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Portfolio Management- Organized Lists To Improve Our Option Profits For Covered Call Writing

How to trade options: I am a big believer in setting yourself up for success. This is accomplished through education, motivation, commitment and organization. Investors reading this article and others are definitely seeking education, and are motivated and committed. However, without organization the process will become difficult and perhaps unmanageable. As we create a watch list of the greatest performing stocks in the greatest performing industries and then buy certain equities and sell their associated options, it becomes essential to set up organized lists of accurate information. Enter portfolio management.
 
Definition: The art and science of making decisions about investment mix and rules, as we coordinate investments to our goals, asset allocation and balancing risk versus returns. The lists required include: 
  • Stocks on our watch list
  • Stocks selected and purchased for our portfolio that month
  • Options sold in a given contract cycle
  • Spreadsheet of options sold showing profits (losses) 

Having these organized lists will allow us to do the following in a time efficient and accurate manner: 

  • Select the most appropriate covered call candidates
  • Prepare for potential exit strategy executions
  • Monitor our stock and option positions

 Watchlist of the greatest performing stocks and stocks selected and purchased: 

The figure below demonstrates an organized list of stocks and their current prices, both highlighted in yellow. You can also enter the original transaction price if these were also the actual list of stocks purchased for a particular contract cycle.  

Watch List of Stocks

Watchlist of the options sold in a particular contract cycle:

Watch List of Options Sold

The option symbols and current market values are highlighted in yellow. Transaction prices can also be included. When option values drop, we may want to initiate an exit strategy to generate additional income or reduce losses.  

Spreadsheet of options sold with profits (losses):

Monthly Returns

The spreadsheet of options sold with profits (losses) show the following: 

A- Stock ticker

B- Purchase price of stock (includes intrinsic value of option)

C- Option ticker (original or previous format shown in this example))

D- # contracts sold

E- Premium per contract minus intrinsic value of option

F- Strike price of option sold

G- Breakeven (stop loss price to some)

H- Profit generated by original option sale

I- B-T-C cost for exit strategies 

The Premium Report: 

Premium members of the Blue Collar Investor Corp receive a report each week where my team screens stocks looking for the best 1-month covered call write candidates. Stocks are screened both fundamentally and technically and a watch list, called the running list, is generated. This will reduce the time and effort required although all final decisions and management of positions is still essential. The figure below will show you the first page of the screening process. The “Weekly Stock Screen” portion of the report faithfully follows the Blue Collar Investor stock selection process. Note the thick blue area towards the top categorizes the screens discussed in my books and DVDs:

Premium Report- Stock Screen

 The end of the report generates your watch list of the greatest performing stocks in the greatest performing industries. We call it the running list because it is constantly being re-screened and updated to provide the most recent information. The figure below is one such running list:

Premium Report- Running List

  

You will note that additional information such as earnings report dates, industry segment analysis and beta are also included on this list.

Conclusion: 

Having organized lists of stocks, options and a spreadsheet of options sold, will allow us to become both time efficient and increase our opportunities of achieving the very highest of returns. We are setting ourselves up for success. These lists will facilitate stock selection, prepare us for potential exit strategy opportunities and help us track our returns.

We’ve got a new Facebook page!

http://www.facebook.com/pages/The-Blue-Collar-Investor/316828718348719

“Like” our page to receive the latest updates in stock selections, new blog articles, and other latest news from The Blue Collar Investor.

Market tone:

Over the past several months the general pattern of the weekly economic reports has been more bullish than bearish. This week was no exception:

  • The US economy added 243,000 jobs in January mainly due to hiring in the private sector
  • The unemployment rate dropped to 8.3%, the lowest stat since February, 2009.
  • The Conference Board’s Consumer Confidence Index fell to 61.1 in January, lower than anticipated but not pessimistic
  • Construction spending rose by 1.5% in December, more than double the rate expected by analysts
  • Nonfarm productivity increased by an annualized 0.7% in the 4th quarter, 2011, but below expectations
  • The ISM Manufacturing Index jumped to 54.1 in January, the 3rd consecutive increase
  • The ISM Nonmanufacturing Index rose to 56.8, the highest level since February, 2011
  • Personal income rose by 0.5% in December but consumer spending remained unchanged
  • New orders for manufactured goods increased in December for the 2nd straight month by 1.1%

For the week, the S&P 500 rose by 2.2% for a year-to-date return of 7.1%

A 6-month chart of the VIX and S&P 500 paints a bullish picture. A declining VIX (from 50 in August to under 18 right now) and an accelerating S&P 500 along with the positive economic reports are guiding this site to a more bullish position:

Market tone as of 2-3-12

 Summary:

IBD: Confirmed uptrend

BCI: Moderately bullish selling an equal amount of OTM and ITM strikes. If economic reports continue to impress, a more bullish position will be taken.

