Most covered call writers purchase a stock specifically for the purpose of selling the corresponding call option. The investment time frame is one to two months as earnings reports will end the “run” of even the best performing equities (if you agree with my guidelines). In many cases share assignment is permitted by the seller and even if early assignment occurs, our investment would still have been a successful one. In other words, losing (selling) the stock is no problem and really just part of the strategy.
There are other investors who sell call options in a different manner, called portfolio overwriting. In this instance, a call option is sold on a stock already part of an existing portfolio. That option is selected in a manner where it is NOT expected to be exercised.
Why a Portfolio Overwriter does not want his shares assigned:
This is basically a tax issue. The holding period for short-term versus long-term capital gains is one year. If the stock has been held for less than that time frame, the writer would prefer to retain the equity for a longer time frame. In addition, if the shares have appreciated substantially from the cost basis, selling in any time frame may not be in the investor’s best interest.
Another important tax issue:
If the underlying stock has not accumulated the full 1-year holding period for long-term capital gains, covered call writing may suspend or eliminate the current accumulated holding period. It is advisable to consult with your tax advisor on this matter.
Advantages of portfolio overwriting:
- Achieve higher returns in declining, neutral and slightly bullish markets.
- Beat the returns of long-term holders of equities
- Increase portfolio downside protection, thereby minimizing risk
- Generate a monthly cash flow
- Use option profits to compound your money
Strike selection for portfolio overwriting:
Since our goals are to generate a monthly cash flow and NOT have our shares assigned, common sense dictates that we sell O-T-M strikes. This will benefit us in that time decay is greatest for these strikes and option value will dissipate as we get closer to expiration Friday. Remember, we don’t want our option strike price ending up I-T-M. Our mindset needs to be slightly different when selling these O-T-M strikes in that a 2-4%, 1-month return is too lofty a goal. I would set it more at 1-1 1/2% per month, ensuring that the implied volatility of the option is not too high. A high IV means that the market is anticipating a large price movement and that increases the possibility of the option ending up I-T-M. So settle for a lower premium and therefore less chance of assignment. As a guideline, I like to see the share price at least 5% lower than the strike sold. As an example, if I sold a $50 strike, I would want that equity to be currently trading @ $47.50 or less, with the option premium generating 1 to 1 1/2% for the month.
Why some portfolio overwriters sell I-T-M strikes:
This is a riskier strategy if keeping the stock is important to the investor but there is a case that can be made for it. It is generally used when the stock or market in general is declining and the I-T-M strikes will generate greater returns with more protection. Also, the higher delta of the option (amount the option changes with a corresponding $1 change in the stock price) will make it easier to close or roll the position (buy back the option). Investors also use the I-T-M approach in conjunction with technical analysis where support and resistance points are identified and I-T-M strikes are sold at resistance and closed or rolled if still I-T-M near expiration Friday.
What if early assignment occurs?
This will not occur often but it will eventually happen. In these cases, purchase an amount of shares equal to the obligation to deliver and notify your broker that these newly acquired shares should be indentified as the shares delivered to meet the option obligation. Check with your broker, before the fact, as to the best way to manage such scenarios.
Conclusion:
Portfolio overwriting provides many of the advantages of the buy-write strategy but because of tax implications, income goals and strike management differ and need to be fully understood before taking action.
Premium report enhancement:
The BCI team is constantly working to improve the quality of the products we provide to our members. Premium members will note that for the report dated 4-21-11 we have made changes to the running list (watch list). The top portion of this list will now highlight all the equities that have passed the BCI screens in the most recent week as shown below:
Running list: passed BCI screens
The lower portion of this list will show the stocks that failed one or more of the BCI screens but were previously on the running list having passed the screens:
Running list: Failed one or more of the BCI screens this week
We trust that you will find that this improvement will make it easier to locate your choices, save you time and make the report a more user friendly experience.
Premium site is expanding:
Premium members: This coming Wednesday, April 27th, the premium site will be under construction and you will not have access to this aspect of the BCI site from 7PM to 3AM. You may want to print out the premium report in advance. This will NOT affect other aspects of our site. We are expanding the site to accommodate the growing population of premium members and thank you so much for your support and interest.
