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Ask Alan #178 Poor Man’s Covered Call Managing Unusual Circumstances

Alan answers a question posed by Martin, who asks:

Hi Alan,
I’m using the poor man’s CC to trade. My question is what to do when the LEAPS gets OTM or how do you manage that trade?
I bought PPL LEAPS (January 2021) call at 30 strike when the stock was trading at 35.42 and way before this crash. But now the stock is at 25 and not too many good strikes at the 30-ish level I am a bit unsure how to trade it from here.
Thank you for your input!
Martin

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It’s the 2nd Wednesday of the month. Time for another original episode of Ask Alan. AA#178, “Poor Man’s Covered Call Managing Unusual Circumstances” you can! Become a premium member today, and tune in to the educational power of the complete library!



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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.

10 Responses to “Ask Alan #178 Poor Man’s Covered Call Managing Unusual Circumstances”

  1. Kevin January 13, 2021 2:49 am #

    Alan,

    I bought 1 contract of FCEL at $13.03 with a Feb. 19th strike of $14.00 for a credit of $1.76. It shot up to $19.50 Approx. cost to BTC is $6.12.

    I have as of yet been able to successfully use the ellman calculator to look at unwind options. Im using the school computer so don’t know how to approach this scenario ?

    Sincerely
    Kevin

    • Alan Ellman January 13, 2021 7:55 am #

      Kevin,

      You are currently in a winning, but risky, position. When the trade was structured, there was a 6-week initial time-value return of 13.5% with an upside potential of 7.4% resulting in a 6-week max return of 20.9%. That tells us that we are dealing with a highly volatile (IV) security.

      The current IV of the S&P 500 is 18.35. It’s 156.89 for FCEL. Of the $6.12 cost-to-close, $5.50 is intrinsic-value so the time-value cost-to-close is $0.62. If we closed the entire position today, we have a net debit on the option side of $4.36 and a net credit on the stock side of $6.47. This calculates to a short-term return of 16.2%.

      When a security has an IV of 156.89%, it can go down as quickly as it accelerated.

      Keep up the good work analyzing these trades..

      Alan

      • Kevin January 13, 2021 9:05 am #

        Thank you for the clarification.

  2. Alan Ellman January 13, 2021 5:05 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly option and implied volatility stats are also incorporated.

    The mid-week market tone is located on page 1 of the report.
    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. William January 14, 2021 2:00 am #

    Alan,

    I am a recent premium BCI member, I have read both Encyclopedias on covered calls, watched all Ask Alan videos on the subject of my question and looked at many podcasts, but still would like an answer.

    What do you do when the market takes a severe downturn like it did around Feb 21, 2020 at the beginning of the covid19 crisis. There was an Ask Alan video about a short downturn, where the answer was to buy the call back after it lost 90% of its value and issue a new call to initiate the repair strategy. It then said to issue another BTC order if the call lost another 90% in case of a further market downturn. But while rare, what happened last year was the S&P suffered a 33% decline in a month. Assuming the stocks in my covered call portfolio are still good stocks, they would have probably suffered the same fate as the S&P. If I continued to deploy the repair strategy until option expiration, I would have lost about 25% of my assets if the market went down 33% assuming the repair strategy recovers about 33% of the decline.

    So what would be the proper strategy in the this rare instance? When and how do you decide to pull the plug in your portfolio of stocks?

    BTW, your books, videos and website are fabulous. I am prepared to use the BCI strategy after some more paper trading. Great job!

    Thank you.
    William

    • Alan Ellman January 14, 2021 6:13 am #

      William,

      Every strategy should have a solid position management component to address every possible outcome, even those that are extremely rare as we experienced in March 2020.

      Our primary defense are our 20%/10% guidelines and the “next-steps” based on our BCI exit strategy arsenal. Not every trade will be a winning one but position management will mitigate losses and enhance returns.

      This past March, I turned to inverse ETFs that allowed me far out-perform (minor losses) prior to market recovery. Here is a link that explains these securities:

      https://www.thebluecollarinvestor.com/covered-call-writing-and-inverse-etfs-generating-cash-in-extreme-bear-markets/

      The key to dealing with these aberrations is preparation, removing emotion from the equation and acting appropriately given the situation at hand.

      Alan

      • Alan Ellman January 17, 2021 6:19 pm #

        William,

        To summarize and confirm:

        1. We use our position management 20%/10% guidelines to close short calls.

        2. We then roll-down or wait to “hit a double”

        3. If share price continues to decline, we sell if the security is significantly under-performing the S&P 500 or reaches a certain threshold decline (7% is reasonable and the one used in our calculators).

        To get more details with numerous examples, see the exit strategy chapters of my books and online video programs as a brief response in the commentary section of this blog will not do justice to your inquiry.

        Alan

  4. Jonathan January 14, 2021 3:54 am #

    Hi Alan

    I bought your book on the subject and its been a great read. Unless I’m missing the example i am struggling with how to deal with a certain scenario.

    I buy a stock and then sell an out of the money call.
    Let say its a $25 stock and i sell the $27.5 option. A few days after selling the option the stock price explodes and goes to $30. I still have 17 days left and based on news expect the stock to keep climbing.

    Do i just roll up ?

    Thanks for your really informative info

    Cheers

    Jonathan

    • Alan Ellman January 14, 2021 6:22 am #

      Jonathan,

      Early exercise is extremely rare and usually associated with ex-dividend dates in the unusual scenarios when it does occur.

      I generally prefer not to roll-up in the same contract month but we do have an exit strategy to consider when share price rises exponentially….the mid-contract unwind exit strategy. Here is a link that explains:

      https://www.thebluecollarinvestor.com/covered-call-writing-mid-contract-unwind-exit-strategy/

      For more detailed information on this strategy:

      Complete Encyclopedia- Classic: Pages 266 – 273

      Complete Encyclopedia- Volume2: Pages 243 – 252

      Alan

  5. Alan Ellman January 14, 2021 6:34 am #

    Members,

    My team is working on issues we are having updating the store and premium login sites. We hope to have addressed later this morning… Alan

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