When we execute our covered call writing trades, we base our decisions on sound fundamental, technical and common-sense principles. To master our option strategies and elevate our returns to the highest possible levels, we must analyze our trades to evaluate if we could have improved our results. In this article, a real-life example with Occidental Petroleum Corp. (NYSE: OXY) will be investigated. This series of trades was shared with me by one of our BCI premium members.
OXY trades
- 11/13/2023: Buy 100 x OXY at $62.81
- 11/13/2023: Sell-to-open (STO) 1x 12/8/2023 $64.00 call at $0.71
- 12/1/2023: OXY dropped in price to $59.22
- 12/1/2023: Buy-to-close (BTC) the 12/8/2023 $64.00 call at $0.03
- 12/2/2023 – 12/8/2023 (expiration Friday): No further action was taken on these OXY trades
Price chart of OXY during the series of trades
Lessons learned
- On 11/13/2023, OXY (gold line) was trending down while the S&P 500 (blue line) was accelerating
- A few days prior to opening the OXY trades, the price activity of OXY moved below the price action of the S&P, adequate warning
- There appeared to be several opportunities to roll-down between the purple arrows and between 12/1/2023 and 12/8/2023 … opportunities lost
OXY calculations using the BCI Trade Management Calculator (TMC)
- Section 1: Initial trade entries
- Section 2: Initial trade calculations results: 26-day return of 1.13% with an additional 1.89% of upside potential
- Section 3: Trade adjustment: BTC at $0.03
- Section 4: Final post-adjusted results: + 1.08% on the option side (realized); -5.72% on the stock side (unrealized)
Lessons learned
- The covered call option partially mitigated the unrealized share loss
- Taking advantage of additional exit strategy opportunities would have reduced the loss even further
- Closing the original short call was at a low cost, but unnecessary since no further action was taken
Discussion
These OXY trades are meaningful examples of how studying our trades can make us all better investors. In this case, I would ask myself if I should have entered this trade at all. If yes (should be “no”), then why not roll-down 1 or 2 more times? We would still have a losing trade, but not to this extent.
Covered Call Writing: A Streamlined Approach
How to consistently beat the market using our CEO Strategy
Combining Exchange-Traded Funds with Stock Options
For more information, click here.
This book Is written for investors seeking a low-risk approach to generating cash flow in a user-friendly and time efficient manner. It utilizes covered call writing and then tailors the strategy to achieve the following goals:
- Sell options to lower our cost-basis
- Generate weekly or monthly cash flow with reduced but still significant initial percent returns
- Reduce the database of underlying securities available from 8500 to 11
- Reduce the number of exit strategy considerations from 14 to 4
- Beat the market on a consistent basis
- Reduce portfolio volatility
This book provides a roadmap as how to accomplish these objectives. The “how”, the “why” and the “when” is addressed for every aspect of each trade. Chapters 9 through 20, show every trade the author executed for each monthly contract in 2022. Screenshots taken from the Scwab.com platform are archived in each chapter.
Here’s what you will not find in this book:
- A stock called “XYZ”
- Hypothetical trades
- Computer generated trades
- Unrealistic promises
- Only winning trades
Join us in this 1-year journey using our CEO Strategy, a streamlined approach to covered call writing.
For more information, click here.
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 last name unless given permission:
Hi Alan:
I recently started my BCI membership. I’ve been very impressed with the content on your website and also enjoyed the webinar last night.
Thanks.
George
Alan’s interview on the Option Industry Council’s Wide World of Options Radio Program (April 4, 2024)
With Mark Benzaquen
Principal / OCC Investor Education
Instructor / The Options Industry Council
Alan’s segment starts at 23:25, click here.
Upcoming events
1. BCI-Only Webinar
Thursday April 11, 2024
8 PM ET – 9:30 PM ET
Ultra Low-Risk Approaches to Covered call Writing and Selling Cash-Secured Puts
Adding Delta and Implied Volatility to existing defensive concepts
Covered call writing and selling cash-secured puts are low-risk, option-selling strategies focused on generating cash-flow. Our trades can be structured to represent aggressive or defensive postures or somewhere in between.
This presentation will detail how to structure our trades to decrease risk, particularly in bear and volatile market conditions while still generating significant returns. It will also be of interest to investors who have a low personal risk-tolerance but still want to generate higher than risk-free returns.
Both Delta (an option Greek) and implied volatility will be spotlighted, and real-life examples will be utilized to demonstrate the process of establishing these conservative trades, while still allowing us the potential to generate significant annualized returns.
A comparison of these ultra-low risk returns will be compared to those of traditional option-selling, using real-life examples.