Market tone:
We had yet another positive week of economic reports as well as positive earnings which overshadowed a credit-rating agency’s warning about the outlook for the US government’s debt burden:
- Sales of existing homes increased by 3.7% in March after declining by 8.9% in February
- ALL regions in the US showed improvement in existing home sales
- Housing starts increased by 7.2% in March after falling by 18.5% in February
- The index of leading economic indicators rose 0.4% in March, better than expected. This index has now been on an uptrend for 9 consecutive months
- The coincident indicator (current economic activity) rose 0.2% in March mainly from industrial production and employment
Summary:
IBD: Confirmed uptrend
BCI: Cautiously bullish selling a mix of in-the-money and out-of-the-money strikes. This site is extremely encouraged by the US economic recovery and mindful that we are in the third year of a presidential term which is historically positive for the stock market. However, we still have concerns over global issues including unrest in the Middle East, the Japan earthquake and rising oil prices.
Happy holidays from our family to yours,
Alan, Linda and the BCI team (alan@thebluecollarinvestor.com)
Alan,
Is there any reason why financial advisors are not using this strategy for the accounts they manage? It just seems that this could be a good way to make their clients happy or even impressed.
Barbara
My IRA account has mutual funds. I’m thinking of converting these to ETFs that mirror the same indexes and selling options on them. Is there any downside to this?
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 in the “Reports” section. Look for the report dated 04-22-11.
Please note the enhancement to the report this week. The “Running List” is now sorted by stocks that “Passed Previous Weeks & Passed This Week” (white section) and stocks that “Passed Previous Weeks & Failed This Week” (pink section). We believe that this will improve the usability of the report.
For your convenience, here is the link to login to the premium site:
http://www.thebluecollarinvestor.com/member/login.php
Best,
Barry
Barbara, I imagine most financial advisors have enough trouble explaining to their clients why they didn’t sell a stock going down. Having to explain why he sold a stock that continued to go up could be professional suicide. You have read Alan’s books. Most people think an option is whether to have fries with their Bic Mac.
Kevin, your investments should be in several pools of money. I would be inclined to keep some money in the better performing mutual funds, but put some to use selling covered calls. The advantage of the ETFs for covered calls is there is less volatility, and a much smaller price than say, a NFLX or PCLN.
Premium Members,
Rev A for the Weekly Report for 04/22/11 has been uploaded the the Premium Site.
Best,
Barry
In spite of my answer to Kevin above, I am not a big fan of mutual funds. Using the ETFs as a mechanism for selling covered calls is ok, but I am not a huge fan of ETFs, either. This is simply because there are now more mutual funds and ETFs on the market than there are individual stocks.
Clients ask me why I don’t like mutual funds. The answer is simply that I see no reason to pay someone else to buy stocks for me, and worse, take a piece of the pie, whether the stocks lose money or make money.
I have the same response for every person who tells me they don’t know anything about stocks: Do you eat Cheerios? GIS. Do you put ketchup on your hamburger? HNZ. Do you were a nylon windbreaker in the fall? DD. Got Post-It notes on your desk? MMM. Put a band-aid on your cuts? JNJ.
If any of you have ever read Peter Lynch’s books you will know that he says one of the best investments he ever made for the Fidelity Magellan fund was when he saw a plastic egg, with pantyhose in it, when his wife came home from grocery shopping. Pay attention. Next time you go to the grocery store, you will see KO, PEP, GIS, CAG, HNZ, K, PG, CLX and YUM. Drive down Main Street in your town you will probably see MCD, C, BAC, JPM, YUM (again). If you are using your cell phone (hopefully hands free) you should hear T, or VZ. Drive by a farm you should think MON, POT, DE. If you are driving, you are hopefully not thinking BUD, but when you get home, and turn on the game, go ahead, have a cold one. If you read about a car accident think ALL, AIG, BRK, HIG.
See? Stock picking is NOT hard. ANYBODY can do it. Every consumer can be a stock picker if they simply pay attention to the company that makes what they wear, drive, eat, live in or live under, or otherwise consume. They just don’t realize what they know. The BCI have taken it one step farther, and learned to screen stocks to find the best of the best. They have also learned how to put that knowledge to good use making a few extra dollars on the stock movement by selling covered calls on those stocks.
