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Ask Alan #163 – Timing Our Covered Call Trades in Bull Markets

Alan answers a question posed by Phil, who asks:

Alan,
Alan, In bull markets, isn’t it a good idea to buy stocks, wait for appreciation and then selling covered call? This way we can take advantage of market conditions. Thanks. Phil

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It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#163, “ Timing Our Covered Call Trades in Bull Markets”

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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 #163 – Timing Our Covered Call Trades in Bull Markets”

  1. Pete October 9, 2019 4:28 am #

    Alan,

    I was wondering if you ever consider the Stansberry Capital Efficiency Monitor as a source for covered calls and or Cash secured puts? I know you use IBD and their rankings, but I just thought I would ask.

    Thank you,

    Regards,

    Pete

    • Alan Ellman October 9, 2019 6:57 am #

      Pete,

      Selection of our underlyings is dependent on the strategy we are using, our cash return goals and personal risk-tolerance.

      It appears that this is a defensive portfolio taken from various publication recommendations which has less volatility than the S&P 500. The recommended holding is 1 – 3 years with a required initial investment of $100k.

      It appears to consist of a list of blue-chip type securities that will generate modest option premiums because of the low volatility. The long-term holding period does not align with our short-term option selling strategy.

      So there appears to be pros and cons to using this list.

      I would suggest premium members focus in on our Blue Chip reports if looking for low-risk defensive underlyings where modest but significant premium profits can be generated. This list is geared specifically to short-term option-selling.

      Alan

  2. Angella October 9, 2019 11:29 am #

    Good Morning Alan:

    Thank you for the wonderful content and calculator. I love your name ‘blue collar’ smacks of ‘ordinary folk’.

    I am learning how to trade forex at the moment and started long ago to learn options. However, I did not continue.

    I do plan on joining your platform. I want to take it back up. I have 3300 in a retirement fund at Merrrill Edge. They have approved me for writing covered call options which is right up my alley and your focus in these videos.

    I want to start but really nervous about losing. Here is my plan

    I located an energy stock (VTE) which I would need to purchase first before I can do the options. I like Vanguard and might transfer funds to them. In the meantime, I want to see if I can grow that account through simply writing the call options. Do you have any advice off the bat?

    I also thought of Century Link (1135)
    With those 2 stocks I would have almost 300 on hand to buy back the stock if need be. would you recommend one or 2 stocks to get going?

    FYI:
    School teacher trying to transition
    Thank you,

    Angella

    • Alan Ellman October 9, 2019 1:45 pm #

      Angella,

      I admire your doing the diligence prior to embarking on your transition. It’s a recipe for success.

      Consider exchange-traded funds as a way to better diversify in a portfolio populated with a limited number of securities.

      Alan

  3. Sagar October 9, 2019 11:53 am #

    Alan,

    You suggest not writing a call option when there is an upcoming earnings announcement. I clearly understand your explanation for this. But, you do go long on the stock so that you can fully enjoy the upside potential. What if the earnings are not good for the quarter and the stock price starts to drop? At this point what is your guidance to exit the stock?

    A stop loss of 2 to 3% or you sell a call option?

    Thank you,
    Sagar

    • Alan Ellman October 9, 2019 2:18 pm #

      Sagar,

      Holding a stock is not specifically part of the BCI methodology for option-selling. However, there are times we have confidence in a stock (based on historical data) and choose to hold it in our portfolio through the report and then sell the option after the report is made public. We also use this approach for “portfolio overwriting” in our long-term buy-and-hold portfolios.

      That said, let’s say we hold a stock through the report and it disappoints resulting in share decline. At this point, we must decide if we are still bullish on the stock and, if so, we write an out-of-the-money call. If our bullish assessment has changed, we sell the stock and move on. This is the risk we take when holding a stock through the earnings report. The question we must ask ourselves is “Would I buy this stock today at this price?”

      Alan

      • Sagar October 11, 2019 6:44 am #

        Thanks Alan for the detailed explanation. I’ll keep in mind the last sentence of your email!

        The question we must ask ourselves is “Would I buy this stock today at this price?”

        This perception gives me some confidence!

        -Sagar

  4. John October 9, 2019 1:32 pm #

    Thank you Alan.

    On another subject: I have CAT 200sh @133.
    On 6/7/19 sold to open 2 cc contracts, strike 145, expire 12/20/19. net $443.70

    On 10/8/19 bought to close those 2 cc contracts for $17.30, net $426.40.

    On 10/9/19 sold to open 2 cc contracts strike 135, for $232.70, expires 12/20/19.

    This left me with $659.10 to the good.

    this does not include the previous cc monthly contracts during the year, CAT has been very good to me.

    The ROO is not the greatest but I’m happy.

    I continue to read and re-read your books, thanks again.

    John

    • Alan Ellman October 10, 2019 6:39 am #

      John,

      Thanks for sharing. Keep an eye on the earnings report due out on October 23rd.

      Alan

  5. Jack October 9, 2019 1:48 pm #

    Alan,

    2 days before expiration Friday your stock drops $3 a share and you don’t have any significant news outstanding that should cause it to stay there and you have confidence in the stock do you ever just hold it past expiration Friday besides selling it for a loss or rolling down to the next month?

    In other words keep it for a while to see if it doesn’t come right back up so you can retrieve your three bucks a share.

    Thanks Jack

    • Alan Ellman October 10, 2019 6:49 am #

      Jack,

      Here’s how I view a scenario like this assuming no tax component to our decision:

      The stock is not what is important to us, it’s the cash we have invested in that security. Let’s say we purchased the stock for $50 and it drops to $47. Well, we have $47 per-share at that point in time as expiration approaches. We ask ourselves: “Where is that $47 per-share best placed? In that same stock or a different one. We base our decision in the criteria we set up in our screening process. In the BCI methodology, it’s fundamental analysis, technical analysis and common-sense principles. It may be the same security or it may be a new one but we are never “married” to one specific stock because it’s the cash, not the stock, that is our primary concern. Emotion must not be part of our investment decisions.

      Alan

  6. Alan Ellman October 9, 2019 5:34 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. Alan Ellman October 10, 2019 7:09 am #

    Recent Philadelphia Money Show interview:

    https://www.moneyshow.com/video/11655/selecting-the-right-strike-price/

  8. Roni October 12, 2019 5:00 pm #

    Alan,

    great video as always.

    I wish to add an answer to Phil’s question.

    We can be in a bull market, but the stock we chose can suddenly have a significant drop, and in that case, the option premium plus our exit strategies can mitigate our loss, or even recover, and turn it into a gain.
    When you just buy and hope for large returns, you are gambling.
    With the BCI methodology you are trading with low risk consistent returns expectation.

    Roni

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