Over the years, I have presented the pros & cons of weekly options versus monthly expirations for our covered call writing and put-selling trades. One of the advantages to weekly expirations is a greater annualized return, in most cases. In this article, I will detail a real-life example with Pinterest, Inc. (NYSE: PINS), a stock on our premium watchlist on 12/4/2023.
PINS: Weekly and Monthly option-chains on 12/4/2023
- PINS was trading at $34.18 on 12/4/2023
- The weekly (12/8/2023) expiration, $35.00 call had a published bid price of $0.21
- The Monthly (1/5/2024) expiration, $35.00 call had a published bid price of $0.89
- Both option-chains showed narrow bid-ask spreads, so we will use the published bid prices in our calculations
PINS: Weekly & Monthly calculations using the BCI Trade Management Calculator (TMC)
- Notice I used an expiration date of 12/10/2023 (red arrow), instead of 12/8/2023. This way the weekend is incorporated (7 days, not 5 days) into the annualized return and will not inflate the practical returns
- The initial time-value returns for the Weekly option is 0.61%, 32.04% annualized based on a 7-day trade
- The initial time-value return for the Monthly option is 2.60%, 28.80% annualized based on a 33-day trade
- The weekly option generated a greater annualized return by 3.24%
Discussion
We can all be quite successful with our covered call writing and put-selling trades using either Weekly or Monthly expirations. Both works well. This article used a real-life example with PINS to demonstrate one of the Weekly advantages … greater annualized returns in most scenarios.
The Poor Man’s Covered Call Online Video Course with Downloadable Workbook
Covered call writing is a cash-generating strategy that lowers our cost basis thereby improving our opportunities for successful investments. It involves a long stock position (we buy the stock) and a short option position (we sell the call option). The PMCC strategy replaces the long stock positions with long call positions, typically deep in-the-money long-term expiration options known as LEAPS. Because long options cost less than stocks, we are investing less money and the return on our capital increases. As with all strategies, there are pros and cons that must be mastered to determine if this is a proper strategy for our personal risk-tolerance and return goals. This program will highlight in detail:
- PMCC definition
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- Option Greeks
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- Rolling LEAPS
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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:
Alan and Barry,
Enjoyed the seminar! Thank you, Alan & Barry, for your great efforts!
Bill in Omaha
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:
barry@thebluecollarinvestor.com
Morning Alan,
I was sharing my Blue Collar Investor Experience with a friend recently. The conversation left me with two serious questions. I’d appreciate any input you might have.
1) What do we do if the market in general makes a big crash, kind of like if there’s a war or another pandemic, or any event that cuts the market half? He is really saying he’s fearful with it comes to having stocks.
2) Can Blue Collar Investors make money in a bear market? Meaning, is selling ITM options for downside protection really going to work?
Personally, I’m doing ok in a bull market, and haven’t any experience in a bear market, and I really don’t know enough about it to answer this question.
Thank you,
John
John,
These are not only serious, but also excellent questions. We must be prepared for bear and volatile markets when they present themselves. My responses, in random order:
1. We should not construct our investment portfolios based on market aberrations (crashes), although we should be prepared as how to react to them, if and when they occur (2008, 20022).
2. Over decades and decades, the average stock market (S&P 500) accelerates between 8% – 10% per-year).
3. Selling covered calls and cash-secured puts, we can make money in mildly bear, neutral, normal (up 8% – 10% per year) and bull market environments).
4. We will lose money in strong bear markets, unless we turn to inverse exchange-traded funds (ETFs) as our underlying securities. These ETFs, move up in value when the market declines. We always include these in our ETF reports, although they are rarely needed.
5. In mildly bear markets, we can be successful, by implementing some of the BCI rules & guideline strategy approaches. Here are some:
– Selling ITM call strikes (as you stated).
– Selling deep OTM put strikes
– Selling OTM put strikes to enter covered call trades (PCP or “wheel” strategy)
– Using low implied volatility underlying securities that are out-performing the market (in our stock and ETF Reports).
– Using Delta and/or implied volatility to establish approximate 84% – 90% probability of success trades.