Wishing you well on your journey to financial independence,

Alan (alan@thebluecollarinvestor.com)

www.thebluecollarinvestor.com

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About Alan Ellman

Alan Ellman loves options trading so much he has written three top selling books on the topic of selling covered calls alone. He is a dentist by day, a personal trainer, successful real estate investor, but he is known mostly for his profound stock option strategies.

38 Responses to “Portfolio Management- Organized Lists To Improve Our Option Profits For Covered Call Writing”

  1. Ann February 4, 2012 12:50 pm #

    Alan,

    You mention itm and otm strike prices but what about atm? When do you use those?

    thanks

    Ann

  2. FrankK February 4, 2012 2:54 pm #

    I really like the new Facebook page

  3. Fred February 4, 2012 4:15 pm #

    I agree with Frank…excellent.

    Fred

  4. Edward February 4, 2012 4:16 pm #

    Alan,

    Can you explain the BTC loss (97) in the profit and loss spreadsheet. Thanks.

    Ed

  5. Barry B February 4, 2012 9:41 pm #

    Premium Members,

    The Weekly Report for 02-03-12 has been uploaded to the Premium Member website and is available for download.

    Best,

    Barry and The BCI Team

  6. admin February 5, 2012 8:07 am #

    Ann (#1),

    I view ATM and OTM strike as bullish positions. ATM offer the greatest initial option returns but little or no upside potential or downside protection of that premium. When I state half OTM strikes that would include ATM or near-the-money strikes.

    Alan

  7. Barry B February 5, 2012 12:22 pm #

    Premium Members,

    The Weekly Report for 02-03-12 has been revised and uploaded to the Premium Member website and is available for download. The Running List Earnings Report section has been reorganized by earnings report date. Look for the report dated 02/03/12-REVA.

    Best,

    Barry and The BCI Team

  8. admin February 5, 2012 1:23 pm #

    Ed (#4),

    This is an example of where I “hit a double”. Notice that JDAS appears twice on the spreadsheet. The first time the option was sold for $266 profit, then bought back for $97 (B-T-C). When the stock price went back up, so did the option premium which was sold for the second time (the double) for $480. By executing this exit strategy I generated an additional $383 into my account ($480 – $97). For more information on this strategy see pages 57-61 of “Exit Strategies…” and pages 259-261 of “Encyclopedia…”.

    Alan

  9. admin February 5, 2012 1:25 pm #

    Frank, Fred and many others,

    Thanks for “liking” our new Facebook page.

    Alan and ther BCI team

  10. Barry B February 5, 2012 4:12 pm #

    Re: Post #9…

    I echo Alan’s thanks. Please share our new FaceBook page with all of your friends and ask them to Like us as well.

    Best,

    Barry and The BCI Team

  11. Jerry February 6, 2012 3:17 pm #

    Do you ever use the stocks on your “banned list” after the monthly numbers come out like with earning reports?

    Thank you.
    Jerry

  12. Fred February 6, 2012 4:11 pm #

    Check out qcor. I sold the 36 itm strike option for 3.05. This was a 2.9% 2 week return with protection of 5.4%. I was surprised to see such a good return half way through the month.

    Good luck to our group.

    Fred

  13. admin February 7, 2012 6:37 am #

    Jerry (#11),

    I do NOT use the stocks on our “banned list” in my covered call portfolio. Most report the same store MONTHLY stats on the 1st Thursday of the month leaving only 11 trading days until expiration. In addition they are all stocks we will need to avoid once again the following month. There are so many other great cc candidates that we can use.

    Alan

  14. admin February 7, 2012 2:32 pm #

    Parity:

    I’ve had a few offsite inquiries regarding the relationship between intrinsic value and parity. An option is said to be trading @ parity when the premium = the intrinsic value. For example, if a stock is currently priced @ $58 and the $50 call is trading @ $8, it is trading @ parity because there is no time value, only intrinsic value. This is important when we are considering the mid-contract unwind exit strategy (264 – 271 of “Encyclopedia…”).

