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Ask Alan #154 – Huge profits Resulting in Unhappy Investors

Alan answers a question posed by Gene, who asks:

On September 24th, 2018 I bought 11,000 shares of AMRN at $1.88 and sold 60 January 2019 $5 calls for $1.17 and 50 January 2019 $7 calls for $0.60. Today (October 5th) the price is up to $20.29. I’m sick to my stomach when I think of all the profit I’ll have to leave on the table when these options are exercised. Can you give me choices to recover some, if not all, this potential profit being left on the table?
Thanks a lot,
Gene
David

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It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#154, “Huge profits Resulting in Unhappy Investors”

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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.

14 Responses to “Ask Alan #154 – Huge profits Resulting in Unhappy Investors”

  1. Alan Ellman January 9, 2019 5:26 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 January 9, 2019 5:38 pm #

    Yeah, its tough and frustrating when you have a stock covered and it takes off. That is why I never cover more than half of any position. Selling covered calls is an essentially bearish strategy which works fine when the market is sideways or down. But in a rally like this you will wish you did not do it on everything. -Jay

  3. Hemant January 10, 2019 2:03 am #

    Hi Alan,

    I have a question regarding covered calls. Although CC is a good strategy, if becomes difficult to sell CC when the underlying stock drops below your cost basis.In that situation, it is difficult to get a good premium for a Call at a strike above your cost basis. Do you still keep selling the ATM covered call although the strike would be much lower than your cost basis? What happens if the stock starts rising above your strike price? We have to take a loss on the covered call while closing it or rolling it. Do you roll it into a ratio covered call keeping the days to expiration to 1 month (selling 2 or more Calls for 100 stocks owned)?

    Thanks,
    Hemant

    • Alan Ellman January 10, 2019 8:11 am #

      Hemant,

      This is a scenario that will come up frequently and we must be prepared to deal with it in a focused, non-emotional manner. If share price declines as a result of overall market decline (as we have seen recently), rolling down to a (now) out-of-the-money strike is a sound way to mitigate losses and still allow for share appreciation. If the stock is now under-performing the market in a significant way, we should re-evaluate our bullish assessment and perhaps cut our losses by closing both legs of the trade.

      If the stock price moves above the strike price, we can employ the “mid-contract unwind” exit strategy or allow assignment depending on the factors detailed in my books and DVDs.

      Stock prices move up and down and this is what gives value to our options. Mastering the position management skill (in addition to stock and option selection) will elevate our returns to the highest possible levels. It is critical to take emotions out of the equation.

      Alan

  4. Mazin January 11, 2019 3:55 am #

    Alan,

    I would like to ask your for your help on where to go to get an answer on this (which is a recurring issue for me):-

    I write a covered call on say FB with 4 week expiration period
    The stock goes up say by 8% or 10% in the same period
    I want to keep the stock

    When is the best time to roll the contract forward and / or up? I would think it is best to do that few days or right before option expiration because then all we are dealing with is intrinsic value. This way, when it is rolled over, one can still make money on the next 4 week period, even if the option is in the money.

    If course, it would be great if the stocks drops before expiration, so I can “buy to close” the contract and do that all over again!

    I understand the risk that the stock can get assigned at ANY TIME even before expiration.

    Thank you very much in advance. I know you cannot give investment advice but I am trying to learn strategies.

    Best Regards,
    Mazin

    • Alan Ellman January 11, 2019 6:58 am #

      Mazin,

      You’re on the right track. The best time to roll an option on a stock we want to retain is close to 4 PM ET on expiration Friday. This is because of Theta (time value erosion) which approaches zero the closer we get to 4 PM. The value of the next month option is not negatively impacted as much as the benefit we receive from the near month time value benefit.

      If were willing to move on to a different underlying, the “mid-contract unwind” exit strategy would be a consideration (discussed in both versions of “The Complete Encyclopedia…).

      Alan.

      • Mazin January 11, 2019 8:18 am #

        Thank you very much. I saw a lot of your videos before signing up and your website is extremely useful!

        Mazin

      • Mazin January 16, 2019 6:09 am #

        Alan,

        “The value of the next month option is not negatively impacted as much as the benefit we receive from the near month time value benefit.”

        So basically, when I sold covered calls, and as I get deeper in the money, I can look at it as if I have built equity and when I roll over for the “near month time value,” I will still be able to make money. Of course, barring an unexpected drops in the price.

