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Ask Alan #162 – Generating Option Income with Technology Stocks

Alan answers a question posed by Joyce, who asks:

Alan,
Alan, I want to use the FAANG stocks to sell options but they are way too expensive for me. Is there a way I can take advantage of these companies with a portfolio of around $85,000? Thank you. Joyce
Joyce

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It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#162, “ Generating Option Income with Technology Stocks”

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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 #162 – Generating Option Income with Technology Stocks”

  1. September 11, 2019 6:57 am #

    Alan,

    SBUX has dropped over the last week 5.00 a share and still falling, no bad news except they cannot continue to grow at 10% anymore otherwise a spectacular company.

    It’s down to 90 and falling I go in at 96.31. I can sell an October to get 480 with a 90.00 strike.

    Any suggestions. Should I continue to wait or take some kind of action. I B-T-C today for about 25.00.

    Thanks,

    Jack

    • September 11, 2019 12:09 pm #

      Jack,

      The BCI exit strategies after closing the initial short call for this scenario (late in a contract):

      1. Roll down to an out-of-the-money strike (based on current market value)

      2. Sell the stock and use the cash from the sale to enter a new position in the September contracts (maybe generate 1%)

      At expiration, if we still own the stock, we can make another assessment if we want to keep the stock or sell it.

      Alan

  2. September 11, 2019 7:13 am #

    Free webinar for premium members:

    Premium members,

    Look for an email this evening with login information for a webinar I will be hosting this Saturday at 10 AM ET:

    “Converting Non-Dividend Stocks to Dividend-Like Stocks with Only 4 Trades Per Year”

    Alan

  3. September 11, 2019 1:11 pm #

    Good Afternoon Alan,

    Thank you so much for your help. I am going to enroll in the premium members club shortly!

    I do have a quick question regarding your Basic Ellman Calculator Sheet (Your Intro Tab);

    1. For an in the Money Call, how do I profit in your 3rd example in your Intro tab?

    – If the initial price is 61.50, and my strike price I select is $60.00, and at expiration the stock price is and called is $64.00, how do I make a profit to begin with? Wouldn’t the price go away from the execution price of $61.50? Wouldn’t this require risk mitigation?

    – What is your definition of called here? I would think this contact would never be executed because the price is not declining from $61.50 to $60.00 and instead rising the other direction

    Thanks again,

    Respectfully

    Kevin

    • September 11, 2019 2:28 pm #

      Kevin,

      When we sell an ITM strike, our maximum profit is the time-value component of the option premium sold. If the stock price moves higher, it will not impact our initial time-value profit.

      In the example in the intro tab of the Ellman Calculator, the time-value profit is 4.4%. That is guaranteed as long as share value does not move below the $60.00 strike. If stock price higher, we still will have realized a 4.4% return.

      I fed this same information into the multiple tab of the Ellman Calculator to highlight the 4.4% initial time-value profit and the 2.4% downside protection of that profit.

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

      Alan

      • September 11, 2019 3:29 pm #

        Great thank you.

        Does that mean when selecting the stock price of $60.00 for an ITM strike, we are hoping that the shares do not go below that strike price? For all ITM strike calls?

        Is this illustrating your point in your lessons that all in the money strikes provide less upside potential but provide downside protection?

        – Respectfully

        Kevin

        • September 12, 2019 5:15 am #

          Kevin,

          Your assessment is spot on. The 4.4% return is guaranteed as long as share price does not decline below the $60.00 strike. If it does, we start eating away at that 4.4% initial profit.

          This DOES illustrate that ITM strikes offer more downside protection (because of the intrinsic-value component of the premium) with no chance of any upside potential.

          Keep up the good work.

          Alan

  4. September 11, 2019 3:31 pm #

    Alan,

    I wanted to know your strategy for selling ITM covered calls(did not see it onweb site) as I have a long term REIT PMT which has been a good stock with strong dividend ~8%. For a beginner, the ITM premiums look delicious but I am unsure of the strategy when the strike price is less than the stock price which in assignment may lose money.

    Do you simply buy back the premium and with hopes that you will not be assigned before the expiration date with goal of keeping stock? or can you keep selling and buying premiums?

    Thanks,
    Clifton

  5. September 11, 2019 6:19 pm #

    Hi Clifton,

    Alan will certainly get back to you with his thoughts and maybe past links where the ITM covered call topic has been discussed.

    If I were to sell an ITM cc I would not do it because the premiums “look delicious” – great term by the way :)! ITM cc’s always will compared to OTM. I would do it because I am concerned about a near term drop in the price of my stock and I want some extra protection taking in premium rather than spending money on buying protective puts. If I am flat wrong and the stock goes up I’ll have a pretty expensive option buy back to keep the stock, may be facing a loss at assignment if I allow that and the ITM sold strike was lower than my stock cost basis. And I would have lost every dime on the put insurance too.

    I have found if I start with a bigger look at how the market is doing, then look at the sector my stock is in and how it is doing, then see if my stock is behaving consistent with that or not I make better decisions about strike selection than if I just get “wowed” by a possible premium intake. – Jay

    • September 12, 2019 5:42 am #

      Clifton,

      Outstanding response from Jay.

      The first step is to set up a structured plan. What is our goal? Is it critical to retain the underlying security? Are we prepared to roll options to avoid exercise? Do we know how to avoid ex-dividend dates to avoid early assignment? As with all securities we use for covered call writing, we also avoid earnings reports (October 31st is next up for PMT).

      PMT is a low-volatility security with a Beta of 0.54. This means that it moves with half the volatility of the S&P 500… if the market moves up 6%, PMT would be expected to move up 3%. Low-volatility means low option premiums which may or may not meet our initial time-value return goals. If our goal is 1% per month for near-the-money strikes, it may make sense to use PMT for covered call writing.

      Finally, ITM strikes may look great but the intrinsic-value component may give a false sense of high returns. Let’s say with PMT trading at $22.33, we look at a 5-week $20.00 call option generating $2.50. Looks like more than a 10% return but it’s not. We must deduct the intrinsic-value of $2.33 (amount the strike is less than current market-value). That leaves a time-value return of $0.17, less than 1%.

      We must first master the skills alluded to in my response and then we will be able to make the best investment decisions that meet our goals and personal risk-tolerance.

      Alan

  6. September 11, 2019 6:51 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

  7. September 12, 2019 8:14 am #

    Dear Alan, Barry and fellow B.C.I. members,

    first post on this truly insightful blog 🙂

    I just started paper trading after a few eye-opening months on Alan’s books and videos.

    I opened a CC position on Realpage (RP) based on last week Premium Report.

    On this week’s Report the stock is not there anymore, and is not listed in the “Failed current week” or “Removed from running list” tables. Any idea to what happened to this stock in the Report?

    Thank you very much for your help and support.

    kind regards

    Francesco G.

    • September 12, 2019 12:11 pm #

      Hi Francesco,

      There was a problem with sorting last week. RP is a valid stock from the report dated 09/06/19…it passed all screens.

      Best,

      Barry

      • September 12, 2019 2:35 pm #

        Thank you very much Barry

        kind regards

        Francesco G.

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