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Ask Alan #166 Strike Selection Factoring in the Underlying Stock

Alan answers a question posed by Hank, who asks:

Alan,
Alan, What is your opinion about selling an in-the-money covered call for below the price of the underlining stock versus an out-of-the-money? For example, with GE trading at $8.18, I can sell the September 20th $8.00 call for $0.52 or the September 20th $9.00 call for $0.13. Thanks, Hank

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It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#166, “Strike Selection Factoring in the Underlying Stock”

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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.

5 Responses to “Ask Alan #166 Strike Selection Factoring in the Underlying Stock”

  1. Andy January 8, 2020 4:31 pm #

    Hi Alan,

    I joined today. What does the expiry date, eg 1/17/2020, mean?

    I understand that you suggest selling a covered call one month out. Or, is the expiry date the date to target for calls to consider.

    Thanks in advance,

    Andy

    • Alan Ellman January 8, 2020 8:28 pm #

      Andy,

      1/17.2020 represents the date when the January monthly option contracts expire/ Monthly generally expire on the 3rd Friday of the calendar month at 4 PM ET. The February contracts expire on 2/15/2020. Weekly options expire every Friday at 4 PM ET. I personally prefer Monthlys but we do have some members who use Weeklys. We can be successful using either one.

      Alan

  2. Alan Ellman January 8, 2020 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

  3. Ted January 9, 2020 2:17 pm #

    Happy New Year Alan!

    When selecting OTM options, how does one determine how far out to go for selecting a strike price? I realize it’s a personal preference, but is there a general guideline I can follow?

    Maybe trend lines?

    – Ted

    • Alan Ellman January 9, 2020 4:22 pm #

      Ted,

      First determine an initial time-value return goal range for our monthly (or weekly for some members) options. For me, it’s 2% – 4% for the month and up to 6% in strong bull markets.

      Next go to an option-chain and view the OTM strike premiums and select the one that falls within the range. The more bullish we are, the deeper OTM we go as long as the returns meet our system criteria… easy!

      Alan

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