Comments on: Using a Zero-Dollar Collar to Protect Low Cost Basis Stocks https://www.thebluecollarinvestor.com/using-a-zero-dollar-collar-to-protect-low-cost-basis-stocks/ Learn how to invest by selling stock options. Wed, 20 Jan 2016 03:42:18 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/using-a-zero-dollar-collar-to-protect-low-cost-basis-stocks/#comment-25123 Mon, 28 Dec 2015 12:28:49 +0000 http://www.thebluecollarinvestor.com/?p=13118#comment-25123 In reply to Jay.

Congratulations Jay…our first Star Wars reference…leave it to Jay!

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By: Jay https://www.thebluecollarinvestor.com/using-a-zero-dollar-collar-to-protect-low-cost-basis-stocks/#comment-25104 Thu, 24 Dec 2015 01:15:41 +0000 http://www.thebluecollarinvestor.com/?p=13118#comment-25104 In reply to Mike.

Mike,

Between your excellent post and Alan’s excellent reply you guys have given us a Christmas present free workshop on the blog! Many thanks….

As I grow longer of tooth and thinner of hair in my options trading I seek simplicity ever more.

Like sign posts on familiar roads I know where VIX, moving averages, volume, seasonality and daily news are at any point.

But with Star Wars the current buzz I must “Feel the Force”. If I suppress it because I can not chart it I will never be Luke Skywalker!

For me investing will always be more art than science, more feel than mechanics. But, as anything else in life, the harder I work at it the luckier I get.

Thanks again for a thought provoking post. – Jay

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By: Alan Ellman https://www.thebluecollarinvestor.com/using-a-zero-dollar-collar-to-protect-low-cost-basis-stocks/#comment-25103 Wed, 23 Dec 2015 21:56:26 +0000 http://www.thebluecollarinvestor.com/?p=13118#comment-25103 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.

Next week’s ETF Report will be published on Tuesday evening.
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

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By: Alan Ellman https://www.thebluecollarinvestor.com/using-a-zero-dollar-collar-to-protect-low-cost-basis-stocks/#comment-25101 Wed, 23 Dec 2015 12:02:27 +0000 http://www.thebluecollarinvestor.com/?p=13118#comment-25101 NKE:

Nike is scheduled for a 2-for-1 stock split today. Those who own these shares will now own twice as many shares at half the price. Also, look for a nice pop in share price after last night’s favorable earnings report.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/using-a-zero-dollar-collar-to-protect-low-cost-basis-stocks/#comment-25100 Wed, 23 Dec 2015 11:22:52 +0000 http://www.thebluecollarinvestor.com/?p=13118#comment-25100 In reply to Mike.

Mike,

You are 100% correct that overall market assessment plays a key role in our option-selling decisions and MUST be factored in. I have stressed this point in all my books/DVDs. My responses:

1- The talking heads are all over the map confirming that we can’t predict with perfection but we sure can throw the odds in our favor.

2- I use a combination of looking at the VIX (under 20 my preference), a chart of the S&P 500 (uptrending with 50-d SMA above the 200-d SMA my preference) and an overview of the weekly economic reports.

3- I share my market assessment weekly in my blog articles as well as our Premium Stock Reports. I also share the market view of IBD and Dr. Eric Wish’s GMI Index. These are outstanding resources.

4- Chart technicals also are factored in. If mixed, favor ITM calls and deeper OTM puts.

5- IV is also important as you stated. 75% is way too high. I use a guideline of generating a 2-4% monthly initial returns when selling options. That will usually keep us away from high-IV stocks. I may go higher in bull markets and lower in extreme bear or volatile markets.

6- I would lean on IV more than beta. Beta is a secondary factor because it is historical in nature while IV is forward-looking. If pressed on a guideline: low beta below .90 and high beta above 1.20. All other factors being equal, favor low-beta in bear or volatile market conditions; high beta in bullish environments. Keep in mind that not all betas are the same. It depends on the vendor providing the stats and varies by time frame and benchmark used. In the BCI Premium Reports, we use a 1-year time frame and the S&P 500 as a benchmark.