Before someone jumps on me, yes I do own some mutual funds, but they are foreign stock funds and bond funds, for obvious reasons.
BTW, many of the stocks mentioned above are optionable and pay wonderful dividends (3-7%). If you were really paying attention to this weeks blog post above, I just gave you a shopping list for “portfolio overwriting”. Go check them out.
Happy trading everyone.
Hi Alan & Co.,
This is off topic, but meant to ask as soon as you started offering “other” stocks to your premium selection. I looked around expecting to see an explanation, but can’t find one. If you can point me to one, maybe that’ll save time.
Anyway, the selection of “other” stocks, beside those in the IBD weekly 50, seems like a fundamental departure from the selection criteria in all of your books and other lessons. Selection always began with what was originally the IBD100.
Now I am encouraged that the “other” stocks still pass all IBD selection criteria. So I hope and suspect that they are all still CANSLIM stocks that perhaps came out of the Friday weekly review, stocksonthemove, or perhaps gleaned from the IBD site using search screens.
Encouraged and comfortable, but I, and I think other premium members, would like to know how the fundamental search and screening process has been modified.
Thanks as Always,
- Doug
Barbara (#1),
I’d like to add another thought to Owen’s “fast food reference” (let’s face it, the man knows how to make us smile!):
Many financial advisors may not have the time to monitor the covered call positions of all their clients. As a result they may not take the time to master this strategy to become comfortable with it. I’m sure that there are many outstanding advisors who use this strategy for their clients when appropriate. Over the years I have been contacted by several who seemed highly motivated to learn the strategy on behalf of their clients. For most, though, it is simply not time efficient to use this strategy for a majority of their investors.
Alan
Barbara,
To add to Alan’s response about the time involved, remember the financial advisor is dealing with one, or two, accounts per investor. if he feels the need to get out of a GOOG call, he might spend half the morning going from account to account making trades. Wouldn’t you be happy to be the one who owns the account he finally got to, at 11:52AM, when the stock has crashed $45?
It would be entirely different if he was working with a pooled fund of client money, but that gets into so many regulatory issues and expenses that it simply isn’t worth it unless your investors are ponying up a million dollars, or more, each.
Doug,
I’m happy to address this issue and glad you asked. First let me say that a better term to describe the change would be “enhancement” rather than “departure”. As you correctly pointed out the IBD 100 has been the backbone of the BCI stock selection process. This was the result of my using a myriad of screens over many years and coming to the conclusion that this fabulous list was resulting in the greatest returns. It has always been the STARTING POINT for the BCI system. It also has NEVER been the only resource we use. Why close our eyes to other potential candidates? Chapter 16 in “Cashing in on Covered Calls” is devoted to and titled “Additional Sources for Locating the Greatest Performing Stocks” and I reference several other resources other than the IBD 100. In my seminars I tell stories of conversations I had with friends, restaurants and businesses I frequented that led to stock selection outside the IBD 100. Some of our members may remember the story I tell of how I was speaking with a woman about to get married and told me about the “KNOT”…made me a lot of money and it wasn’t an IBD 100 stock at the time. So we always usd a broader base than just the IBD 100 which was our main resource.
Now let’s fast forward to a few months ago when the IBD 100 became the IBD 50. Many of our members and the entire BCI team felt that the number of screened stocks generated a list that was of the highest quality but perhaps a little short on quantity. As a result we decided to use a database of stocks we have developed over the years (thousands of stocks) and screen them in the EXACT manner that we screen CANSLIM, IBD 100, restaurants and businesses we frequent, stocks heard on Cramer’s Mad Money and on and on. ALL stocks pass the same SmartSelect screens, Scouter screens, volume requirements etc. Nothing has changed in this regard other than we are spending hours more each week to provide our members with more candidates to choose from. That being said we also provide you with the information as to which equities were derrived from the IBD 50 list. If anyone wants to select only from the IBD 50 the report makes that extremely easy to do. I make my selections from this premium list and have complete confidence (for both me and you) that ALL stocks meet the fundamental, technical and common sense screen requirements that define the BCI system.
