One of the best ways to elevate our option-selling results is to analyze real-life trades. On August 3, 2021, Mark shared with me a series of trades he executed with CLX. His conclusion was that he was currently in a $250.00 net credit position. I will break down these trades into 3 stages. I ask you to mentally comment on each stage prior to presenting my analysis.
Stage I
- 7/28/2021: Buy 100 x CLX at $181.52
- 7/28/2021: Sell-to-open (STO) 1 x 8/6/2021 $180.00 covered call at $4.59
- 8/3/2021: CLX to report earnings pre-market
Stage II
- 8/3/2021: CLX declines to$162.70
- 8/3/2021: Buy-to-close the $180.00 call at $0.07
Stage III
- 8/3/2021: STO 1 x 8/13/2021 $140.00 call at $20.50
- 8/3/2021: Mark’s analysis is that his cost-basis is near $160.00 and with CLX currently valued at $162.70, he is in a net positive position by $270.00
Now that you’ve made your assessments, here are mine:
Stage I analysis
The initial 9-day time-value return was 1.7% (68.9% annualized) with 0.8% downside protection of that time-value profit as shown by the multiple tab of the BCI Calculators:
CLX: Initial Calculations
The robust return reflects a high-implied volatility situation. Why? The obvious answer is the upcoming earnings report (ER), something we avoid like the plague in our BCI methodology. The ER creates the potential for high-risk of significant share depreciation.
Stage II analysis
The ER disappointed and share price declined by $18.82. At that point, closing the $180.00 short call at $0.07 was appropriate.
Stage III analysis
Rolling out-and-down, a technique rarely approved of (some exceptions) with our BCI methodology, generated an enticing premium ($20.50) but did not enhance the trade position. With CLX trading at $162.50, the $140.00 call was trading at parity (all intrinsic-value) so there was no time-value benefit. Furthermore, we have now locked-in a substantial loss on the stock side of the trade due to the contract obligation to sell at $140.00.
Mark’s analysis that the new cost-basis was near $160.00 neglected the fact that there was a contract obligation to sell at $140.00.
Current status of trade on 8/3/2021
- Stock side: $181.52 – $140.00 = -$41.52
- Option side: $4.59 – $0.07 + $20.50 = +$25.02
- Net total position: $41.52 – $25.02 = -$16,50 per-share = -$1650.00 per-contract
Discussion
Analyzing real-life trades will make us all better investors and, ultimately, put cash into our pockets. Avoiding ERs, understanding time-value components of option premiums and avoiding non-productive exit strategies are lessons-learned from these CLX trades.
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 and Team,
Thank you for putting out such great content. Please keep up the awesome work!
Best regards,
Ed
Upcoming events
1.Ramapo College of New Jersey | Anisfield School of Business: Private Webinar
The Basics of Stock Options
November 30, 2021
9:30 AM ET – 11:00 AM ET
2.Mad Hedge Summit: Free webinar
December 8th
12 PM ET – 1 PM ET
Using Low-Risk Option Strategies to Enhance and Protect Portfolio Profits and Buy Stocks at a Discount
Covered Call Writing and Selling Cash-Secured Puts
3.Wealth365 Summit: Free webinar
January 17th – 22nd
Details to follow
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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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Alan,
I have been paper trading since early October. I’m preparing for retirement next summer when I’ll get several lump sums which I’m planning to roll into IRAs.
Each week I have been creating a new paper trading portfolio based on the latest BCI Report.
It is going pretty well. I’m entering mostly profitable positions, but in this market it seems like it is pretty easy to choose a good position with the BCI stock picks.
In the recent reports, you mention favoring OTM strikes 2-1.
But, I have missed a lot of upside potential by not knowing when to choose an OTM strike price.
In your books, ( mine are paperback and a few years old) you mention choosing the strike price based on how bullish or bearish we consider the stock to be.
Even going back in hindsight and examining the charts, I’m unclear as to what clues exist to suggest on which stocks to sell OTM calls and which to be more conservative.
