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Analyzing a Multi-Faceted Series of Covered Call Trades: A Real-Life Example with Kohl’s Corp. (NYSE: KSS)

When we write a covered call option, we first buy a stock or exchange-traded fund (ETF) and then sell the call option which is protected by first owning the underlying security. This is what makes our position covered or partially protected. In November 2021, Avi wrote to me regarding a series of trades he executed with KSS and was inquiring as to the current status of the (10) positions, if closed at the time of the email.

 

Avi’s KSS trades

  • 10/18/2021: Buy 100 x KSS at $47.77
  • 10/18/2021: Buy 1 x Jan. 21, 2022 $32.50 call at $15.10
  • 10/18/2021: Buy 3 x Jan. 21, 2022 $35.00 calls at $14.80
  • 10/18/2021: Sell-to-open 5 x Nov. 19, 2021 $54.00 calls at $1.49
  • 11/4/2021: KSS trading at $56.89

The stock price has moved up $9.12 since initiation of this series of trades, leaving the 5 short calls in-the-money. The question posed was regarding the trade status if all positions were closed.

 

Broker screenshot of trades

 

KSS Option Trades

 

Trade debits

  • $4777.00 (cost of KSS shares)
  • $1510.00 (1 x $32.50 call)
  • $4440.00 (3 x $35.00 calls)
  • $2375.00 (cost-to-close 5 x $54.00 short calls)
  • Total debit: $13,102.00

 

Trade credits

  • $5689.00 (sale of shares at current market value)
  • $2460.00 (sale of $32.50 call)
  • $6660.00 (sale of 3 x $35.00 calls)
  • Total credits: $14,809.00

 

Final calculations if all 10 positions are closed

Net credit: $14,809.00 – $13,102.00 = $1707.00

$1707.00/$13,102.00 = 13.03% = 264% annualized (based on an 18-day series of trades)

 

Discussion

Holding the equivalent of 500 long shares of KSS and then benefitting from share appreciation of $9.12 per-share in 18 days as well as option-selling premium, resulted in an impressive return. The deep in-the-money long calls had Deltas approaching 1, therefore, for every $1.00 movement in the underlying share price, the option value increased by a similar amount.

 

Trade Management Calculator update (Manage trades start-to-finish)

We have completed this new, one-of-a-kind tool. We have decided to include a new book I am finalizing to make this a complete package. I expect that the product package (Trade Management Calculator and book pdf.) will be available within a few weeks.

Click here for video overview

Click here for a detailed video (40 minutes)

 

New book (in the hands of our publisher)

for Covered Call Writing & Selling Cash-Secured Puts

 

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a name unless given permission:

Facebook testimonial

I find value in every single “message” (podcast/video etc.). They are messages and reminders that I need to hear and be reminded of. I have learned to master the 3 elements of and to set your goals and select options that match them. And overall, keep covered call writing conservative!!! Don’t invite risk. Thank you for your valuable messages.

Tami

 

Upcoming events

1.Long Island Stock Investors Meetup Group

Stock Options: How to Use to Determine  

Creating 84% probability successful trades for and selling cash-secured puts

Wednesday April 13, 2022

7:30 PM ET – 9:30 PM ET

Private webinar for this investment club

 

2. LIVE at The Money Show Las Vegas

May 10th – 11th

Click here for information

2 presentations:

Portfolio Overwriting (free)

Tuesday May 10th at 1:30 PM – 2:15 PM

Increasing Profits in Our Buy-And-Hold Portfolios Using

A Comprehensive Analysis of Covered Call Writing: 2-hour Masters Class (paid event to The Money Show)

Wednesday May 11th at 1:30 PM – 3:30 PM

How to master all aspects of this low-risk option-selling strategy

 

Alan speaking at a Money Show event

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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

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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.

20 Responses to “Analyzing a Multi-Faceted Series of Covered Call Trades: A Real-Life Example with Kohl’s Corp. (NYSE: KSS)”

  1. Joan April 9, 2022 2:06 am #

    Alan,

    I listened to your excellent presentation on Thursday about 10 delta put trades. In your put book, you talk about the 3% guideline when using 2-4% initial returns. My question is what is the guideline when using this 10 delta strategy?

    Thank you.

    Joan

    • Alan Ellman April 9, 2022 7:13 am #

      Joan,

      Glad you enjoyed my webinar on ultra-low risk put trades.

      When moving from traditional put-selling trades to 10-Delta or implied volatility-based trades, a reasonable guideline to close the short put is the [strike – put premium].

      It is also reasonable to assume that prior to closing the trade, there were other exit strategy opportunities available, perhaps rolling-down.

      This information is detailed in the new Trade Management Calculator and exit strategy book mentioned after the conclusion of this week’s blog article.

      Alan

  2. Roni April 9, 2022 10:23 am #

    Alan,

    your article :

    I love MCUs and wish they could happen more often.

    During the present options cycle, I placed twelve 04/14/22 CC trades and had four 20/10% buy-backs and only one MCU.
    I hope next week will be better.

    Roni

  3. Barry B April 9, 2022 9:02 pm #

    Roni,

    You are going to be just fine.

    You’ve mastered stock selection, strike selection, setting your target exit, contingency exit, and how to adjust your trades. Not every trade will hit your target…but you have the skill set to adjust to whatever Mr/Ms. Market throws at us.

    You got this…

    Best,

    Barry

    • Roni April 11, 2022 11:05 am #

      Barry,

      Thank you for your supportive comment.
      I am really working hard to follow all the details of each trade, but the adverse events have frustrated my efforts in the past four option cycles.