Now, to get a bit philosophical: When we are seeking to generate greater than risk-free returns (Treasuries, CDs etc.), we, by definition, are willing to incur some risk. Our goal, in the BCI community, is to minimize that risk and maximize our gains. These are low-risk, not no-risk strategies.
Alan
Oh wow. That is such an awesome answer! Thank you so much.
John
Hello Alan,
Hope all is well.
Just completed your latest book, and all of your others, and a situation that I don’t recall reading about that I have experienced comes to mind, and would appreciate any strategic comments.
On 3/15/24 my GOOG 142 call was to expire.
Google was down that day, but trading above 142.
Normally I would roll-out and up; however, since it was a down day and close to the strike price I BTC ( and still made money on the option).
On Monday 3/18 GOOG opened at 149.37; I then sold a 162.5 CC expiration 3/22. (made money)
My question is did I just get lucky or is it a best practice to BTC on a down day (expiration day) vs rolling-out and up. Yes I want to retain GOOG stock.
I am counting on the normal variation of the market and a strong company and bull market tone as I made my decision.
Comments?
Bob
Bob,
There are pros & cons to this approach, however, I lean in favor of rolling.
By closing and not rolling the option, we are betting that share price will not decline in value when the market re-opens on Monday.
In bull markets, this is more likely, but on a day-to-day basis, predicting market movement is an exercise in futility. Even bull markets have down days.
In this case, you won, and the bet was definitely in your favor, but the opposite (share price decline on Monday) was a possible scenario as well. You ended up benefitting from an increase in stock price and wrote a higher OTM strike than you would have had you rolled the option.
If share price declined, you would have had to write a lower strike (and locked in a lower share price potential than had you rolled). Had you rolled first, you may have had an opportunity to roll-down and generate a 2nd income stream.
Bottom line: Your approach worked and benefitted you handsomely regarding unrealized share profit.
I suggest evaluating the pros & cons of closing the short call versus rolling it before deciding on which approach aligns best with your trading style and goals. For me, it’s rolling.
Alan
Thanks for the feedback.
Ok-so I got lucky and each situation needs to be evaluated individually.
Sometimes it is better to be lucky than smart.
Bob
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 03/22/24.
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:
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.
Best,
Barry and The Blue Collar Investor Team
Hello Alan,
I have read all your books and tried to look up this question but can’t seem to find it.
I remember a 1 % return minimum on multiple exit strategies.
In other words if I sell a covered call and buy it back and sell another one in the same contract month the 1% minimum comes into the picture.
I can’t remember the exact details. Could you give a brief explanation please?
Thanks,
Donald
Donald,
You are referencing the “mid-contract unwind” exit strategy.
In this scenario, the share price moved up, leaving the original call strike deep in-the-money (ITM). This results in the time-value cost-to-close (CTC) to approach $0.00 (but never actually reaches $0.00).
We will consider this exit strategy opportunity when we can generate >1% than the time-value CTC in a new position in the same contract cycle.
For example, if we can generate 2% in a new position after spending 1% of time-value to close the original covered call trade, we consider this exit strategy.
Please re-read Chapter 7 (pages 29 – 34) in my book, “Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts” for more details and a real-life example.
Alan
Alan,
If you have higher returns with weekly options, why do you prefer monthly options?
Mike
Mike,
Both weekly and monthly expirations work well. There is no right or wrong. I use both but do favor monthly expirations. There are pros & cons to both. Here are reasons an investor may favor monthly expirations:
1. Larger pool of securities with monthly expirations compared to those that have both monthly and weekly expirations.
2. Smaller bid-ask spreads (some exceptions)
3. Less management in terms of rolling decisions.
4. More time for exit strategy mitigation.
5. 1/4 the # and amount of trading commissions compared to weekly expirations (minor factor).
Weekly expirations have their advantages as well, so both are excellent approaches to option-selling.
Alan
Alan,
Do market makers use option pricing models like Black Scholes, when setting up their option prices in option chains?
Thank you.
Randy
Randy,
No. Opton pricing models calculate theoretical option value, not the value we actually see in option-chains.
The most important factor that determines option pricing is supply & demand and is the consensus of all market participants (retail & professional) … what traders are willing to pay.
The SEC requires market-makers to publish the “NBBO”, National Best Bid and Offer. These are the prices we see in published option-chains.
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