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Rolling Weekly Options & Covered Call Writing

The stock option strategies in our BCI methodology are based on years and decades of real-life trading experience. The information detailed in my books and DVDs is geared to giving us the best chance to achieve the highest possible covered call writing returns. This article is different. It is meant to start a conversation and is in response to an email question I received from a BCI member. The thrust of the inquiry was when is the best time to roll a weekly option?

Weekly options are gaining in popularity and that is why we are seeing more and more weekly products available to us. In a recent article I explored the standard weeklys vs. the expanded weekly program. Historically, weeklys are created on a Thursday and expire on the Friday of the following week. Should we roll our options on Thursday or Friday? This article is far from a scientific study but a venue to start a conversation and perhaps make some preliminary hypotheses.

I began this venture by selecting 4 stocks with weeklys that have been appearing on our Premium Stock Reports in the past few months:

  • CELG
  • YNDX
  • FB
  • CTSH

On Thursday January 2nd, 2014 (mid-day) I captured the following information:

  • stock price
  • nearest in-the-money strike price
  • cost to close (ask)
  • option premium for next month’s same strike (bid)
  • 1-week ROO (return on option)
  • annualized ROO

The next day, also around mid-day I captured the same information to compare rolling out results. Here is a chart showing both Thursday and Friday results:

rolling out and covered call writing

Rolling weekly options

Note the following:

  • Yellow rows represent Thursday’s stats
  • Pink rows represent Friday’s stats
  • YNDX and CTSH showed better returns on Thursday
  • CELG and FB had better results on Friday
  • YNDX and CTSH went up in value from Thursday to Friday so rolling on Thursday was the better choice in these cases (looking back)
  • CELG and FB went down in value from Thursday to Friday so rolling on Friday was the better choice in these cases

Hypotheses:

The results of this very brief analysis indicates a possibility that the choice between rolling a weekly on a Thursday or Friday may be dependent on the price movement of the stock from one day to the next. This needs to be explored in much greater detail with a broader array of stocks and a much longer time frame. If it does turn out to be the case then one might conclude that in a bull market environment rolling on Thursday would make more sense. In a bear market environment, rolling on Friday would be to our advantage. In a sideways moving market it would appear to be a toss-up and perhaps here we would simply wait for Friday so we can make an assessment for the following week based on the most up-to-date information.

Conclusion:

This is the first article I have ever written that has no conclusion. Rather it asks a question as to whether overall market conditions can give us a slight advantage as to roll our weeklys on Thursday or Friday. Blue Collar Investors are always looking for an edge and perhaps there is one to be had in this Thursday-Friday dilemma.

 

Next live speaking engagement:

Houston, Texas;

Tuesday, January 14th

6:30 – 8:30

http://www.aaii.com/chapters/meeting?mtg=2576&ChapterID=12

 

Beat the rate increase for Premium Membership:

On January 17th, 2014 we will be raising subscription rates for both monthly and annual memberships. Current members will be grandfathered in to the current lower rates and need to take no action to retain this lower fee schedule. All new members who subscribe prior to January 17th will also be grandfathered in to the lower rates. Thanks for the positive feedback we have received for the new and enhanced version of our Premium Stock reports. Link to subscribe:

www.thebluecollarinvestor.com/membership

 

Here is a link to our updated video tutorial of our enhanced Premium Stock report:

www.youtube.com/watch?v=tMj_oK8TXVc&feature=c4-overview&list=UURoCa2LnmLO3o8tF6Q2ddvQ

 

 

Market tone:

2013 was the 5th consecutive calendar year with positive returns for our stock markets. The S&P 500 rose by 32.4%, including dividends. The economic reports leading into the 2014 year were also encouraging:

  • According to the Commerce Department, construction spending was up 1% in November, better than the 0.6% predicted by analysts and up from the revised October reading of 0.9%
  • The Institute of Supply Management’s (ISM) manufacturing index came in @ 57.0 as was anticipated. This was the second best reading of the year and reflected expansion for the 7th consecutive month as the overall economy expanded for the 55th month in a row
  • New orders came in at 64.2%, the highest level since April, 2010 and the manufacturing employment reading @ 56.9%, the highest since June, 2011
  • The Conference Board’s consumer confidence index increased to 78.1 in December from 72.0 in November, after 3 straight monthly declines which were related to the partial government shutdown (don’t get me started!)
  • Initial jobless claims for the week ending December 28th came in @ 339,000 below the 358,000 expected

For the week, the S&P 500 declined by 0.5%

Summary:

IBD: Confirmed uptrend

BCI: This site continues to remain bullish favoring out-of-the-money strikes 2-to-1

Special thanks from our BCI team for making 2013 such a spectacular year and we look forward to working together to make 2014 even better.

