Comments on: Using Beta To Capture Higher Premium Returns https://www.thebluecollarinvestor.com/using-beta-to-capture-higher-premium-returns/ Learn how to invest by selling stock options. Fri, 27 Feb 2015 14:26:57 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/using-beta-to-capture-higher-premium-returns/#comment-22281 Fri, 27 Feb 2015 14:26:57 +0000 http://www.thebluecollarinvestor.com/?p=11323#comment-22281 In reply to Rakesh.

Rakesh,

I have found over the past 2 decades that the 20/10% guidelines are the most reliable parameters for determining when to close the short options position. Remember, these are guidelines (not hard and fast rules) so if the price is “in the ballpark” it’s okay to close. For example, if 20% computes to $0.82 and the price is $0.85 and you are concerned, it’s okay to close the short call.

If you have concern for other reasons, like unexpected bad news, then ignore the 20/10% guidelines and close. I call that the CDMCP exit strategy in my material.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/using-beta-to-capture-higher-premium-returns/#comment-22279 Thu, 26 Feb 2015 20:48:07 +0000 http://www.thebluecollarinvestor.com/?p=11323#comment-22279 In reply to Erick.

Erick,

The “moneyness” of the selected option depends on several factors:

1- Overall market assessment
2- Chart technicals
3- Personal risk tolerance

These factors will determine ITM or OTM. ITM has the advantage of the downside protection as you rightly suggested. The deeper ITM you go, the lower the time (extrinsic) value. OTM will allow for additional share appreciation and in the proper market environment generate the highest returns.

Strike selection is one of three skills that must be mastered to become an elite covered call writer or put-seller.

Alan

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By: Rakesh https://www.thebluecollarinvestor.com/using-beta-to-capture-higher-premium-returns/#comment-22278 Thu, 26 Feb 2015 20:39:47 +0000 http://www.thebluecollarinvestor.com/?p=11323#comment-22278 Hi Alan,

I have a question regarding exit strategies.

I am looking to develop some personal hard and fast rules when applying exit strategies using the BCI methodology. Should technical analysis take presidence over the 20%/10% guidelines? For example, if my technical analysis indicates that a support level has been reached but the 20%/10% guidelines have not, should I wait until the 20%/10% guideline has been met before applying my exit strategy?

Thank you,

Rakesh.

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By: Alan Ellman https://www.thebluecollarinvestor.com/using-beta-to-capture-higher-premium-returns/#comment-22277 Thu, 26 Feb 2015 17:20:03 +0000 http://www.thebluecollarinvestor.com/?p=11323#comment-22277 In reply to Brian McMorris.

Brian,

It does not include share appreciation. In normal and bull market conditions I try to sell as many OTM strikes as makes sense based on the parameters detailed in my books and DVDs. My goal is to generate at least a time value return of 2%/month and share appreciation would enhance those returns.

In bear or volatile markets I favor ITM strikes again with a goal of 2-4% for time value return. I use the intrinsic value component of the premium to protect that time value. The percentages of ITM and OTM strikes fluctuates based on market conditions.

Alan

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By: Erick https://www.thebluecollarinvestor.com/using-beta-to-capture-higher-premium-returns/#comment-22276 Thu, 26 Feb 2015 15:35:28 +0000 http://www.thebluecollarinvestor.com/?p=11323#comment-22276 Hi Alan,

One of the perils of covered calls is holding the stock to collect the
premium when the underlying stock may continue to plummet. Why then
wouldn’t it make sense to always sell deep in the money covered calls.
You would collect the intrinsic value of the option as premium up
front. But does it do so at the expense of the extrinsic premium?

Thanks,
Erick

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By: Alan Ellman https://www.thebluecollarinvestor.com/using-beta-to-capture-higher-premium-returns/#comment-22275 Thu, 26 Feb 2015 12:27:22 +0000 http://www.thebluecollarinvestor.com/?p=11323#comment-22275 In reply to Johnny.

Johnny,

When we sell ITM strikes, only the time value component of the premium is our actual initial profit. The intrinsic value (amount the strike is in-the-money) must be deducted. In this case $1.75 must be deducted from the $4.20 premium to get an accurate assessment of your initial profit, otherwise it would be exaggerated. We do use the intrinsic value to “buy down” our cost basis from $131.75 to $130. That is our downside protection of the option profit, different from the breakeven which is $131.75 – $4.20 = $127.55.

Therefore, the calculation is as follows:

($4.20 – $1.75)/($131.75 – $1.75) = 1.9%

Alan

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By: Brian McMorris https://www.thebluecollarinvestor.com/using-beta-to-capture-higher-premium-returns/#comment-22274 Thu, 26 Feb 2015 12:26:48 +0000 http://www.thebluecollarinvestor.com/?p=11323#comment-22274 Alan, Does the ROO you target (one month 2-4%) include appreciation in the stock price during the period? If so, it is much easier to obtain those returns if one does a buy-write just 2% OTM (2% cap appreciation + 2% call premium)?

Thanks

Brian

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