If it is just instinct or experience, then I’ll just be patient until mine develops, but if there are subtle clues to improve the odds, I’d appreciate any tips you may give.
Thanks,
Bill
Bill,
Strike selection (specifically the “moneyness” of the strikes) is as much an art as it is a science. This is the 2nd of our 3 required skills for achieving the highest possible returns (stock selection and position management are the other 2). We base our moneyness decisions on the following parameters:
1. Overall market assessment (bullish, bearish or neutral).
2. Technical analysis of the price chart of the underlying security
(mixed or bullish)
3. Personal risk-tolerance
Each contract cycle will usually have a combination of ITM, ATM and OTM strikes in various ratios depending on the above factors.
The conclusions we come to and the appropriate strikes will not be the same for every investor.
For example, some investors will only sell in-the-money (ITM) strikes because the additional downside protection afforded by the intrinsic-value component of the option premium helps them sleep better at night even in bull market environments. This approach would not align with my trading style or that of many other retail investors but it is 100% appropriate for these investors.
When we are early in our option-selling career, if there is doubt as to the moneyness of the strike, we should take a more defensive position ITM) until there is more clarity and comfort in executing more aggressive (yet still conservative) trades.
Alan
Welcome aboard, Bill.
We were all new at this at one time. Many of us were not fortunate enough to have the benefit the BCI teaching, methodology, or this blog.
Option selling can be an intimidating venture to begin with. You are off to a good start and are correct to begin with a cautious approach.
I have been trading stocks for 39 years and options for 10 years.
I will share some of my thoughts on the subject.
1. Selling covered calls has two distinct paths.
A. Selling calls against your existing core positions of equities and ETFs. This referred to as portfolio overwriting. Normally, these are equities that you prefer to keep and if they are in a taxable account, you would normally prefer to keep. In this case if you sell calls on them you would sell further OTM than you might otherwise. But remember you can always buy them back.
B. Buying equities and EFTs for the sole purpose of selling calls against them. Here you determine, as Alan outlined, where your personal choices lie. This often is different for each equity or ETF based on your assumptions about the particular equity or ETF and your assumptions on the overall market.
You mentioned missing a lot of upside potential by not knowing when to choose an OTM strike. (And I would assume how far OTM). This is a decision that will come to you easier as you gain experience and confidence. What I want to do is share my philosophy on this very subject. Do not place too much emphasis on the money left on the table!
1. Above all else, if the equity you sold calls on was called away, then the trade was successful.
2. You only bought the equity to sell a call on it. If not for that you wouldn’t have owned it to begin with.
3. Each time this happens you gain experience and learn more.
4. After a while, by using beta and the various volatility metrics you will begin to intuitively know which equities to go further OTM on.
Remember that not all trades are successful There will be losers. But if you immerse yourself in the BCI methodology those losses, when they occur, can be mitigated. Over the long run you will be rewarded for your effort financially and by the satisfaction of learning a new skill and seeing positive outcomes as a result of those skills.
Lastly, learn from others on this blog. We do not all need to learn by “putting our hand on a hot stove”. If someone tells us it’s hot, we don’t need to touch it. Also, let us know how things are going and give back to the community. We are all pulling for you.
Best of luck (and skill) :-),
Hoyt T
Hoyt,
You hit the spot.
That is what I learned in the past five years using the BCI methodology.
After some mistakes, I chose to focus exclusively on monthly CCs, and my goal is 2-4% ROO. Not more, too risky; Not less, too little reward for all the hard work, and not enough to compensate for the losers. There are always some losers each month.
Bill,
Welcome. I wish to add that OTM strikes above 2% are not easy to find for a good stock.
One more thing; When a stock goes up far above your strike, early in the options cycle, you should consider the MCU, and use the cash for a new trade on a different ticker with a 2 or 3% ROO, and try to get an additional return in the same month.
Roni
Roni,
Thanks for your kind words.
