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Ask Alan 147 – “Why is the Ellman Calculator Showing Negative Returns?”

Alan answers a question posed by Duminda, who asks:

I am trying to understand why I am getting a negative ROO on a trade I made with the ETF BOTZ. First, I bought 100 shares for $27.13 and sold the February $27.00 in-the-money strike for $0.75. The option expired worthless and I then sold the March $26.00 out-of-the-money strike for $0.30. That option also expired worthless and the current price is $25.00, a drop of 8.2% from $27.13. I wanted to sell the April $26.00 option for $0.25 but the Ellman Calculator shows a negative ROO of (-)3.4% with downside protection of 4.2%. Can you help me understand how I get a negative ROO and why I would make such a trade?
Thank you.

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It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#147, “Why is the Ellman Calculator Showing Negative Returns?”

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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.

9 Responses to “Ask Alan 147 – “Why is the Ellman Calculator Showing Negative Returns?””

  1. Alan Ellman June 13, 2018 5:04 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

    New members check out the video user guide located above the recent reports.

    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

  2. Jay June 13, 2018 6:27 pm #

    Hi Duminda,

    I too have been disappointed with the YTD and particularly last few months performance of BOTZ and ROBO versus the XLK or QQQ. but I still like the investing theme and have held some for a while now.

    Good to read you softened some of the weakness with over writing. I had not been doing that since I looked at them as niche growth investments. You have done better than I have with them by over writing recently!

    I have friends with iRbt vacume cleaners and robots do more complicated things every day so I think it is an investable trend for the future. – jay

    • Terry June 17, 2018 10:13 am #

      Jay;

      I too am holding ROBO and have not been over writing, looking for long term growth.

      Best;
      Terry

  3. Bill June 14, 2018 3:01 am #

    Allan,

    I follow your report on 6/2/2018 and decide to play PANW, bought stock at 198.65 sold 207.5 strike 6/29/2018 (16 days to expiration).

    Today PANW at 213.19. Profit now calculate at 8.36/share, I know if wait 16 more days my profit will be $11.09/share It means I need to wait 16 days to get 2.73/share.

    Can you please help to see if any other ways to do better like roll out or rollout and up ?

    Thank you for your help.

    I am looking to buy your book on Poor man cover call but I do not see it on the website.

    Thank you for your coaching I do enjoy study with you

    Bill

    • Alan Ellman June 14, 2018 10:15 am #

      Bill,

      There are times that the best action is no action at all. That may be the case here. Based on the stats you have provided, the current 11-day return is 4.2% ($8.36/$198.65). Now, if you wait 16 days, your total 1-month return is 5.6% ($11.09/$198.65). This represents an additional 16-day return of 1.4%, which annualizes to an additional 32%…not so bad.

      Now, closing the position does make sense if the time value component of the option premium approaches zero. In our books and DVDs, I refer to this as the mid-contract unwind (MCU)exit strategy and can be calculated by using the “Unwind Now” tab of the Elite version of the Ellman Calculator (free to premium members and for sale in the BCI store).

      For more information on the MCU exit strategy:

      Pages 264 – 271 of The Complete Encyclopedia for Covered Call Writing- classic edition

      Pages 243 – 252 of The Complete Encyclopedia for Covered Call Writing- Volume 2

      Alan

    • Alan Ellman June 14, 2018 11:03 am #

      Our new book, “Covered Call Writing Alternative Strategies”, which includes the “Poor Man’s Covered Call”, will be available in 2 -3 weeks. We just approved the final proof edits. Look for an early-order discount promo code we will be making available.

    • Jay June 14, 2018 2:34 pm #

      Hi Bill, nice work with PANW! A good stock for some time now.

      You have a nice “problem” with PANW appreciation AND your OTM call sale.:). Since 207.5 is your agreed sale price and as I write this PANW is at 216.91 and your option is priced at $11 you would be buying back $9.41 of intrinsic and $1.59 of time value.

      That would, of course, free you of obligations and the market is now your true value. Which if PANW stays parabolic will seem a smart move in hindsight! But since early exercise is so rare, there is no dividend and PANW could just as easily back up a bit from profit taking by your expiry my two cents is also to sit tight and see how it goes.

      You already have a great trade essentially locked in unless there is a big pullback. And if that happens you will kick yourself for having bought back the option now :). So doing nothing at the moment seems the higher % play to me! – Jay

      • Marsha June 14, 2018 4:27 pm #

        I agree 100% with Jay. The maximum profit has been achieved (so far) and unless stock price moves a lot, I would just enjoy the ride over the next 16 days. Nice going Bill!

        Marsha

  4. Alan Ellman June 15, 2018 6:35 am #

    Today is QUADRUPLE (TRIPLE) WITCHING FRIDAY, frequently a day of enhanced volatility. Here is a link to an article I previously published on this topic:

    https://www.thebluecollarinvestor.com/triple-witching-friday-coming-to-your-portfolio-on-june-18th/

    Alan

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