I really appreciate the question because over the years I have found that when I get one question there were others who may have been reluctant to ask it…so thanks.
Alan
Doug,
The reason Alan used the IBD100 as his starting point was that it is a list of a) very popular stocks, b) shows the graph on the page, and, most important, had a little “o” next to the price if the stock had options available. It simply was a ready made list that required little effort to start your watch list with.
When anyone discovers a different, optionable, stock, which passes the screens, it is added to the list to inform the BCI. As you read the comments you will see many people mentioning stocks they have found. The market changes fast. There are stocks being added to the option list all the time. They don’t necessarily meet Alan’s screening, but it is difficult to keep track of them as they fall in and out of favor.
Some of us were irritated when IBD cut the list to 40, from 100. The lower on the list the less likely it would pass, but it was still a good starting point. Maybe someday the CBOE will have a BCI screener on the optionable stocks on their website. Of course, that might be the day too many people have found our secret for making extra money, and our profits may disappear. (Shhhhhhhh. Be vewy vewy quiet. I’m hunting profits. huh-uh-uh-uh-uh-uh-uh-uh)
Alan & Owen,
Thank you for the excellent answers. Been a while since I first read “Cashin In” so I’d virtually forgotten that chapter and other sources. Back then, pre-premium, Owen reminds me that yes, for the do it yourselfer, the IBD100 listing, with charts, “o”s, etc. was key to an efficient weekend process.
I must add that having you folks sleuth through many other sources beside the 50 has added twice the value to the premium membership, at least, considering how much added time you save your members for what would be substantial extra effort to find other candidates. And they all meet the exact same criteria. Excellent!
Cheers,
- Doug
To The BCI Community,
Every time earnings season rolls around, there are a large number of questions that come up as to why we selected a specific ER date for the date that we publish in the report.
So here is an open response to an email that we received today about WRC…
I’d like to address your question about the ER date for WRC.
To start with ER dates are moving targets…that’s why we always warn our subscribers to check the date before placing any trades. Other times, there are multiple unconfirmed dates published by different market data organizations. This is the case with WRC. the dates that we looked at were:
Earnings Whispers – 5/30
Earnings.Com – the period between 5/9 and 5/19
IBD – 5/10
Finviz – 5/9
Briefing.com – 5/9
However, if you look at the last actual WRC reporting date, you’ll find that it was on 2/28 according to Earnings.com. From the historical perspective, the “most likely” ER date is approximately 90 days from the last ER date. In this case, it would put the “most likely” date at 5/30…per Earnings Whispers date.
Since ER dates are always moving targets, Alan when establishing his methodology (based on over 20 years of covered call trading experience), decided to use Earnings Whispers as the “source of truth”. Over the years, the Earnings Whispers track record has been the closest to reality. So, when there is such a wide spread difference between published dates, the practice was established to use Earnings Whispers as the source of truth…but using the “90 day rule of thumb” to confirm. This was exactly the case with WRC.
Again, as a trader and as the “CEO of your own money”, you must establish the practice to check the ER date prior to placing any covered call trade. I apologize if I’m sounding like a broken record, but this practice is a foundational building block to the BCI system.
I hope this helps.
Best,
Barry
OWEN (#!!),
To reinforce Owen’s comments, whenever a stock has been mentioned in the Blog, I immediately (typically the same day) run it through all of the screens in the BCI system. If it passes, then that stock is included in the “Other’ category in the next published report.
Best,
Barry
New video demonstrating ONE WAY to use the premium report:
http://www.youtube.com/watch?v=Lz5Y3d9WHdA
Alan
Update to Premium Report coming later…
There will be a Rev B to the weekly report coming out later today. It is important to note that it does not affect any of the data that you use for your decision making. The Watch List section does not change. The only changes that will be published are changes to the Weekly Screening section. These changes will only reflect 3 stocks that were not included in the original screen, but failed the screening process…so there is no impact to your decision making data (The Running List). The change is for completeness only.
I was focused on the enhancements to the report didn’t include the 3 stocks that failed the screening process.
