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Adjusting Target Goals with ETFs

Exchange-traded funds are baskets of stocks some going up and others going down in price. Generally, this makes these securities less volatile than individual stocks. Lower implied volatility translates into lower option premiums. Of course, there are exceptions but covered call writing with ETFs will usually provide better diversification and less risk at the expense of lower premiums. It would then make sense to set lower option-selling initial time-value return goals with ETFs. As a guideline, I set a goal of 2% 4% for individual stocks and 1% – 2% for exchange-traded funds.


A real-life example with SPDR S&P Homebuilders ETF (NYSE: XHB) : Bullish Technical Chart

XHB: Price Chart as of 10/17/2019


Option-chain for the 1-month November 2019 expirations

XHB Option Chain


With XHB trading at $45.18, we will look at the $44.00, $45.00 and $46.00 strikes which generate bid prices of $1.67, $0.98 and $0.49.


Calculations with the Ellman Calculator

XHB: Calculations with the Ellman Calculator

All 3 choices fall within the 1% to 2 % initial 1-month time-value return goals. The $46.00 out-of-the-money strikes offers an additional upside potential 1.8% while the in-the-money $44.00 strikes offers an additional 2.6% downside protection of the option profit.



ETFs provide more diversification than individual stocks but because of their lower implied volatility, the option premiums are lower than those for individual securities. Therefore, to manage our expectations, we must lower our initial time-value return goals.


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The thing I so appreciated about Alan’s book was keeping exits super simple which makes it much more likely people will utilize. Thank you, Alan, for sharing the secrets, tips and shortcuts of your 20+ years of blazing this trail and helping us succeed in easier, less risky fashion.

Daniel M


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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.

25 Responses to “Adjusting Target Goals with ETFs”

  1. Mike May 2, 2020 2:42 am #

    Hi Alan.

    I am enjoying the weekly newsletters.

    My question comes on a deep in the money covered call I purchased that way when there was a lot of uncertainty in the market and I was looking for quite a bit of downside protection. Although not a primary motivator, a side benefit is being able to capture the KO dividend in June.

    Here is my trade:

    4/13/20 Purchased 100 shares KO @ $48.15
    4/13/20 Sold 1 June, 2020 monthly 40 Strike Call @ $8.75

    How would I calculate an exit from the Call using the 20%/10% rule.

    Thank you for your time.


    • Alan Ellman May 2, 2020 6:49 am #


      The 20%/10% guidelines apply to ITM strikes as well. This is because Delta will moves the option price down faster for ITM strikes. The buy-to-close limit order guidelines will look like this:

      20%: $1.75

      10%: $0.90


    • Mike May 2, 2020 7:29 am #

      Thank you so much Alan! Have a great weekend.

  2. Frank May 2, 2020 4:11 am #


    I just finished reading your book, Exit strategies for covered calls. Very good book, very educational.

    I have a question. The book was written in 2009 – 2011 when options were closed on 3rd Friday of every month. I remember those days as I was in the market then. Now, many stocks have options expiring every week.

    Do you now sell options every week as opposed to every month ? And if so, do you roll out to next week ?


    • Alan Ellman May 2, 2020 6:58 am #


      Options have become incredibly popular resulting in the creation of more and new products including Weeklys. Every product has its pros and cons. For example, Weeklys limit the time we have for exit strategy opportunities but do facilitate the management to circumnavigate around earnings reports and ex-dividend dates.

      Rolling decisions come up every week rather than monthly with Weekly options.

      I believe we can consistently beat the market with both. My personal preference is for Monthlys but I have absolutely no issue with members who use Weeklys.


  3. Barry B May 2, 2020 9:21 pm #

    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 for download in the “Reports” section. Look for the report dated 05/01/20.

    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 link to the BCI YouTube Channel is:

    Since we are in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:


    Barry and The Blue Collar Investor Team

    [email protected]

  4. David May 3, 2020 1:56 am #

    Hi Alan,

    I have a scenario that I haven’t seen addressed quite yet in your strategies. I own 100 shares of Ford at $7.07 and another 100 shares at $6.14. Given that Ford is trending down and is expected to continue, Ford is currently trading at $4.92. I’d should have taken action earlier to get out of the stock, but I didn’t and I can’t change the past. I’d rather not dump it and take such a loss at this point. The ITM calls are not very much. What strategy should I consider for each lot?



  5. Gaetan May 3, 2020 2:55 am #

    Greetings from Belgium!

    This contract cycle was my first one using your concept and it would be very helpful for me to have your feedback about how I set it.

    First, initially I wanted to take a position on two ETF (Gold sector and QQQ invert) however it looks likes these US ETFs ares not available in Europe because of some different rules.
    Do you have any advice for a plan B letting trading invert from Europe?

    Here are the positions I took:

    Portfolio initial valor: $33000

    All prices are broker commissions and 1/2 taxes deducted (we pay the other 1/2 taxes when we sell the shares).