At the end of the online seminar, Alan & Barry will respond to all questions related to covered call writing and cash-secured puts.
REGISTRATION DETAILS
Zoom Meeting ID, passcode, and direct link will be sent via email to those who register using the link below on Wednesday, April 10, 2024, the day before our online, education event goes live. A final reminder that also includes the Zoom login information will be emailed about 2 hours before the event begins. Only registrants receive a day-of-event reminder.
For those who register you will also receive the following benefits:
- Unique opportunity to ask questions during the Live Q&A that will immediately follow the presentation.
- Unlimited access to a replay of the webinar (link sent via email shortly after the event has concluded).
- A bonus gift (emailed along with the replay link) of BCI’s highly popular, 40-page e-book, entitled…
Selling Cash-Secured Puts for Beginners The E-Book
Investing To Generate Monthly Cash Flow
All questions related to covered call writing and cash-secured puts will be answered in real time after the webinar presentation.
2. Stock Traders Expo- live event in Orlando Florida
October 17 -20
Details to follow.
3. Coming Soon From BCI…
· The Blue Collar Investor Conservative Credit Spread Trading System
· We Are Introducing Our Credit Spread Trading Methodology Following BCI Conservative Trading Principles
· The System Includes:
o Bull Put Calculator
o Bear Call Calculator
o Expected Price Movement Calculator – That Will help To Determine High Probability Short Leg and Long Leg Positions of The Credit Spread
o An Extensive Credit Spread Trading Journal
· A New Approach to User Guides…Detailed Context Specific Cell Descriptions and Guidelines…For Both Data Entry and Calculated Results
If you are interested in learning more or want early access to our new system, please send an email to Barry Bergman at:
Alan,
Do you always avoid ex dividend dates when selling covered calls? Please explain.
Thanks,
Joan
Joan,
I typically, do not avoid ex-dates.
Unless the strategy we employ specifically includes dividend capture, or the underlying securities are of a low cost-basis, and we don’t want to incur negative capital gains tax issues (non-sheltered accounts), early exercise can actually be a benefit.
First, on the ex-date, we are eligible for the future dividend distribution if we hold the shares. However, share price will also decline by the dividend amount on that date (other factors will result in final pricing, as well).
If exercise occurs, we have maximized our returns for the trade and have the cash from the sale of the stock (at the strike price) to initiate another covered call trade with the same cash investment in the same contract cycle.
Bottom line: We must define our strategy approach and determine if the sale of the stock will result in negative tax consequences.
Alan
Alan,
Is there a certain percent profit you would close a covered call trade and accept a lower than maximum return?
For example, if a maximum return is 5% and we have a 4% return so far, would you close at an 80% of maximum profit?
Thanks,
Tanya
Tanya,
Before deciding to close both legs of a covered call trade, we must first measure the time-value cost-to-close.
When the strike is in-the-money (ITM), the premium we pay to close has intrinsic – and time-value components.
The intrinsic-value is neutralized by the share price increase from the strike to current market value, so the time-value component is what we focus on. The “Unwind Now” worksheet tab of the “Trade Management Calculator (TMC)” will do this for us.
Once we have this stat, we ask ourselves if we can generate at least 1% more than this time-value cost-to-close by contract expiration. If yes, we consider unwinding. If no, we take no action and continue to monitor the trade. There are a multiplicity of circumstances when the best action is no action at all.
Alan
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 04/05/24. We had technical difficulties with our PDF management system. As a result, there are three blank pages in the uploaded report. These three blank pages do not impact the report content. Also, in the last report, the industry for AIZ was entered as “Internet”. This was a typo and the actual industry for AIZ is “Insurance”.
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:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium Member’s pricing is locked into your current rate and will never see a rate increase as long as the membership remains active.
Barry and The Blue Collar Investor Team
Edit
Alan,
When is the best time to check option chains to set up portfolio plans for a new contract? Over the weekend? Before market opens on Monday?
Thanks,
Mike C
Mike,
I check option-chains over the weekend to get a “ballpark” overview of the returns I can expect.
I re-check prior to entering new trades, which are between the hours of 11 AM ET and 3 PM ET, to avoid early morning and late afternoon computerized institutional trading which frequently enhances market volatility.
Alan
PSQ: Reverse stock split today:
ProShares Short QQQ (PSQ) has announced a 1-for-5 reverse stock split. As a result of the reverse stock split, each PSQ Share will be converted into the right to receive 0.2 (New) ProShares Short QQQ Shares. The reverse stock split will became effective before the market open on April 10, 2024.
Those long PSQ now own 1/5 the # of shares at 5x its previous value. There will be corresponding changes in option contract parameters.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
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