Best,
Barry
All;
Per VPHM’s website – earnings to be reported 4/28. I like this stock and have owned it in the past, but will wait till the er comes out to decide. btw the current running list indicates 5/26.
Alan,
Which tab from your calculator did you use in the new video shown above? I am a new member and just started learning the calcultor.
Thank you.
Anita
A few points:
1- NFLX down 5% after hours on disappointing earnings:
http://www.investors.com/newsandanalysis/article/570033/201104251406/Major-Indexes-End-Mixed-Netflix-Falls-After-Hours.aspx?ven=aolcp
2- Gold and silver prices could be impacted after Fed Chairman Bernanke speaks on Wednesday. Many of the top-performing ETFs on the premium ETF reports have been commodity-related.
Alan
Anita (#18),
I used the “multiple” tab. This is the best tab to use when comparing multiple stocks and strikes. You can use the single tab when comparing multiple strikes for one stock. There is also a copy of the user guide in the “resources/downloads” section of the premium site.
Alan
Premium Users (#16),
The revised Weekly Report for 4/22/11 has been uploaded. Look for the reported dated 4/22/11 REVB on the Premium site.
There were technical difficulties during the data download last Thursday night that weren’t discovered until this morning. The data details have been corrected. In my earlier posting, I indicated that there were no changes to the actual data. As it turns out, there was one change. The only actual change to the report aside from report data layout was with the stock SWI. This stock has been eliminated from the list (it’s Group RS rating failed our screen) . All of the other data items are 100% correct.
Please accept our apology for the multiple revisions this week. We were focusing on getting the enhanced layout right to improve readability and usability. We hope you agree.
Best,
Barry
TITN:
This new member of our premium watch list posted a fabulous 4th quarter ER on April 18th. Titan Machiney makes construction and agricultural equipment. Revenues rose 46% and net income tripled to $10.4M. TITN also acquired three more companies in 2011. It trades at a very reasonable PEG of 1.o. Our premium running list shows a segment rank of “B”, a beta of 1.34 and a projection of 7/18/11 for the next ER.
Alan
I bought 100 NFLX at $234 and sold the May $235 for $9. NFLX is signing up more than a million customers a month, beating Comcast. It is going to be developing its own content which will only be available on Netflix. NFLX may be down today, but it will be up again, soon.
***Premium members***
Tomorrow, Wednesday April 27th, the premium site will be under construction as we expand this aspect of the BCI site to accomodate the growing number of premium membership. ONLY this aspect of the BCI site will be unavailable from 7PM to 3AM EST. You may want to print out the premium report in advance.
Alan
Owens trade:
For new members there are a few points to consider regarding the trade above (#23):
1- Owen waited until after the earnings announcement to place the trade, a great decision since the report disappointed dropping the stock $22.
2- The $9 premium represents a 4% 3 1/2 week return. This shows us that the implied volatility is high as the “market” is anticipating a significant price move prior to expiration Friday. As Owen stated, he is betting on an upward move as IV does not predict direction, only degree.
3- Owen’s breakeven is $225
4- The price dropped to $229 after the trade was placed but is up in pre-market trading today.
This was a great example as to why we never sell covered calls prior to an earnings report.
Alan
Why is Yahoo still showing the options chain for April? I was checking the returns for SLV and the May 45 looks pretty good. Any thoughts?
Len
Len,
Watch the dates on the option chains. What you are seeing is the April 29th weekly options. They only exist on a select group of stocks, and Yahoo is one of them.
Owen,
I missed the dates, thanks.
Len
Hello! I’m a newbie learning a lot from your site – THANKS
I have what I think is maybe an odd question related to this – I have some good money in an IRA, and i want to keep the shares. Why could I not sell a call option a little OTM, collect a big premium, and then if it gets exercised then just buy it back?
I’m wanting to keep the shares – there’s no tax implications since its in an IRA.
The only issue I can think of is if the stock appreciates to ITM, I may be out the difference between the strike and the higher stock price. But I’m thinking that a strike about 10% above the starting point, every month, would be safe.
Thoughts?
