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Margin Accounts and Covered Call Writing

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.

8 Responses to “Margin Accounts and Covered Call Writing”

  1. Alan Ellman February 9, 2013 8:23 am #

    Running list stocks in the news: KORS:

    Michael Kors (fashion retailer) is a company this site has highlighted several times over the past few months and is currently a candidate on our premium watch list (next earnings report due out 2-12).

    On November 13th, KORS reported a stellar fiscal 2nd quarter earnings report with earnings up 96% year-to-year and revenues up 74% in that same time frame. Long-term anticipated earnings growth rate is at 31.4%

    Our premium watch list shows an industry segment rank of “B” and a beta of 1.57.

    As a result of its outstanding fundamental and price performance, the earnings estimates have been incredibly strong as shown in the chart below (click on chart to enlarge and use the back arrow to return to this blog):

    Alan

  2. Barry B February 9, 2013 2:01 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 02-08-13.

    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 Earnings Season is in full swing right now, 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/

    One last point, please try to download the report as soon as you can. We are still concerned about the NE snow storm and want you to have the report in case of a power problem at our hosting center due to the storm.

    Best,

    Barry and The BCI Team

  3. Paula February 10, 2013 8:43 am #

    Alan,

    With expiration Friday coming up this week several of my options are in the money. My question is what is the best way to decide whether to roll out the option or let the stock be sold and use the money in another stock? Thank you.

    Paula

    • Alan Ellman February 10, 2013 2:29 pm #

      Paula,

      Congrats on your recent success!

      First make sure the stock still meets the system criteria. If you are a premium member just check to see if the stock was on the recent list. Most important is to make sure there is no upcoming earnings report prior to the March expiration. If there is, I normally allow assignment and use the cash for a new position. Finally, the calculations must meet your goals. For me, if you deduct the debit for closing the near-term short position and add the credit for the March premium and then divide by the strike price x 100, if the result is between 2-4%, I will give rolling serious consideration. For those mathematically challenged, the Ellman Calculator will do the math for you in the “what now” tab. Also, remember that another benefit of rolling out is that you are also generating downside protection of the option credit because you always roll out to an in-the-money strike.

      Keep up the good work.

      Alan

  4. Barry B February 10, 2013 1:01 pm #

    BCI’ers…

    You might want to check out Schwab. Last week they announced commission free ETF trades. I sent an email to my Schwab broker on Friday afternoon for clarification…which ETFs, will the no commission policy allow options to be included, etc. I’ll publish his response as soon as I receive it. This may be an opportunity to reduce your transaction costs.

    Stay tuned…more to come.

    Barry

  5. Alan Ellman February 10, 2013 3:51 pm #

    Offsite rolling out question:

    Hi,

    Although is against the rules I did the following:
    Bought 100 shares of ATVI @10.95.
    Sold 1 Feb 11 Call For 73$.

    Now the stock is at 13.41$. I think it might go down after the sharp move. I tried to figure out whether I can roll out or roll out and up.
    It doesn’t seem to me that any of the choices is valid since the 11 call of next month has the same price as the current month.

    Also the 12 and 13 strikes don’t seem to make it either.

    What do you think?

    Thanks,
    IB

    My response:

    The sharp run-up was a result of a positive earnings report definitely a rule-breaker! That being said, you still generated a nice return of almost 7% for the month. A negative surprise would have required several boxes of Kleenex!

    So let’s explore why the numbers don’t make sense (as you astutely pointed out):

    Your impressive initial option premium was the result that a high implied volatility option (pre-earnings) provides. Now that the report has passed that level of volatility has decreased significantly causing the time value of the later-term options to decline as well. If you look at the options chain below, if you roll out, you will actually lose money based on the current options chain. Rolling out and up to the $12 call will be a break-even scenario and you stand to make 2% by rolling out and up to the $13 call. Use the “what now” tab of the Ellman Calculator to see the specifics. However, if you are anticipating a downturn in the share price, rolling out and up is not indicated as this is a bullish exit strategy. See the option chain below (click on image to enlarge and use the back arrow to return to this blog).

    Alan

  6. Paul February 11, 2013 6:34 pm #

    I’m looking at CREE for the March contracts. Several good choices both in and out of the money.

    Good luck to all.

    Paul

  7. Alan Ellman February 12, 2013 7:30 pm #

    Premium members:

    We recently posted a new file in the “downloads/resources” section of your premium site titled “Tax Treatment for Covered Call Writing” In this article, we show examples and reference forms and sites of interest. Thanks to Owen Sargent, CPA for contributing this up-to-date information for our members.

    Alan

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