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Ask Alan 161 – The Importance of Delta in our Covered Call Writing Decisions

Alan answers a question posed by Artie, who asks:

Alan,
I recently listened to an options webinar. When the speaker got to covered call writing, he suggested using options with a delta around 40. I was wondering if you agree with this or have a different number that you use.
Thanks for any information you can share.
Artie

———

It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#161, “ The Importance of Delta in our Covered Call Writing Decisions”

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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.

13 Responses to “Ask Alan 161 – The Importance of Delta in our Covered Call Writing Decisions”

  1. Dietmar August 14, 2019 8:15 am #

    Hi Alan,

    Sorry for bothering you again, but maybe you can help me sort out the trading hours. I am actually using an interactive broker paper account to figure out how it all works.

    Their first choice is the SMART system, and there I see the option chains filled only in the later afternoon for European Central Time. Am I doing something wrong, or is that the way it works?

    Thanks for your help
    Dietmar

    • Alan Ellman August 14, 2019 9:44 am #

      Dietmar,

      You are doing everything correctly. Love that you are paper-trading. This makes perfect sense in that there is a 5-hour time difference between EST and CET. The option pricing is published when US exchanges open at 9:30 AM EST which translates to 2:30 PM your time.

      I get the option pricing here in Florida at the same moment (but different time zone) you receive it in Switzerland.

      Keep up the good work.

      Alan

  2. Hoyt T August 14, 2019 4:20 pm #

    Everyone,

    Yes, today there was blood in the streets, particularly, Wall Street.

    I hope there was one bright sign today. All three major averages closed on their lows of the day. In normal times that is a very good sign. However, these are not normal times. So who knows?

    Question? Will the Fed cut .75 in order to maintain a non-inverted curve between the 2 year and the 10 year? My thinking is that the Fed is behind the curve, no pun intended.:)

    I personally do not believe they can maintain the non-inverted curve in the long run. Too much money globally seeking a safe haven to be able to do it. That said, does that mean that this time it really is different? Time will tell.

    Hoyt

    • Roni August 14, 2019 6:15 pm #

      Hi Hoyt,

      good question, but too difficult to answer. The Fed is a team of top economists. How can we expect to interpret their reasoning?
      And more challenging, how can we guess how the big boys who move the market will react?

      Baffles me. I really do believe it is like flipping a coin. the chances are 50/50.

      Today was really bad. Let’s see what happens tomorrow.

      As Tom Hanks said in Cast Away, “I had no control about anything”

      That’s the way I feel about the market.

      Roni

      • Jay August 15, 2019 11:48 am #

        Hey Hoyt and Roni,

        My hunch is the Fed will continue to be the adult in the room and seek to serve it’s charter to support the U.S. economy.

        From a practical perspective regardless of one’s view of Trump it’s clear to me he attaches self esteem to the stock market and takes it personally. It’s therefore unlikely he will let it fall very far between now and the election next year.

        Which is good news for stock investors! Twitter has seriously damaged the value of The Stock Trader’s Almanac :). But if you look at once was seasonality after another down week next week it should get a little better?

        When I step back and consider things it feels scary at the moment. But stocks as measured by the S&P have done fine this year. If one were fortunate enough to have some GLD and TLT in their holdings, congrats, a stand out year for those assets.

        But in this low interest rate environment where else is high liquidity cash going to go but in and out of the stock/gold/bond markets? And with the churn the VIX goes up, implied volatility goes up and options premiums go up helping the sellers of covered calls and cash secured puts.

        So I do not fret much about my portfolio these days. The over written calls help, the stocks pull back but my cost basis is lower and this is just part of the cycle of things. – Jay

        • Roni August 15, 2019 5:54 pm #

          Hi Jay,

          In the same sentence, Tom Hanks continued: “I said to myself, let’s see what the tide will bring tomorrow, and it brought me a sail”.

          Roni

          • Jay August 15, 2019 9:31 pm
            #

            Thanks Roni,

            Great stuff, I hope it brings you the rest of the boat too :)! Jay

  3. Nick August 14, 2019 5:17 pm #

    Hi Alan,

    I went through the entire covered call series and am getting ready for the next contract period. Testing the waters with Select SPDRs is of interest to me.

    I get that earnings reports are insignificant in these cases but that we do still need to pay attention to ex-dividend dates.

    Regarding specific options, I’m assuming we should also pay attention to open interest > 100.

    But what about volume? Does the minimum of 250,000 still apply for Select SPDRs?

    Thanks,

    Nick

    • Alan Ellman August 14, 2019 6:43 pm #

      Nick,

      Yes, open interest and average trading volume both apply to ETFs. SelectSector SPDRs have average volume in the millions.

      Alan

  4. Alan Ellman August 14, 2019 5:19 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

  5. Alan Ellman August 14, 2019 5:24 pm #

    BCI members,

    The inversion of the yield curve (historically reliably predictive of recessions) spooked the market today not to mention many investors.

    On the bright side, we are coming off a stellar earnings season, interest rates are incredibly low making other investment vehicles unattractive and the dividend yield on the S&P 500 stocks is greater than that of 10-year Treasuries. Makes us ask the question… where else can investors go to make money?

    Trading liquidity is low during the summer months making up and down movements exaggerated.

    It is important to weight all factors when making our trading decisions.

    Alan

  6. Bob August 15, 2019 3:54 pm #

    Alan,

    If I plan to own Aapl or other stock for a long time, could I continually sell an in, at or just above covered call continually and if called do a cash secured put at or just below the money? I believe they call it the wheel method. Would it make sense?

    Thank you,
    Bob

    • Alan Ellman August 15, 2019 5:57 pm #

      Bob,

      The strategy you are alluding to is titled the “PCP Strategy” in my books and DVDs. Out-of-the-money puts are sold to either generate cash flow of purchase a stock “at a discount” and then write a covered call.

      Yes, this is a viable strategy especially in bear and volatile market environments.

      Alan

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