THANKS
Mike,
Welcome to the BCI community. You make a valid observation. Your strategy is called portfolio overwriting (the topic of this week’s article) where you write a call on a stock that you already own and want to retain. You are also correct that in this situation you would normally sell out-of-the-money calls. There are two considerations you should factor in:
1- In my view you should never sell an option when there is an upcoming earnings report. For that contract cycle you may want to own the stock through the ER and then sell the option after the report passes.
2- Most of the time you can avoid assignment by rolling the option. If you have my second book on exit strategies see pages 95 – 109 where you will find numerous examples as to how this works.
Keep up the good work.
Alan
Mike,
As you gain more experience with covered calls, the next strategy you might want to learn is the “Collar”. With this strategy, you can plan for both the upside appreciation and a potential downside drop. The collar is composed of a covered call and a protective (long) put. The call gives you the upside appreciation up to the strike price you select, while the put that you buy gives you the downside protection.
The mechanics of this strategy are a bit complex and is beyond this posting. As you can begin to think about the next phase in your learning, this should be one of your focus areas IMHO. There are occasional postings on this topic. As a matter of fact, Alan has written a weekly article on this strategy in the past. You should be able to easily find it…look for his article dated 10/23/10. As with all strategies discussed here, always paper trade first until you master the details.
Best,
Barry
Premium members:
It has been brought to my attention by many of our members that the latest premium reports (stock and ETF) were missing from the premium site this morning. This was the result of the site expansion that took place yesterday and for some reason these two reports didn’t make it back. They have since been re-uploaded to the site and are now available. We apologize for this inconvenience and thank you for your understanding.
Alan
Premium members:
This week’s report of top-performing ETFs has been uploaded to your premium site. New members: if you didn’t receive a direct email notifying you of this upload, please let us know and we’ll add your name to the premium mailing list. Premium members, who have changed their email addresses and do not receive direct emails, send your updated address to:
info@thebluecollarinvestor.com
For your convenience, here is the link to login to the premium site:
http://www.thebluecollarinvestor.com/member/login.php
Alan and the BCI team
Always a learning blog. Does the area exist that merges some of the key items to exercise this strategy. Has a video or comment been posted previously that would educate one as to how to set up a spread sheet in order to put a ticker in a field and information all comes together. thanks David
David,
Here is a link to a video I recently produced that walks you through the process of stock selection and calculations using the premium report:
http://www.youtube.com/watch?v=Lz5Y3d9WHdA
Alan
Hi Alan,
You used the words below in the above article:
I would set it more at 1-1 1/2% per month, ensuring that the implied volatility of the option is not too high. A high IV means that the market is anticipating a large price movement and that increases the possibility of the option ending up I-T-M.
Would you quantify “High and not to high” as used above?
Would these parameters also be helpful in writing options on a position with a large loss
( the stock has nose dived e.g. BCSI), so that exercise can be avoided.
Thanks Alan!
Bill
Alan, very helpful video. My question is are the spread sheet you use your own creation or do they exist on this site, or in the ellman calculator. Also where does the option chain used in the video come from and is there a existing program you use that merges the premium site with option chains and spread sheet. Thanks David
Bill (#36),
The main factor that drives our option premiums is IV since the time to expiration is generally the same for our 1-month options (we are not comparing to options trading, let’s say, 6 months into the future). Other factors like interest rates and dividends play a minor role. Therefore, the best way to make a quick assessment of IV or market anticipation of a price move is via option returns. My general GUIDELINES are as follows:
1- My 1-month goals are 2-4%
2- A 1-month return of greater than 6% (I may go to 7% in bullish markets) is too high (risky) and I will avoid that stock (remember my Taser story in book I!).
3- A return below 2% as in the article above may be acceptable in cases when we are portfolio overwriting.
In the BCSI example, the earnings report caused a gap down in price. If we were “nurturing” that stock back up by selling out-of-the-money strikes this rationale WOULD apply. If a certain strike reflected a high IV we may want to move on to a higher strike. If the higher strike generates little income we could rely on our exit strategies. If a strike is in-the-money on expiration Friday, we could roll out and up to maintain that equity. Excellent observation!
Alan
David (#37),
The “Elite” version of the Ellman Calculator is located in the “resources/downloads” section of the premium site. You will also find the user guide in the same section. If you are not a premium member send me a direct email and I’ll send you a FREE copy of the Basic Calculator and user guide.
