wish my crystal was better and I could see the future.

        More weakness would not surprise me into the weekend. – Jay

        • Geoff May 17, 2017 5:50 pm #

          Yeah, I’ve had a position in XLU since February because I traded entirely away from financials and headed for strength. XLU is in a high base pattern looking like it would like to break-out. I’ve only rolled the position forward, not up so I got a nice dividend and a few percentage points from the covered calls written. I’m up about 5% net but the capital return on the stock is only a fraction of a percent (I was ITM the while time–sold the $51s). Today’s action makes a slightly tougher decision.

          I also have a position in XLY which is about similarly aged. That one was moving up consistently, but I just kept riding it rather than trade out. I’m ITM there too with the $87s. So, we’ll see as they’re both nice winning positions.

          Made some nice cash secured puts income from the QQQ which I took off a bit early. MCHP put @ $80 I sold on Monday hoping for assignment and then selling the June call is hurting a little bit right now. All told, still feeling good. Unless we really see a meltdown (I think we’re pretty clear of that here) I’m feeling good. I’ve been raising cash holdings the past couple of rounds so I’m pleased overall.

          • Jay May 17, 2017 6:28 pm
            #

            Geoff,

            Great stuff. and nice work!

            I got slammed on investments today but lucky on trades. I own calls on TLT, GLD and VIX. Some times even a blind squirrel finds a nut! – Jay

        • Geoff May 19, 2017 5:03 pm #

          Well, Jay, I “no-actioned” the MCHP put and it looks like it expired OTM today. Quite a fight in the final couple hours that had me thinking it just might pin the strike but those who wanted a close above $80 won the day and it really snapped up right before close. I let a few others go to assignment and I think other markets are trying to tell the equity markets it’s time for a decline. The equity market hasn’t gotten the message just yet but I get the distinct sense that the options market itself gave us a nice lift out of the Wednesday post-VIX settlement downdraft which may not be a sustainable pull while traders readjust a good drop may suit them well. I almost doubled-down long on Wednesday for a two-day pickup into today because the charts all continued to show bullishness with every expectation of closing today. I can’t say that’s changed as of today but I’m going to wait a bit into next week to decide what, if any, capital deployment I choose.

          My metrics have gone a bit bearish and I need to heed their warning. I can’t complain, though. Five months into the year and five winning trading months. I’ll take that batting average any day.

          Happy trading!

          • Jay May 19, 2017 7:28 pm
            #

            Hey Geoff,

            Thanks for the check in and update.I know all about trying to wait out trades!

            Five out of five positive trading months this year is great stuff – congratulations!

            Not sure if you will see this post, our blog rolls over every Saturday, but i was wrong today. I ended up spending more than I intended to closing expiring calls.

            Of course the Gremlins ran up the tape just when I needed lower prices :)! – Jay

  14. Alan Ellman May 17, 2017 5:47 pm #

    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:

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

    NOT A PREMIUM MEMBER? Check out this link:
    http://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

  15. Jay May 18, 2017 3:04 pm #

    What a wild little week! And tomorrow we have monthly expiry. I am going to wait until well into the afternoon session before closing and rolling any open covered calls. We are getting a nice bounce back today but if the selling resumes tomorrow I will not be surprised. Call buy backs will either be cheaper or moot if my hunch is right – a big “if” :).

    Not sure if Lerner and Loewe were market guys? But even they wrote about the vagaries of May in this song from Camelot:

    https://www.youtube.com/watch?v=pljyjiIMH9o

    Hope everyone has a good close tomorrow and nice weekend-Jay

  16. Gene May 18, 2017 6:32 pm #

    Alan — good afternoon — I became a premium member this morning — thank you for the great information and learning opportunities.

    I have a quick question — when using the Ellman calculator for ITM calls, I’m wondering about the calculation for the downside protection. I understand how the calculation is made (intrinsic value/purchase price), but isn’t the true downside protection the breakeven price, as you will still make a profit on the trade at any point above the breakeven price? The profit on the ITM call is capped at the ROO, but still profits at any point above the breakeven. Am I missing something? Thank you.

    Gene

    • Alan Ellman May 18, 2017 6:44 pm #

      Gene,

      Welcome to our premium member community.

      In the BCI methodology we differentiate between downside protection (of the initial time value profit) and breakeven. This allows us to statistically visualize how much a stock price can decline in value, when selling in-the-money strikes, before eroding the time value profit. The Ellman Calculator has columns for both calculations.

      Alan

    • spindr0 May 18, 2017 7:23 pm #

      Ignoring commissions, here are the non margin calculations for covered calls that are utilized:

      Cost = Share Price – Premium received

      Return if Exercised = Strike Price -Cost + Dividends

      Return if Unchanged = (Share Purchase Price – Cost) / Cost

      Break Even = (Cost – Dividends) / Number of Shares

      Downside Protection = (Initial Stock Price – Break Even) / Original Purchase Price

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