Alan

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By: Mike https://www.thebluecollarinvestor.com/using-a-zero-dollar-collar-to-protect-low-cost-basis-stocks/#comment-25099 Wed, 23 Dec 2015 07:23:53 +0000 http://www.thebluecollarinvestor.com/?p=13118#comment-25099 Alan,

A common theme I’m reading on selling puts and calls is one must have an informed opinion/view on the overall market volatility and sentiment…i.e., whether I think we’re in a bullish, neutral, or bearish trend. Based on this assessment, I’m suppose to then pick a strike price of my call or put that reflects this assessment; i.e., ITM (bearish), ATM (neutral), and OTM (bullish).

My assessment of the market direction, as I read, is to compare current volatility of the market to its historical averages. Perhaps some technical analysis that I am unware of. Heck, I simply listen to CNBC daily to get my market sentiment news but even that source is all over the map…some gurus predict a big crash while others predict a modest but volatile up-trending market in 2016. How us retail guys can possible predict this is a fools game for sure, but if I’m going to trade some calls and puts, I need a “process” step to make this assessment. Can you help me with this piece?

I was hoping you could give me some guidance on how best to do assess the market volatility on any given day to draw an opinion on bearish, bullish, or neutral, so I can pick my strike prices accordingly. That is, this process step will be my first RULE that I will check off before I even look at stocks.

1. Should I look at the VIX and compare its current value to, say, a 1 year average of VIX values, calling values at the average as (neutral), below the average as “bullish”, and above the average as “bearish” or what?

2. Do I perform some kind of technical analysis on the S&P 500 index or Nasdaq index?

3. Are there other statistics and indictors that I’m suppose to consume and synthesize (daily or weekly) into a conclusion of current market direction?

Seems to me I must have a good baseline understanding and step-by-step process for drawing a reasonable market sentiment and direction assessment before I start on this journey of writing options. I realize nobody has a crystal ball on where the market is going, but I’d like to have a good foundation on how to go about doing this market analysis rather prescriptively without taking hours per day to do it.

If there are any good authoritative sources out there that can help me draw this market conclusion (sort of like how you use the IBD 50 to get your stock “short list”) that would be a good to have.

inally, how can I use an options IV to pick my strike prices. I believe I read in your book on covered calls to stick with an IV of 75% or less to start out. Is that correct. That ‘rule’ eliminates many stock options I’m looking at for sure. Also, how does a stock beta relate to the option IV, if any? What rule do you use between the beta and IV overall ? I recall in your book you recommended staying away from high beta stocks because they’re too volatile. So does that mean I should pick stocks who’s beta’s are 1 or less. My currently open ETP put position, as example, has a beta of .9. Another stock I’m eyeing is ATVI…nice uptrend as I can tell…but beta is 1.1.. But the 15 Jan 16, $40 call strike is going for about .65 cents with a nice low IV of 26%. This looks like a decent Buy-Write candidate notwithstanding the higher beta of 1.1. Once I have a good understanding of the IV/beta relationship I can focus my search a little more efficiently I hope.

Appreciate any help you might suggest on this important piece of the option puzzle, Alan. I’m still learning.

Regards

Mike

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By: Alan Ellman https://www.thebluecollarinvestor.com/using-a-zero-dollar-collar-to-protect-low-cost-basis-stocks/#comment-25097 Tue, 22 Dec 2015 19:18:51 +0000 http://www.thebluecollarinvestor.com/?p=13118#comment-25097 In reply to Fran.

Fran,

Happy to help. Yes, low-delta options are deeper out-of-the-money and less likely to end up in-the-money by expiration. Delta also tends to be higher the further out the expiration date and the greater the implied volatility of the underlying security.

For detailed information on writing calls while also strategizing to retain shares (Portfolio Overwriting):

343 – 346 (Complete Encyclopedia-Classic)

341 – 351 (Complete Encyclopedia-Volume 2)

Alan

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