As far as integrating live quotes into these spreadsheets there is currently no tool available for doing this. Our BCI team is working on ways to accomplish this and will post any updates we have in this regard down the road. Live option quotes can be retrieved from several resources:
1- Your brokerage
2- http://www.cboe.com
3- http://finance.yahoo.com/
For the last, place the ticker in the box on the upper left and hit “get quotes”. Then in the left column of the next page click on “options”. This information can be fed into the blue cells of the calculator and the calculations will appear in the white cells on the right side. These are FREE sites.
Alan
Alan
I have used Delta of .2 or less and may have to
go out farther than I like (5 – 6 months) but have had sucess in not having stock called.
JIM
Jim,
That’s an excellent way to frame it. For new members, low delta options are classic for deep out-of-the-money strikes. As a result, they are less likely to be exercised. One consideration with an approach that goes 5-6 months out is that we are going through one or two earnings reports which could have a major impact on our success. Thanks for providing us with the “delta perspective”.
Alan
Hi Alan,
From the premium report, the next ER date is on 05/26. But there was a news from SXCI that the company would host a conference call on Thursday, May 5, 2011 at 8:30 a.m. ET to discuss the Company’s fiscal 2011 first quarter financial results.
How different is this from the ER date?
Thanks
hrkstox
hrkstox,
In general, this conference call could mean that the ER date was changed to May 5th or that there would be a “pre-announcement” regarding the earnings release. Companies will sometimes do a “pre” if there is a discrepency between market expectations and the actual report. It mitigates investor outrage or euphoria.
There has been postings on this site regarding a few of the anticipated ER dates being different from site to site. The BCI team uses http://www.earningswhispers.com as the “go to” site but check others as well. When there is a discrepency we go 90 days from the last report. In this case SXCI last reported on 2/24 making the 5/26 date look like the best choice.
In the specific case of SXCI earningswhispers had the date last week at 5/26 but UNCONFIRMED (not in bold on your premium report). Today we see it as 5/5 on this site and CONFIRMED reacting to the same report you saw.
When this occurs I will buy back the option sometime prior to 5/5 and either hold the stock through the ER or sell the stock depending on the confidence I have in this equity. Conservative investors with low risk tolerance will usually sell the stock. As we all have seen, ERs can send a stock to the moon or the bottom of the ocean.
Alan
Jim L,
The only problem with going out 5-6 months is the next earnings report. Netflix closed at $251.67 on Monday. Then it reported its earnings. On Tuesday it closed at $228.91., and it has still only recovered to $232 at yesterday’s close. That’s kind of a steep price to pay to use to a fixed delta figure.
Just a thought from a guy who got whacked hard by Google for ignoring the earnings report rule.
Even Jim Cramer agrees with the BCI:
“The height of earnings season is a horrible time to be trader, which is why I’m telling you what I always do during the three weeks of every quarter when the cacophony of quarterly reports are at their most confusing: stop, look and listen, but do not trade,” Cramer said.
While the “Mad Money” host doesn’t advise trading earnings, he plans on monitoring them. What follows is his earnings “Game Plan” for the week of Monday, May 2.
http://www.cnbc.com/id/42823350
Allan–
I am a subscriber to your premium site and have noticed that your “passed all screens” list is composed primarily of stocks who have prices near or above their resistance leval. While some may be winners and continue to climb, many will fall back.
Since many stocks trade in well defined trading ranges, and regularly oscilate up and down, I would like to locate stocks following this established pattern and climbing up from the area near their support leval. I think that these stocks may be safe candidates upon which to sell calls.
Is there anywhere to find stocks trading in these oscilating patterns, and rising from the bottom of their well defined range.
Thanks for everything
Mike
Mike,
There are a myriad of technical indicators that can be applied in a myriad of ways. What is presented in the BCI system (books, DVDs, premium report etc) is what has worked best for me over the years. However, I do recognize the fact that there are other approaches to technical analysis and support and resistance is certainly a viable consideration. Over the years I have had inquiries about many other approaches and I respect them all.
