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Analyzing Market Assessment Based on Portfolio Setup

In May 2020, Gaetan sent me his portfolio positions for the May 2020 contracts. His cash available was $33,000.00 and decided to diversify with 5 different stocks. I thought it would be a useful exercise to look at his positions and analyze what we believe his overall market assessment was at the time of his initial trade executions.

 

Gaetan’s 5 stock selections (see chart below)

  • 300 x Vipshop Holdings Limited (NYSE: VIPS)- purple line
  •  200 x ZTO Express (NYSE: ZTO)- pink line
  • 100 x Ciena Corp. (NYSE: CIEN)- brown line
  • 100 x Emergent BioSolutions Inc. (NYSE: EBS)- yellow line
  • 100 x RealPage, Inc. (NASDAQ: RP)- green line

 

Comparison chart with the S&P 500- blue line

 

3- Month Comparison Chart with the S&P 500

 

All 5 stocks were significantly out-performing the S&P 500 (blue line on bottom of chart) over the previous 3 months as trades were entered. VIPS (purple line) was showing a modest downtrend on the right side of the chart. Gaetan smartly selected an in-the-money strike which provided 5.6% downside protection of the 4.5% initial time-value profit.

 

Initial calculations with the multiple tab of the Ellman Calculator (click here for a free copy)

Initial Trade Calculations

  • The initial time-value return averages to 3.14% for the month (yellow cells)
  • Downside protection on 4 positions averages to 5.35% (brown cells)
  • Upside potential on RP is 2.2% (purple cell)

 

Discussion

Since 7 of the 8 contracts were written with strikes, Gaetan is showing a defensive inclination for the May contracts. The initial time-value return of 3.14% shows a conservative investor with modest risk-tolerance. I consider myself, as well as most BCI members, to be in this category. Once we enter our trades, we immediately enter buy-to-close limit orders on the short calls based on the 20% guideline, if adhering to the BCI methodology.

 

Well done, Gaetan!

 

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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 saw you on the virtual Money Show event in the spring and have been using your website, reading your blog and watching your YouTube videos. Lots of great information presented in a very understandable way- thank you.

Best regards,

Phyllis

 

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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.

24 Responses to “Analyzing Market Assessment Based on Portfolio Setup”

  1. Dennis November 14, 2020 10:53 am #

    Alan,

    I have been using your PCP strategy with great success. How would I take these ideas and use them with PCP?

    Thanks for all this great information.

    Dennis

    • Alan Ellman November 15, 2020 7:32 am #

      Dennis,

      I’ve had dozens of emails lately with members turning to the PCP strategy.

      The put leg of the trade can be crafted to market assessment by using deeper out-of-the-money puts for additional downside protection in bear or volatile environments and closer to at-the-money put strikes in bull markets.

      The covered call leg is described in the article.

      Great to learn about your recent success.

      Alan

  2. Marsha November 14, 2020 11:29 am #

    Alan,

    You probably answered this before. If market tone is bullish but chart technicals are mixed would you favor otm or itm covered calls?

    Thank you,
    Marsha

    • Alan Ellman November 15, 2020 7:41 am #

      Marsha,

      In a bull market environment, I favor OTM strikes. If chart technical indicators are mixed, I may “ladder” the strikes using a larger percentage of OTM strikes with some ITM strikes. In our weekly reports, I frequently publish the percentage of OTM and ITM calls I am currently using. These stats are to be used for educational reasons. not a call to action.

      Alan

  3. Barry B November 14, 2020 11:13 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 11/13/20.

    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:

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

    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:

    https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

    On the front page of the Weekly Stock Report, we now display the Top 10 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.

    Best,

    Barry and The Blue Collar Investor Team

    [email protected]

  4. Alex P November 15, 2020 2:22 am #

    Allan

    Hope you are well. I did not pay attention to the following note until now in the BCI report regarding the China ETFs. I am practicing with my paper account and selected FIX and KWEB. They have high Open Interest. Could you please elaborate what are the risks or transparency concerns?

    ***BE CAREFUL WITH ALL CHINEESE=BASED COMPANIES DUE TO
    TRANSPARENCY CONCERNS.

    Thanks so much as always.