    Alan

  15. Steve Z February 7, 2012 5:00 pm #

    Anyone know what’s going on with ENDP?

  16. Octaviano Nino February 7, 2012 5:33 pm #

    Can I have the link to your options calculator, please?

    I sell calls too , but my stocks usually run too high and then I end up with a small profit.

  17. admin February 7, 2012 6:18 pm #

    Octaviano,

    Send an email to:

    alan@thebluecollarinvestor.com

    Put in header “request Ellman Calculator”.

    We will send you the basic calculator along with the associated user guide.

    Alan

  18. admin February 8, 2012 8:19 am #

    Running List stocks in the news: YUM:

    On February 6th, YUM (KFC, Pizza Hut and Taco Bell) reported an outstanding 4th quarter earnings report with earnings up 20% and revenues up 15% year-to-year. Operating profit rose by 14%. Much of this was due to stellar results in China which represented 44% of the revenues.

    Analysts are projecting EPS growth of 12% for 2011 and 14% in 2012.

    Our premium report shows a dividend yield of 1.80%, an industry rank iof “B” and a beta of 0.76.

    Alan

  19. Steve Z February 8, 2012 9:20 am #

    Per my previous question about ENDP, it must be the ongoing issue about their patent and whether Watson will win the court ruling or not. Watson put out a new press release on 2/3/12 and the stock price has been falling since then. http://online.wsj.com/article/BT-CO-20120203-712643.html

  20. Barbara February 8, 2012 9:58 am #

    Steve,

    I agree with you that this downtrend is news driven and moving against market direction. Technicals look bearish. Seems risky at this point. Good luck.

    Barbara

  21. Dave February 8, 2012 10:32 am #

    Alan,

    A few weeks ago you had a blog on gapping down. What about when a stock gaps up, such as BWLD did this morning. Are there any special considerations or re-evaluating you do? It’s tempting to take that 13.5% profit and wait for a pull back, although I know thats not part of the method.

  22. admin February 8, 2012 12:01 pm #

    Dave,

    Thanks for sharing your trade with us. It is a good learning example in several regards:

    You selected a great cc candidate based on fundamentals and technicals but what was the cause of the gap up? The answer is a positive earnings surprise. I always ask myself 2 questions:

    1- Was this a trade I could have improved upon or done differently?
    2- Is any action indicated at this time?

    This is a great example why we shouldn’t sell a cc option prior to an ER. In the rare situations when I decide to hold a stock through an ER, I allow the report to pass, the price to settle and if I still like the stock, then sell the call option. This way you could have benefited from the FULL share appreciation + option premium at a higher strike price. The best of both worlds if you will. Of course, the risk was a negative surprise.

    As it turns out, you are a winner, with a nice return. At this point I look at the option premium of the original strike sold. If the time value is near zero (which it probably is) and you can generate a decent return with the same cash in the same contract month I would consider the “mid-contract unwind” exit strategy. When it is too late in the current option cycle to generate any additional significant returns in the same month I will wait for expiration Friday and then evaluate if I want to roll my options.

    Alan

  23. admin February 8, 2012 4:43 pm #

    ***SITE MAINTENANCE***

    This web site will be unavailabe from 2AM EST to 5AM EST tonight for maintenance. We hope you like and will benefit from these enhancements.

    Alan and the BCI team

  24. Steve Z February 8, 2012 4:57 pm #

    Good luck with the upgrade!

  25. admin February 8, 2012 7:21 pm #

    Running List Stocks in the news: BEAV:

    This stock from our premium list recently caught my eye when on February 1st it reported its 7th consecutive positive earnings surprise. Revenues rose from $542M to $655M and earnings from $0.47 to $0.60.

    Our “running list” shows an industry rank of “B” and a beta of 1.54.

    Alan

    Thanks Steve (#24)

  26. Alan Ellman February 9, 2012 7:58 am #

    We’re still working on ouir site enhancement. Thanks for your patience.

    Alan

  27. Alan Ellman February 9, 2012 3:15 pm #

    Running List Stocks in the news: FAST:

    This stock has been on our premium watch list for 5 weeks. On January 18th it reported a stellar 4th quarter earnings report with earnings up 21% and revenues up 22%. Analysts are projecting earnings growth of 21% in 2012 and 19% in 2013. Our “running list” shows a dividend yield of 1.4%,an industry segment rank of “A” and a beta of 1.09. The next proojected earnings report is due on April 12th.