I admire your ability to be methodical in your covered call strategy. You have taken all the emotion out of your trading. Of course, we all feel bad when we have a loser. But that’s not the same as being emotionally attached to a “Ticker Symbol”. 🙂
I wish I was as methodical as you are. I am long past any emotional attachments to any “Ticker Symbol”. But the, as Alan puts it, “Gunslinger” in me has never died. So, I still allocate part of my portfolio to “skating on thin ice” as well as alternative strategies. Even with them I have a “method to my madness”
Best of luck in these trying times, my old friend.
Hoyt
Hoyt,
I love your post.
“Gunslinger” and “skating on thin ice” are precious.
Roni
Friday’s market decline:
Friday’s selloff was due to a new COVID variant concern from South Africa discussed in an emergency meeting of the World Health Organization.
However, trading volume was low due to the holiday so we will get a better assessment of market reaction on Monday.
We must stay the course and continue to invest non-emotionally.
In the interim, let’s continue to enjoy the holiday weekend.
Alan and the BCI team
Thank you, Alan and Barry, for the reassuring and helpful email message yesterday.
I am currently 100% invested in twelve positions, all 12/17/2021 CCs.
I feel very fortunate because my total decrease was “only” 1.3.%.
All my 20% buyback orders are in place and not one was filled.
Hoping that the market will recover in the next few days and wish that the new COVID variant will not kill too many people.
Take care – Roni
Dear Alan, and BCI friends,
I already have and use the Elite Plus Calculator for the initial trades. However, do you have any suggestions of templates/spreadsheets to control your final profits and losses of your trades? It may be challenging when you have a trade for several months with BTC, rolling outs and the new current stock price.
Best regards,
Hi Alex,
We are in the process of developing a “Trade Management Calculator” that will address this very issue. This new tool uses the Elite-Plus Calculator” data plus data on the follow-on steps to provide much of the information that you are looking for.
At this point, the calculation sections are complete. Our next steps are:
– Add detailed instructions…similar to the Elite-Plus calculator
– Extensively test the new calculator
– Clean up the user interface and user “experience”
– Beta test the final product
As an interim solution, you can use the “Schedule D” tabs on the older “Ellman Elite” calculator to give you the profit and loss information that you are looking for.
So…we’re still a few months out, but it looks like it will be a great addition to The Blue Collar Investor toolbox.
Best,
Barry
Dear Barry
1. Fantastic news about the “Trade Management Calculator”. Certainly, I will but it once it is ready. Does it will include Cash Secured Puts and Covered Calls trades? Thanks as always.
2. You are right! The SCHEDULE D will be useful for now.
Enjoy these days!
Best regards,
Hi Alex,
Alan and I had numerous discussions about how to handle C-S put trade management. Our final resolution was that detailed C-S put management was not necessary. Our reasons were:
– The end result was that the vast majority of C-S put trades were concluded at the end of the option cycle.
– If the put was assigned, it resulted in a new covered call trade for the next option cycle.
– If the put was not assigned and expired worthless, no further action would be required.
– If the trade went “against you”, the exit strategy has a pre-defined exit target.
– As for covered call trades, we’ve added a lot of new features for forward managing the trade.
– There will be a drop-down identifying the specific exit strategy that the user will be implementing.
For each covered call exit strategy, we will be adding instructions as to what data will be required for each of the columns. We will provide both unrealized and realized gains (or losses) for covered call trades.
The new tool will be quite extensive and will give you detailed trade outcome information.
Best,
Barry
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 11/26/21.
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
On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.
Best,
Barry and The Blue Collar Investor Team
barry@thebluecollarinvestor.com
This is for Mark. We’ve all made these mistakes. I consider these the cost for my Masters in Investing. Biggest thing is don’t quit. I have been doing options for a while, hit and miss, but since I found BCI my numbers have been doing a lot better. I like others use BCI’s 2-4% target, but I do 1 or 2 over 4% (some winners, others not so much) My continuing ED costs. But I also have some stocks I wish to hold and am satisfied make 1/2 % a month on.
I am new to the BCI system (around 5 months), so I don’t have a whole lot of trades from the BCI reports under my belt. I have paper traded and traded for real money. So far, my wins are small ($0 – $300 dollar range) and the losses are huge ($150 – $700 range). I’ve shared several of the trades and don’t seem to be making any mistakes. I am getting gun-shy.