Much success,

Alan (alan@thebluecollarinvestor.com)

www.thebluecollarinvestor.com

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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.

11 Responses to “Rolling Weekly Options & Covered Call Writing”

  1. Barry B January 4, 2014 5:28 pm #

    Premium Members,

    The Weekly Report for 01-03-14 has been uploaded to the Premium Member website and is available for download.

    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 BCI YouTube Channel link is:

    http://www.youtube.com/user/BlueCollarInvestor

    Best,

    Barry and The BCI Team

  2. Steve Z January 4, 2014 7:09 pm #

    Alan, since you’re looking to start a conversation about this, I’ll throw out a few ideas for the conversation.

    1) In all four cases, the day with the closer to ATM price got the higher return. No surprise there. So unless one can predict the movement of the stock price from Th to Fri, this doesn’t give a workable solution. Although, if someone were choosing the ATM strike, if it’s really close to the actual price on Th, roll. If not, roll the dice instead and wait for Fri.

    2) In theory, if the volatility for the ticker is up on any given day, there should be more premium than for the day before. So one could look at implied volatility, and if it’s higher on Th than Wed, roll. If it’s not, then cross your fingers for Friday.

    3) Also in theory, the MarketMakers start taking premium out on Thursday afternoon and certainly on Friday. So for any credit roll, all other things being equal, Thursday AM should be the best time for the roll.

    4) For tickers with multiple weeklies, you could also look at each week between “now” and the monthly. Some weeks often seem to have a little more premium than others and heck if I know why. A quick way to see this is to look at the theta per day value and roll to the week with the optimal result.

    5) I will also add that when you’re playing around with options that are this close to expiration, gamma can really bite you so I might wonder if ETFs would be better choices for a weekly strategy.

    Okay, there are some ideas that may help kick-start a conversation.

    Steve

  3. Steve Z January 5, 2014 11:59 am #

    Here’s one more item for the discussion. During expiration week, Market Makers don’t want to take the other side of closing orders on expiring options because it means they would have to open new positions in those expiring options and they especially don’t want to do that on Th or Fri. However, they know “we” are desperate to close so they make it very attractive for themselves (so very unattractive for us) to close positions. In fact, supposedly, MMs created weekly options in order to get this Th-Fri expiration advantage over us every week instead of every month. So net, closing (or rolling since it involves a close) a position on Th or Fri may be quite expensive.

  4. Ruth January 5, 2014 1:14 pm #

    Alan,

    In your books and dvd program you favor one month options but I’ve noticed recently you are writing about weekly options. Which are better?

    Thanks for you help.

    Ruth

    • Tom January 5, 2014 7:13 pm #

      The weekly trades generally give a higher ROO.

      This week IBDs top weekly is DDD (3 D Sytems).
      It gives the following premuim returns:

      The stock closed at $96.42, so I look at the Strike of 97.
      Jan Wk2, Premuim- $2,50/contract, with return of 2.59%
      Jan Wk3, Premuim- $3.40/contract, with return of 3.52%
      Jan Wk4, Premium- $4.61/contract, with return of 4.78%
      Jan Wk5, Premium- $5.50/contract, with return of 5.70%

      Looking at the weekly with a premium of 2.59% and multiply it by 4 gives a huge yield of 10.36% in one month. This makes one dream of becoming a millionaire before the year ends. However, most of the time you have to roll-over the contract which takes from your profit margin. Also the stock can go down which can be costly. And when as the last time you owned a stock that went up a dolar or so 4 weeks in a row.

      In summary, I use a combination of weekly amd monthly contracts and have an 80% positive trade rate since July 2013. The trade profit is right around 14%.