    300 VIPS bought $18 – 3 calls 17 sold @ $1,77

    200 ZTO bought $ 28,90 – 2 calls 27,71 sold @ 1,92

    100 CIEN bought $ 46,76 – 1 call 43,50 sold @ 4,22

    100 EBS bought $ 73,47 – 1 call 70 sold @ 5,62

    100 RP bought $ 63,60 – 1 call 65 sold @ 2,12

    Last Friday I BTC 3 calls VIPS @ 0,35$ (20% of the initial price) and I sold the 300 VIPS @ $14,78

    I opted for the selling of these shares because they are no longer on the BCI watchlist and technicals look bad.

    So on this operation I lost $549

    Since the cash from VIPS was freed up:

    300 LSCC were bought $ 21,20 – I tried unsuccessfully to negotiate a better price on the call 22,5 last Friday but I hope to be able to sell it by tomorrow.

    I have to confess that I feel bad for having sold VIPS shares thinking they could recover however technicals looked bad.
    I am also worried about the balance of the risk/reward on the overall portfolio considering the lost on VIPS even if I could mitigate with the LSCC trade.

    I hope you would have some time to give me your feedback about this first real trading cycle.

    Many thanks!


    • Alan Ellman May 4, 2020 7:33 am #


      Your initial time-value return goal range was from 2.2% and 4.5% (see screenshot below). You had downside protection ranging from 4.1% to 7.0% and upside potential for RP of 2.2%. So far, so good.

      Regarding VIPS, you were spot on by closing the short call and, at that point in time, our choices are between rolling-down or selling the stock. The position you are taking with LSCC should help mitigate the VIPS loss.

      Overall, a well established portfolio if defensive on the market. If our market assessment was more bullish, using more out-of-the-money strikes would be preferred.

      Keep up the good work.



      • Gaetan May 5, 2020 6:05 am #


        Thank you so much for your feedback, it really makes the difference when the person who teach you a technique is also there to bring you some assistance.

        I really like your service, it’s highly rich and educative for a pretty reasonable fee!

        Best regards,


  6. kalyan kuppa May 3, 2020 6:35 pm #

    Hi Alan,
    Can you suggest a way to setup limit orders to exit cash secured put positions, when the underlying stock falls three percent below
    The strike price?

    • Alan Ellman May 4, 2020 1:07 pm #


      For put-selling, exiting the option position is managed slightly differently then it is for covered call writing since the basis for closing relates to stock price.

      Most brokerages have a feature allowing us to set price alerts. Let’s say a stock is trading at $53.00 and we sold a $50.00 put and we want to set an alert for 3% lower… $48.50. We request an alert when share price drops <$48.50. When we receive this alert, we close our short put. Check with your broker on the specifics of managing these alerts. They are usually quite user-friendly. Alan

  7. Lisa May 4, 2020 2:39 am #

    Hi Alan,

    Hope the message finds you well! I have 2 questions for you.

    1. Risk of selling covered calls and cash secured puts: I cannot believe the $125k premium income earned from selling calls on my portfolio a month ago and selling covered puts 2 weeks ago. Sounds too good to be true for me! There must be some risks, the “catch” beyond what I am aware of? For covered calls, the maximum loss is the purchase price minus the premium if the stock drops significantly. If the stock goes up a lot, can we just roll out and up the calls to capture the upside appreciation?

    For covered puts: the maximum risk is the strike price minus the premium, if I have to buy the stock above the market value if the stock drops significantly. In this case, I can choose to roll out and down the puts if I don’t want to own the stock, correct? My strategy to mitigate the risks is to sell out of the money puts with the strike price near the 52 weeks low or major support level and the expiration date in the second half of the year and before future closest earning date ( assuming the stock market and economy will recover after the uncertainty over the virus. )

    All underlying stocks must meet the fundamental and technical tests and are the ones I will buy anyways. Are there other risks I forget to factor in?

    2. My dilemma on RDS/B
    I bought a lot when it was around $65. The stock has dropped like a rock lately. I want to end the pain of never ending losing but am afraid of selling it at the bottom. What do you think of my crazy idea of selling calls to make the loss less painful ( but risking of the upside) and selling OTM puts (in case of rising price in the future)? Any other alternatives besides of selling the stocks outright?

    Thanks for your wisdom!


    • Alan Ellman May 5, 2020 7:09 am #


      Outside of Royal Dutch, congratulations. My responses:

      1. Both covered call writing and selling cash-secured puts have breakeven (BE) points. The risk is share price dropping below those BE prices. That’s where our exit strategy skills come into play. Covered call writing also caps the upside.

      2. When a put moves in-the-money as expiration approaches, we simply buy back that put to avoid having the shares “put” to us. Rolling the puts also works if we want to use the same underlying and the calculations meet our initial time-value return goal range.