Does anybody have any suggestions?
Are others having better results?
Thanks.
William
William,
I’ve been with BCI nearly 5 years. From time to time I have some tough trades usually when the market is like today but I have beaten the market every year.
Early on, my mistakes included picking high volatility stocks, not placing BTC limit orders and only using OTM strikes.
Have you considered the PCP strategy which allows us to enter covered call trades at a lower price?
Good luck.
Marsha
Hi, Marsha.
Thank you so much for your thoughtful reply!
How do you avoid high volatility stocks?
So far I have always placed the BTC limit orders right after making the options trade and updated them as needed. Since I am new to the report, I wanted to focus on making winning trades over making a better return. With that in mind, I have only used NTM or ITM CCs.
I am trying the PCP strategy now for the first time. I am not using a stock off the report, but is a stock I have watched for a long time and wouldn’t mind owning one way or the other.
Congratulations on consistently beating the market! Great job! That is inspiring.
Best regards,
William
William,
Brokerages will have IV information.
Alan has mentioned cboe.com and finance.yahoo.com in his articles as sites that give IVs in the option chains.
I use the approach Alan discusses in his books. I set a goal of 2-4 percent for one month returns. Stocks that return much more are too volatile for my portfolio.
Good luck with PCP. I use it as well.
Marsha
William,
Marsha makes a good point…just about every trading platform can provide IV data as part of the options chain. If you have a problem, you can call the technical support team at your broker. They can walk you through the steps. This shouldn’t take more than a minute or two. Platforms like Schwab’s StreetSmart Edge, TD’s Think Or Swim, Trade Station, and others can provide a wealth of data that can be part of your options chain setup.
If you use Schwab’s StreetSmart Edge, let me know and I can walk you through the set up.
Best,
Barry
Marsha and Barry,
Here are some of the IV numbers from my broker. The image is AMD for options that expire on Dec. 3. Are any of these the IV numbers you are using to avoid high IV stocks? What should I be looking for–am I looking for numbers in a certain range?
William,
You can use the ATM IV for the period that you are trading (i.e.: weeklies, monthlies, etc). you can also use the “Beta” metric in the Premium Member Weekly Stock Report. This is the relative performance of the stock in question compared to the S&P 500 over a one-year period (IBD version). Some sites measure the Beta over different time periods but we have been using the IBD definition since the beginning.
The range is dependent on your own risk tolerance. A Beta of 1.0 means that the stock/ETF in question will move in step with the S&P 500. For example, if the S&P increases $1.00, the stock/ETF will increase $1.00 and will decrease $1.00 if the S&P 500 decreases by $1.00. A beta of !.5 means that the stock/ETF will increase by $1.50 for every $1.00 increase in the S&P 500. Similarly, the stock/ETF will decrease by $1.50 for every decrease of $1.00 in the S&P 500.
The higher IV stocks also will have a higher Beta. So you can use the Beta in our report to help you decide on which stocks you want to trade. Same thing for IV on your broker’s platform. The higher the IV or Beta, the more volatile the stock/ETF is. Hence, increased risk with higher IV/Beta stocks. Only you can determine what the appropriate risk is for your investments and trades.
I hope this helps…
Best,
Barry
Alan,
If we roll down and put in a btc limit order, what prpice do we base the limit order on? Do we use both premiums or only the second?
Thanks a lot,
Dennis
Dennis,
The 20%/10% guidelines are based on the premium of the last option sold. Previous stats are not factored in.
Alan
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
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Alan and the BCI team
Alan,
What are you using as an exit point when trading QQQ weeklies?
Thanks
Fred
Fred,
Which strategy are you using… traditional, Delta or IV?
I will usually close when share price moves below the OTM put strike by the amount of the premium originally generated. In the current unexpected high volatility environment, reaching that threshold becomes more likely. Also, in many cases, I write puts on shares I wouldn’t mind owning in my portfolio so I will “allow” assignment and then write covered calls on that security to continue the cash-generating process.
Alan