    • Alan Ellman January 6, 2014 3:16 pm #

      Ruth,

      There are many ways to generate profits in the stock market. I have had success with monthlys for two decades now so that is my sweet spot. But interest in weeklys is growing and this site is about you, our members, and that is why we are providing information on this and other related products. Here are some points to consider with weeklys:

      Positives:

      • Annualized returns can be higher
      • Can avoid exposure over weekends
      • Can generate greater premium as earnings report dates are approached and trade up to the week before earnings

      Negatives:

      • The pool of stocks with weeklys is much smaller than those with monthlys
      • Management is much more time-consuming as “rolling” possibilities come up every week
      • Less time for exit strategy execution
      • Quadruple the number and amount of commissions
      • Lower option liquidity
      • Wider bid-ask spreads

      Many thanks to Steve and Tom for their interesting and valuable input into this discussion.

      Alan

  5. Herb January 5, 2014 6:39 pm #

    I have some, but not extensive experience with weekly covered calls. I have been trading them in place of monthly options for about three months. To simplify the ‘when to roll’ question I watch the extrinsic value, When that drops to .03 or lower I enter my order, targeting the next weekly strike with the largest extrinsic value, either up or down. Sometimes that happens early on Thursday morning, sometimes not until the last hour of trading on Friday.

    I have also noticed a reluctance of the MM to take the closing trade. For example a quote price may suddenly change against me by .10 to .15 immediately after I enter my order, especially on lower volume equities. As I normally have the time I will wait for an hour or so but usually have to meet their bid, frequently at a still lower price. This past week I positioned my initial order .01 to .02 below the MM bid and they filled immediately. I don’t know if that caught him by surprise and electronically filled before the bid could be changed or if the order would have been filled anyhow.

    My rationale for trading weekly covered calls is the ability to adjust positions on weekly intervals and realize higher premiums than normally available on the monthly series of the same underlying stock. Over the time period I have been doing this the increased premium has more than compensated for the increased trading costs. It will be interesting to see if these conditions hold for the future.

  6. Barry B January 5, 2014 9:55 pm #

    Premium Members:

    This week’s Weekly Stock Screen And Watch List has been revised and uploaded to The Blue Collar Investor premium member site and is available in the “Reports” section.

    There was a typo and the stock, SPR, appeared twice. The correct report now reads SPR and SLXP in place of the second erroneous SPR entry.

    Look for the report dated 01-03-14-REVA.

    Best,

    Barry and the BCI Team

  7. Alan Ellman January 7, 2014 7:44 am #

    Strike price selection and the Greeeks: Money Show interview:

    http://www.moneyshow.com/video/video.asp?wid=9567&t=3&scode=031070

  8. Tom January 10, 2014 7:18 pm #

    Hello Alan,

    I wanted to weigh in on this discussion about use of weekly options.

    As your most recent article pointed out, the value of rolling forward on a Thursday or a Friday was based
    more on the change in intrinsic value rather than the time value. I’m not sure what level of time value
    weekly options have, but I suspect it is a lot smaller than for monthly options. If I understand your
    overall concept of trading covered calls, the idea is that you want to invest in good companies that
    have a positive price trend (over a month or two, since you are using the 11 day and 50 day trend
    lines). And then you want to sell a call option to add some icing to the cake that is your expected
    underlying long position. The call sale appears to be taking advantage of the time value of the option,
    since you almost never sell the call after the first 3-5 days of the new month.

    So, to work with weekly options, which are probably way more intrinsic value then time value basically
    says you are working with a whole different set of parameters than what your training, books, etc. are
    based on.

    I wonder if the interesting experiment would be to look at weekly options and see what kind of time
    value is in place and how it degrades over time and compare that to the time value degradation of
    monthly options.

    My bottom line: trading covered calls on monthly options seems to be investing with additional income
    (since I assume the underlying long position is one you would have gotten into anyway for that month).
    Trading weekly options seems a lot more like day-trading the very short-term price trends and
    predicting the “black swans” to stay away from (such as earnings release on monthlies) are going to
    be a lot harder.

    Thanks for the interesting thought experiment.

    Tom

    • Alan Ellman January 10, 2014 7:28 pm #

      Tom,

      I’ve made no secret of the fact that I, personally, am more comfortable with monthlys. But that’s how I’ve been trading covered calls for nearly 2 decades. I’ve also said that there are a lot of ways to make money in the markets and I certainly would not eliminate weeklys as one of them. As the pool of stocks with weeklys grows and as the liquidity increases and option spreads decrease, these products will become more attractive to investors. The dynamic of theta (time value erosion) defintiely plays a role in mastering this strategy and so does the management of positions, another concern I have.

      This site will continue to provide information and dialogue regarding weeklys because our membership does have an interest and I thank you for participating in this conversation.

      Alan

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