      3. Royal Dutch: We care about the cash, not the stock. Do we want to retain the cash in RD or in another security? If the answer is in RD, writing out-of-the-money calls will assist in lowering cost-basis. Writing OTM puts will expose us to the risk to increasing our position in a declining security.


  8. Jay May 6, 2020 1:48 pm #

    Hey Friends,

    Hope everyone is well in these crazy times.

    I am a highly reliable contrary indicator. When I sell calls the market goes up to get my stocks. When I sell puts the market goes down to stick it to me :).

    So this month I tried to throw the machines off a bit. My favorite holding is XLK. If you have a bullish bone in your body and are an investor how can you not be long tech :)? So I both covered some OTM and sold some csp’s OTM to maybe buy more? The rest I let run free.Two premiums, same ticker, let them fight it out, I am OK either way :).

    I sold the calls on an up day and the puts on a down day. This market is so volatile please never do the opposite. It’s worth a day or two of lost time decay to wait on both sides.- Jay

    • Roni May 6, 2020 4:23 pm #

      Hello Jay,

      from the 100% in cash safe haven since early March, I am not trading befor this hell is over.

      Also, I am in total isolation in my apartment, using mask, gloves and safety glasses just to take the elevator and fetch my omline purchases in the garage, or to take my car out for a spin, within our condo, to charge the battery.
      Working in my home office, while most of my employees are not in the factory.

      Do you not believe there may be a big recession after the sanitary crises is over, and millions were layed off? factories went bust? And many people have spent their economies on survival?

      Take care – Stay home


      • Jay May 6, 2020 7:04 pm #

        Hey Roni,

        It is fantastic to hear from you! I knew you were in isolation with your wife from previous posts you had with Hoyt who is also a great friend of BCI! So thank you for replying to my post.

        I absolutely fear the worst economically. My worry is not Recession – we are already in that. My worry is Depression.

        In the opinion of only this hobbyist the market has a long way down to still go unless there is a vaccine. The market is being propped up at the moment by a huge spending Liberal President and Fed piling up the debt focused only on buying his re-election. I suspect the hangover from this spending binge will be painful :)?

        I further suspect you are wise sitting this one out in cash/money market. I am 50% there taking little jumps up stream like a salmon when I see opportunity. – All the best my friend, – Jay

        • Roni May 8, 2020 2:12 pm #

          Bless you Jay,

          stay home.

          Let’s hope for better days – Roni

  9. Alan Ellman May 6, 2020 5:15 pm #

    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 as well as the implied volatility of all eligible candidates.

    Also included is the mid-week market tone at the end of the report.

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

    NOT A PREMIUM MEMBER? Check out this link:

    Alan and the BCI team

  10. Marty May 7, 2020 1:17 am #


    I bought your book and I’m now practicing trades on sinkorswim. I’ve had a few transitions, but because of the market conditions the value of the stock has gone down a few points. I did have some downside protection selling calls in or near the strike price.

    I put the closing price in the profit calculator and it calculates my profit on the transaction. Ie, option premium minus stock loss.

    So the question is, when I sell another option with the same stock, do I put the closing price of the last transaction as my new cost, or do I put in the price of the stock at the time I sell the new call?

    Your book doesn’t explain that.



    • Alan Ellman May 7, 2020 4:51 am #


      When entering a covered call trade, the stock price that should be entered is the price of the stock at the time the trade is executed. This is the price you would receive if you sold the stock and used a different underlying security. This is different than entries we use for tax calculations should the trading take place in a non-sheltered account.


  11. Raj May 7, 2020 2:01 am #

    Hi Alan,

    I just posted on your youtube video. Thought will write a email to you.

    Yesterday mornind i sold 10 covered calls for BYND stock for $100 strike price for may 08 expiry with $3.96 premium.

    I did not yesterday even it had ER. ER was good and bynd skyrocketed.

    Today morning the call was worth $ 7.95, i shud hv closed call with loss, but kept waiting it will come down and it never did.

    Noe bynd stock is $128.98 and the call us worth $28. So i m close to losing $24000 if i just let the call expire.

    Please let me know what should i do. I will be really greatful if you hv a way to cut down the loss.


    • Alan Ellman May 7, 2020 5:04 am #


      Let’s start with this… this is not a losing trade! It’s a 4% return in 3 days.

      Now, a reality check. The reason for the high return was the upcoming earnings report. Disaster would be if the report disappointed and share price declined by $25.00… ouch. That would be a true loss. If the stock is trading at $126.00 on Friday, we ask ourselves if we would buy at this price. If yes, it will cost us $26.00 plus a few pennies to retain the shares. If no, allow assignment and use the cash on Monday for a different stock position.

      The big takeaway is the golden BCI rule: Never sell an option if there is an upcoming earnings report prior to contract expiration. It could have been a disaster but this story has a happy ending.


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