        My situation now is that when I sold the covered call, the call price moved from $4 to $10, Stock price is almost $10 in the money, even though the expiration date is about two weeks away. My delta is .89 which means I think means I am deep in the money.

        Please let me know if my thinking is correct. I am tempted to roll forward and up now but I agree that waiting until the expiration date, or even day before, will ensure that I am not giving away Theta.

        I am just looking for strategies.

        Finally, for your Orlando conference, is it only for beginners? I am interested mostly in covered call strategies and pricing of options.

        Thank you so much for the wealth of info you guys have on the website!

        Mazin

        • Alan Ellman January 16, 2019 6:16 am #

          Mazin,

          A general guideline is that rolling options make sense when we want to retain the underlying shares in our next-contract-month portfolio, there is no upcoming earnings report and the % time value credit meets our stated goal (2% – 4%, in my case).

          Early in the contract, the mid-contract unwind exit strategy makes sense when the time value component of the option premium approaches zero and closing the current position and opening a new one in the same contract will generate a second profit potential of more than 1% greater than the cost-to-close.

          The Orlando conference has many speakers. My 2 presentations are geared to beginners but I always include information that will benefit more experienced investors as well.

          Alan

  5. Hoyt T January 11, 2019 3:05 pm #

    Alan and Jay,

    Alan,

    Your video was excellent in describing the total environment around in selling covered calls with extremely high time value.

    Profit potential is very high as is loss potential. Back in 2016 and 2017 I used e-Trade’s option scanner for highest TV%. I scanned for Bio-techs. It was not uncommon to buy a stock for $36.00 and sell a call for $9.00. I did this often. As it usually seems to work when you first start a strategy every trade works and you think you are a genius. While this was going on I had several stocks I purchased double or more in value in a short time.

    The young man who works in conjunction me would often say, “Look at all the money we didn’t make by selling these calls.” I would answer, ” I would never have owned them if not for the strategy.” These positions were taken with “gambling” money and as usual about about three quarters the Bio-techs started doing poorly and we ended up with some trades with BIG losses as these gap downs occurred overnight with no opportunity for position management.

    My experience with high TV% calls that gap hugely is that you have no time for profitable position management unless the gap is up. All you can do on a gap down is cut your losses. You lose less than if you had not sold the call. So selling the call helped some. But here again, I typically would not have been in them but for the strategy of high TV%.

    I believe that your most prescient observation was that stocks like this are not appropriate for the BCI strategy.

    Jay,

    I use your technique too on stocks that have “normal” time value valuations. As you say you must pick your market, long term bear or bull, short term, monthly, weekly, daily, bear or bull.

    Hoyt

    • Alan Ellman January 12, 2019 7:39 am #

      Hoyt,

      I learned my lesson with high implied volatility stocks back in the 1990s with Taser Inc. (TASR)…no longer trading. I made huge monthly profits as I watched Taser’s price decline from high $30s to low single digits. I lost money but learned a valuable lesson that has made me a much better investor. Thanks for sharing and making these critical points.

      Alan

  6. michael January 13, 2019 12:01 pm #

    Was there a typo in his initial question?

    Where did he get an entry of $1.88 on Sept 24th, 2018?

    The 52week low is only around $2.35 and Yahoo, Seeking Alpha, and Schwab all show the price range for Sept 24th 2018 to be over $12.00 per share and also did not closed under $2.00 per share in all of 2018 and the 52 week low was in August of 2018 at $2.35.

    On the date provided the stock opened at $10.44 and then stayed over $12 for the day.

    Did he send in documentation showing his trade or just tell you about it? I can’t see how it was even possible based on the information that he provided. I mean his entry is 20% lower than the 52 week low which occurred a month before his buy in.

    • Alan Ellman January 13, 2019 12:16 pm #

      Michael,

      I used the stats presented to me in the email. Below is a price chart showing the huge gap-up from the $2.00 range to the $18.00 range. If the member stats were slightly off, the general concepts still apply.

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

      Alan

  7. Roni January 16, 2019 12:13 pm #

    Well,

    there may be some nistake in the information provided by Gene, but the example presented leads us to believe that he invested about $20,000.00 and did not enjoy when it bacame worth more than 70,000.00.

    Human nature is very strange. You are not happy about the huge return you just got lucky to receive, but you are terribly upset about the lost oportunity to make much more.

    Hindsight is worthless.

    Roni

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