    Alex P
    Mexico

    • Alan Ellman November 15, 2020 7:43 am #

      Alex,

      In the United States and other advanced economies, government statistical agencies are staffed by career professionals whose independence from politics is widely accepted. The heads of some agencies are political appointees, but the individuals chosen are professional statisticians rather than politicians.

      Chinese data agencies, on the other hand, don’t have these advantages. Their impartiality as statisticians is questioned because of a consistent alignment with the Party leadership.

      Alan

      • Alex P November 15, 2020 8:49 am #

        Hi Alan,

        Thank you for the great explanation.

        Have a great day!

  5. Lynn November 15, 2020 9:32 am #

    Hi Allen- if possible I would like to get more details on the put selling you are doing with 20% of your account. You mention in the weekly report that you are selling 10 Delta or less puts, but a little bit more flesh on that bone would be helpful (spreads?,durations,underlyings?).

    Thanks
    Lynn

  6. Guru November 16, 2020 2:34 am #

    Alan,

    I much appreciate knowing your current strategy via the weekly stock & ETF reports. Currently it says ” I am selling DOTM puts with Deltas of 10 or less to achieve 5-day returns of 0.25% – 0.4% on 20% of the cash available in my stock/option portfolios.There is too much uncertainty..”

    I have been doing DOTM Puts at deltas of ~20 (works out to 5% to 10% OTM) for a while as my standard method. Here is my question for you. One thing I notice is that with DOTM Puts, if the stock price significant takes a significant tumble, the OTM put becomes extremely expensive to unwind and inevitably leads to assignment.

    However, it seems that when I start with a say 2% to 5% ITM covered call instead of the 5% to 10% OTM Put, if the stock price tumbles it seems there are more options e.g. roll down & out etc. to mitigate loses? Is this true or am I missing something?

    Thank you sir!

    Guru

  7. Mike November 16, 2020 6:17 am #

    Alan,

    Great read as usual . I have sat in on your live talks many times…good solid info you present.

    I have been selling naked puts on a regular basis since July 2011 average 8-12 trades/month. Average price .25- .40, usually go out 2-4 weeks.

    My 2 words of wisdom to people contemplating this:

    1. Never ever sell puts on stocks that you don’t like at their current price. Must like the company, like the chart.

    2. Learns tech analysis: weekly 10 40 200 day ma’s, daily 10 20 50 day ma’s, my favorites and know when to fold them.

    Mike

    • Alan Ellman November 16, 2020 11:38 am #

      Mike,

      Glad you enjoyed the article and thanks for sharing your thoughts.

      Alan

  8. Alan Ellman November 16, 2020 11:37 am #

    Market volatility and Deep OTM puts:

    With the VIX (CBOE Volatility Index) declining recently (a positive for us), the option premium returns have declined. That’s okay as we still should beat the market on a consistent basis.

    I noticed this morning as I sold several weekly deep OTM puts, that the annualized returns were closer to 9% rather than the previously targeted 10% – 15%.

    Given the near 0% interest rate environment we are currently experiencing, I feel that we are so fortunate to have the skill set to take advantage of these option-selling opportunities, even at 9% returns.

    Alan

  9. Alan Ellman November 18, 2020 8:09 am #

    Premium members:

    A new Blue Chip (Dow 30) Report for the December contracts is now available on the member site (right side- “resources/downloads” section).

    Dividend investors: see the note at the bottom of the report regarding Dow 30 stocks that have no dividends.

    Alan

  10. Alan Ellman November 18, 2020 5:07 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 option and implied volatility stats are also incorporated.

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

  11. Patrick November 19, 2020 2:45 am #

    Hi Alan.

    Can I ask a quick question? I have a deep in the money call on PLTR. I’m using your what now tab and don’t fully understand the “what should I do now” section.

    Particularly the roll out and up section, specifically w/upside potential vs without upside potential. I think this section is comparing a roll out vs a roll out and up.

    I bought PLTR at 14.64 and sold the one month 12 call for 3.11 Today that call is worth 6.5 and PLTR is trading at 18.48

    The calculator in the roll out and up section has the two columns and the figures are the same just for with and without upside protection. Just trying to get a handle on this section.

    I spoke to the broker online and he mentioned rolling out and up will reset my cost basis and I guess that makes sense but I want to closely follow your guidance from your book. I’ll review the exit strategy section (again and again!).