      I believe that we are actually in a bear market, dissimulated by the trillion dollars giants’ growth, and as Alan says “it’s like pedaling uphill”.

      Roni

  4. Barry B April 10, 2022 12:02 am #

    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 04/08/22.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

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

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  5. Victor April 10, 2022 2:14 am #

    Alan,

    If I’m using your implied volatility formula to get a high end of a trading range, is it better to use weekly or monthly options to avoid losing my shares?

    Thank you.

    Victor

    • Alan Ellman April 11, 2022 7:27 am #

      Victor,

      I give a slight edge to Weeklys for these ultra-low-risk strategies because the returns are significantly lower than those from traditional covered call writing and by using Weeklys, the annualized returns will be enhanced. Weeklys also make it easy to circumvent earnings reports and ex-dividend dates. Monthlys will also work.

      Keep in mind that not all securities have weekly options associated with them.

      Finally, we must always be prepared to roll our options if the strike moves in-the-money as expiration approaches.

      Alan

  6. Susan April 10, 2022 7:00 am #

    Alan,

    When looking to roll up a cash secured put trade, is it better to use the 10 delta approach or the 20-10 guidelines?

    Thanks,
    Susan

    • Alan Ellman April 11, 2022 7:33 am #

      Susan,

      We maintain the strategy requirements we started with.

      If we are using the 10-Delta put strategy, we roll-up for additional option credits when the new strike shows a Delta of 10 or less.

      If we are using a traditional put-selling approach, the 20%/10% guidelines are implemented. As a matter of fact, we enter these BTC GTC limit orders immediately after entering our cash-secured put trades (for traditional) to partially automate the process.

      Alan

  7. Bill April 10, 2022 11:52 am #

    Alan,

    In the 10 Delta methodology of selling cash secured Puts, most trades work out fine. But in a few cases, the stock/ETF will fall below the Put strike price. What is your method for dealing with this? Do you buy the option back before expiration and take the loss or do you allow the stock/EFT to be assigned to you and sell covered calls?

    Thanks.

    Sincerely,

    Bill

    • Alan Ellman April 11, 2022 7:46 am #

      Bill,

      Both approaches can be used.

      Before we enter a trade, we define our strategy and goals. If we are using PCP (put-call-put) and the security still meets our system requirements, we “allow” assignment and write a call after contract expiration.

      If we define our strategy as selling cash-secured puts (only), then we close the short put when the stock or ETF price drops below the once deep OTM put strike which is now ITM. If we were using traditional put-selling with a 2% – 4% initial monthly time-value return goal range, we would close when the price drops 3% or more below the strike. We do not have to wait for expiration to approach to close the short put as we may want to cut our losses as soon as possible.

      There is 1 other exit strategy opportunity available to us when share price declines and price approaches the put strike, and that is rolling-down to another OTM put strike. This will partially mitigate the cost-to-close premium.

      Not all trades will be winning ones. Mitigating losses is equally as important as generating and enhancing initial returns.

      Alan

      • Bill April 11, 2022 12:38 pm #

        Alan,

        Thank you very much for the thoughtful answer.

        Bill

  8. Tom April 11, 2022 3:33 am #

    Alan,

    I purchased the advanced selling puts course to learn about your low risk delta and IV puts. It isn’t clear to me what you use for an exit strategy when the put goes bad, i.e. the stock price starts dropping toward the strike price and the option price starts rising.

    When do you pull the trigger to buy back the put?

    Thank you for any insight you can provide me!

    Tom

    • Alan Ellman April 12, 2022 6:22 am #

      Tom,

      With our ultra-low-risk put strategies, the initial strike is deep out-of-the-money. If share price drops below that strike, we buy back the short put at a loss. If the stock still meets our system requirements and the decline was market-related, we have the choice to roll-down to a new OTM strike to help mitigate the loss. If not, we use the cash freed up to secure a new OTM put on a different security.

      Alan

  9. Silky April 11, 2022 10:21 am #

    Alan,

    I have a question on the 20/10 Rule on your DCCC Calculator;

    I went over your explanation, but I’m still not sure I understand; do you have an example you can refer me to or will you please explain for me.

    Thank you in advance.

    Silky

    • Alan Ellman April 12, 2022 6:29 am #

      Silky,

      The 20%/10% guidelines assist us in deciding when to buy back the short call if share price declines significantly.

      In the 1st 2 weeks of a 4-week contract or in the 1st 3 weeks of a 5-week contract, we buy back the short call if its value declines to 20% or less of the original share price. In the last 2 weeks of a monthly contract, we change the threshold to 10% or less of the original option sale price.

      This information is detailed, with examples, in the exit strategy sections of my books and online video courses.

      Here is a link to an article I published on this topic:

      https://www.thebluecollarinvestor.com/automating-the-20-10-guidelines/

      Alan

  10. Alan Ellman April 12, 2022 11:35 am #

    Expiration heads-up:

    The April monthly contracts and this week’s Weeklys expire on Thursday April 14th as Friday is a market-recognized holiday.

    Alan

  11. Alan Ellman April 12, 2022 1:28 pm #

    Premium members:

    The latest Blue Chip report for the best-performing Dow 30 stocks for the May contracts has been uploaded to your member site. Look on the right side under “resources/downloads” and scroll down to “B”

    The “Ask Alan” video titles have also been updated through video # 197 (includes future productions). This file is also located in the “resources/downloads” section of the premium member site.

    Alan

  12. Alan Ellman April 13, 2022 5:17 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.

    The mid-week market tone is located on page 1 of the report.

    New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.

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

    https://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

    https://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

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