One approach to achieving your goal and still using the same free site from which we do our technical analysis (www.stockcharts.com) would be to use “moving average envelopes” instead of moving averages. As an example, I have set up a chart using ORCL and a 20-d moving average setting the upper and lower limit @ 5% above and below the average. You can adjust the percentage and/ or average to your specs. The stocks on the premium list can then be evaluated to your specific needs. Once you set the parameters and stay on the site, tickers can be entered with the same chart parameters. Here’s the chart:
Alan
I appreciate covered-call writing (especially the Ellman variety).
Yet I find writing puts to be a better play, if you are very bullish on an underlying stock. Make sure to practice a solid, disciplined strategy, of course. My particular strategy recently gave me an instant 47% annualized profit…enough to pay my rent plus some over the next five months.
I don’t want to have my stocks called away during a big upswing. Portfolio overwriting’s less than two percent premium per month isn’t sufficiently profitable, for the risk, imho.
PS. Your books have helped me to think for myself, financially. A lot of the rules for covered calls also apply to cash-secured puts…especially the use of proper exit-strategies.
Thanks, Allan.
ZorroZeppo,
I respect your position. I always say that there are a lot of ways to make money in the stock market. I present what has worked best for me over the years. Certainly cash-secured puts is another way to approach investing with stocks and options. The key to any strategy is to master the technique, do your due-diligence and monitor your positions for possible exit strategy execution. It seems like you meet these requirements. We’d love for you to share your trades and ideas with our BCI community as I am a firm believer that we can all benefit and learn from each other.
Thanks for your kind words about my books.
Alan
Well, OK. Here is my approach:
Given a fundamentally sound stock (fundamentals = VERY important) within a rising sector and industry, I look for relatively high implied volatility, between about 50% and 75%. This generally means choosing small cap stocks (mid cap at most). However, the stock can’t be so lightly traded that there isn’t enough liquidity in the options. The high IV will generate good premiums.
Then I wait for a technically driven drop that moves the stock price well off its 52 week high and at or near the 200 day moving average.
I choose expiration dates between six months and a year out and write deep in the money puts. I make sure that there is adequate open interest for the month and strike.
As Mike alluded to, a good stock coming off its technical support level will have a very good chance of rising to resistance, given enough time to recover. Generally, I can collect the time value and intrinsic value and buy-to-close the puts when they fall to 20% of the premium I originally collected. The ‘worst case’ scenario is that the puts will be exercised and I will have been paid to own a stock I wanted anyway.
The downside of writing cash-secured puts is not collecting dividends, and not generating interest in the current low-interest environment. The cash is basically dead money until my obligation ends.
Btw., the trade I mentioned in my previous post, was writing SVM January 15 puts for a 31.3% return, or 47% annualized.
Btw., I leave about a 15-20% cash postition in my account for writing cash-secured puts. The rest of my portfolio is invested in well-diversified stocks. This allows me to pursue a somewhat riskier strategy (which generates much higher levels of income) while still playing it relatively safe in the non-option portion of my portfolio.
ZorroZeppo,
Thanks for sharing your thoughts and approach to investing. What we learn from you and many other of our members is that becoming CEO of your own money and untimately financially independent can be accomplished in many ways. Through education, motivation and due-diligence we can come to our own determinations as to the strategy that works best for us. Our personal risk tolerance also plays a major role.
As an aside, another appro0ach to writing cash-secured puts is that we can enter a long stock position “at a discount” and then write a covered call on that position. Again the strategy gets a bit more complicated but for some, this would be a viable approach. For me, covered call writing has worked best over the past two decades but I admire and respect all members who are taking control of their financial lives. Thanks again for your participation in our BCI community.
Alan
can I ask to you the real step, so in what order to see your videos and books to know about options?
Please! Consider also that I’m italian, but I see sample video and I think to understand your words.
thanks in advance
Giuly,
Thanks for your interest.
For books: Read
1- “Cashing in on Covered Calls” first. Then …
2- “Exit Strategies for Covered Call Writing”.
For videos:
Get the new DVD package as web video library is topic related and not in learning order.
Books and DVDs can be obtained here:
http://www.thebluecollarinvestor.com/store.shtm
Use the blog articles and commentary to review this information.
Alan