    Anyway, I hope my question makes sense. I’m really enjoying writing covered calls and occasionally selling cash secured puts. I’m enjoying the learning process thanks to you.

    Regards,

    Patrick

    • Alan Ellman November 19, 2020 7:00 am #

      Patrick,

      I am assuming your contract expires tomorrow. We check the next earnings report which is on 2/11/21 so rolling is a choice.

      Next we enter the rolling strikes. Rolling out would be the same $12. Let’s use the $18 strike for rolling out-and-up. Let’s also say that the 2 premiums are $7 ($12 strike) and $2.50 ($18 strike). These are hypothetical stats.

      The calculator shows (see screenshot below) a 4.17% 1-month initial time value return with 35.10% downside protection for rolling-out and 16.67% initial time-value profit with 2.60% downside protection for rolling out-and-up.

      Check the stats prior to making rolling decisions which I usually make on Friday afternoon but today is okay too if tomorrow is inconvenient.

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

      Alan

  12. Sara November 19, 2020 3:05 am #

    Alan,

    I am a new member to BCI. I had a pleasure of attending one of your meeting long time ago and was impressed with your presentation. Finally, I got time and opportunity to join the group.

    I have few questions.

    1. Several of highlighted covered call stocks (example: November 18th – XPEL, GRBK, BRKS) are not showing any volume or open interest on the options. But this is one of the BCI selection criteria. Am I missing something here?

    2. I think I followed and understood some of your videos on Covered Calls as well as Cash Secured puts. My roadblock is understanding when to buy the stock and what price is reasonable. If it is the list, can I assume that price is reasonable for that stock that week to buy or should I wait to see ‘Price’ column on your chart and wait to get that price.

    3. Once I buy the stock and do a covered call and the following week, if that stock is removed from the list, then what are my next steps?

    Appreciate your input.
    Regards
    Sara

    • Alan Ellman November 19, 2020 7:10 am #

      Sara,

      My responses:

      1. We leave stocks that have passed all our screens but fall short in option open interest (OI) for 2 reasons. First, OI can change during the contract. Second, many of our members use our lists simply for buying and selling stocks where OI is not a factor. Check the 3rd column from the right where an “N” means inadequate option liquidity at the time the report was constructed. This facilitates quick elimination when making selections for option-selling.

      2. I enter my trades at the beginning of a contract… Monday or Tuesday after expiration Friday. The price on the report is as of market close on Friday. If the stock meets your goals, no need to wait for a different price other than the current one.

      3. Once a trade is entered, we manage as detailed in my books and videos programs, NOT by its removal from our lists. Now, if we do sell a stock mid-contract, we use the most recent reports for a replacement stock.

      Alan

  13. Patrick November 19, 2020 2:00 pm #

    Hi Alan,

    Thank you so much for taking the time to respond to your students. I’m amazed at your integrity and commitment to our learning. Thank you.

    I think I’m starting to understand the calculator a bit better. I was confused a bit yesterday about rolling out vs out and up after speaking with a representative at Charles Schwab. By the way, I experienced and early assignment for three PLTR 12 calls. That took me by surprise. For some reason this one remaining call with same strike did not get called away (yet).

    My confusion after speaking with the broker is that my cost basis would rise if I roll out due to buying back the option. That is to say I would have to have the stock go up in value and it would take longer to again see a profit. But like your book says, we have the gain in the stock. From what I can tell, if a stock goes deep in the money and you want to continue to write calls against it, roll out and up. My exact numbers for rolling out and up to the 18 call would be 17.92% comparative return with 2.8% downside protection. That seems in line with the BCI philosophy and strategy so I plan to roll out and up. But first I’m going to go review this in your book!

    I hope you have a happy and safe holiday season. Take care sir.

    Patrick

  14. Patrick November 19, 2020 4:55 pm #

    Alan,

    I’m sorry to bother you again but I’m still struggling with the “roll out and up” section of the what now calculator. In this section there are two columns.

    w/upside pot. And w/o upside pot.

    Both columns apply to the same higher strike correct? We are just analyzing returns for the roll out and up with and with out upside potential for that specific strike price correct? And what does “bought up value” mean?

    Thank you for your time.

    Patrick

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