    Alan

  28. Alan Ellman February 9, 2012 5:25 pm #

    Premium members:

    This week’s 6-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site.

    For your convenience, here is the link to login to the premium site:

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

    Not a premium member? Check out this link:

    http://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

  29. Barry B February 9, 2012 5:35 pm #

    The Blue Collar Investor Members,

    Your Team at The Blue Collar Investor (BCI) is proud to announce that our updated website is now up and available for you to use. Throughout the process of updating the website, our goal was to give our members a world class user experience and provide the industry’s best site for covered call information and education. We believe that we exceeded our goals.

    Visit us on Facebook as well…while you are there, please “Like” us and share with our posts with your friends on Facebook.

    Best,

    Barry and The Blue Collar Team

  30. Chris F February 9, 2012 7:00 pm #

    Like the site upgrade!

    Any thoughts of adding a membership discussion / forum?

    THX

  31. Alan Ellman February 9, 2012 7:35 pm #

    Chris,

    Thank you. We have a few more additions to this site and perhaps a few wrinkles to iron out and then we will address enhancing the premium site as well. I encourage ALL our members to send your suggestions and ideas so we can create a site that meets the needs of our membership. With your help, we can achieve our goal for the BCI community to share the best covered call site possible.

    Alan

  32. JR February 9, 2012 11:18 pm #

    Really like the professional feel of the site. Great work to the BCI team and thank you Alan for all the great reports and info on Covered Call writing.

  33. Alan Ellman February 10, 2012 6:17 am #

    Running List Stocks in the news: FUL:

    On January 18th FUL reported its 4th quarter earnings with a “beat” of 10.2%. Revenues rose 18.6% with a growth projection of 6% to 9%. It boasts a favorable price-to-sales ratio under “1″.Our premium report shows and industry segment rank of “A”, a beta of 1.46 and a divdend yield of 1.00%.

    Alan

  34. Art Z February 10, 2012 6:25 am #

    Hi Alan,

    I’ve recommended your site to several people- we’ll see if they stay with it and get going or not. Here’s something that I didn’t expect in joining with a premium membership: I have been very successful using the newsletter stocks, not to do CCs as I intended, but just going long the stocks themselves.

    The screening process is described in your book and I feel it is thorough. So at least for right now, I will continue trading stocks based on the weekly newsletter. (also do my own screen from the candidate stocks as well).

    Art

  35. Steve Z February 10, 2012 10:56 am #

    Alan, congratulations on the new website. Any tips you want to give us about how you envisioned we would use it for improved effectiveness? I don’t want to overlook something and miss out on it.

    Steve

    • Alan Ellman February 10, 2012 12:49 pm #

      Hi Steve,

      Our goal for the re-development was to make a more organized, easier to navigate website that creates a great experience for beginners as well as experienced Blue Collar Investors. Included in the updated site are:

      • Easier blog navigation with consolidated Blog Categories
      • Added service for beginners with The Beginner’s Corner
      • Cleaner, easier navigation and flow (blog is not separate as was previously)
      • 3 steps to success, easy to follow suggested progression for site visitors.
      • Links to our social networks (twitter, facebook & youtube)

      Once we put the final additions to the site, we will then do the same for the premium site.

      My team and I appreciate all the positive feedback our members have sent on and off site.

      Alan

  36. Steve Z February 11, 2012 2:11 pm #

    Goals seem good to me. I especially like the consolidated categories. Speaking of which as an FYI, the consolidated list on the right hand side at the top of the blog has some typos/errors. I’m pretty sure the one labeled “exit strategies” without the caps is meant to be deleted entirely since is redundant with the first one and is incomplete. I also suspect you wanted either the second or third one called Covered Calls or Covered Call Writing to be deleted since they have duplicative blogs in them also.

  37. Alan Ellman February 11, 2012 4:15 pm #

    Steve,

    Thanks for the feedback. It may take a week or two to iron out the minor wrinkles in the re-developed site. To tell you the truth, I had no idea how much time and effort was involved in a project like this. My team did a fabulous job and along with our loyal members we will continue to strive to make this the best covered call site posssible.

    Alan

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