beginners corner

Automating the 20%/10% Guidelines

Position management is the 3rd required skill for achieving the highest level of option-selling success. One of the most important of the BCI protocols for covered call writing are the which assists us is closing short calls when those opportunities are presented. This allows us to mitigate situations when share price declines. These guidelines can be automated such that, if specific thresholds are realized, the short calls will automatically be closed without further action by the investor.

 

Generic description of the 20%/10% guidelines

  • Sell-to-open at $2.00 (selling the covered call)
  • Buy-to-close at $0.40 in first half of the contract (20% guideline)
  • Buy-to-close at $0.20 in the latter part of the contract (10% guideline)

 

Entering covered call trade for Invesco QQQ Trust (NASDAQ: QQQ)

Buy 100 Shares of QQQ

 

Sell-to-open the covered call and enter buy-to-close limit order

QQQ: BTC Limit Order Set at 20%

 

The $249.00 out-of-the-money call was sold for $5.10 and a BTC limit order was set at $1.00 (20%).



A note is placed in our calendar to change to 10% on July 6th, if these 20% limit orders are not executed in the first half of the contract:


Entering the 10% guidelines mid-contract


QQQ: BTC Limit Order Set at 10%

The BTC limit order was changed from $1.00 to $0.50. If this thresholds is met, the exit strategy will be executed automatically.

 

Summary

Exit strategy execution is the 3rd required skill necessary to become an elite option-seller. Implementation of the 20%/10% guidelines can be automated by entering BTC 20% limit orders immediately after entering our trades and then changing to 10% mid-contract. If the short call is closed using these guidelines, we are in a position to take further action such as rolling-down, selling the stock and “hitting a double

 

Investment club program board members

If you would like to schedule a private webinar with Alan and Barry, send an email to:

[email protected]

Include:

  • Contact email
  • Contact phone #
  • Club website URL
  • Put “private webinar” in the header

 

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:

Alan,

I enjoyed your presentation at the Michigan Investment Club meeting last month. I love that your information is always consistent, clear as a bell and so very useful.

Thank you, Alan,

Tracy

 

Upcoming event

Sacramento Options Traders webinar

Covered Call Writing with 4 Practical Applications

Sunday July 19th

12:30 – 4 PM

Login information to be sent to registered members (club and premium members)

 

Alan speaking at a Money Show event

***********************************************************************************************************************

Market tone data is now located on page 1 of our premium member stock reports and page 8 of our mid-week ETF reports.

****************************************************************************************************************

 

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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.

49 Responses to “Automating the 20%/10% Guidelines”

  1. Tony July 18, 2020 3:45 am #

    Hi Alan,

    I’ve just become subscriber after watching several of your videos.

    On your Exit Strategy Video you showed how you sold, and bought back options and had a triple.

    I didn’t understand how you said you minimized your loss after the stock dropped in the last couple days of the contract period.

    My understanding is if the stock price drops, you still keep the premium and the stock since it would not be assigned because it would not have hit the strike price.

    You made it sound like you minimized your loss by the strategy you used. I would think all the premium you collected, net the premiums you paid for buying back the option would be your gain and the drop in stock price would only count as an “unrealized loss”, since you still own the stock.

    If you have a chance, could you clarify that?

    Thank You,

    Tony

    • Alan Ellman July 18, 2020 6:33 am #

      Tony,

      You have a great understanding of the status of these types of trades.

      When share price declines significantly and we sell options and manage those short calls using rolling-down. “hitting a double” etc., we have a net credit on the option side.

      Now, looking at the trade in its totality, factoring in unrealized share loss, we may be in a net debit situation which represents a much lower loss than had our position management techniques not been implemented.

      Let’s say our stock declined in price by $7.00 per share and we have a net option credit of $5.00, we have an unrealized net debit position of $2.00.

      In my books and DVDs, I factor in the stock side when viewing these trades as a multi-leg trade.

      Alan

      • Tony July 18, 2020 6:54 am #

        Alan,

        Thank you for clarifying. It now makes sense. At first I thought you were treating the combination of the options and the holding of the stock as a net loss, but in reality for the stock portion of it, it’s only a loss in value of the stock for that moment in time, but not a “booked” loss.

        I enjoy your videos and look forward to more of them and will also look into your books.

        Best Regards,

        Tony

  2. Vinh July 18, 2020 3:01 pm #

    Hi Alan,

    I have a covered call for a stock that has dividend paid quarterly. Will I loose my stock’s dividend when it pay out. Thanks.

    Vinh

    • Alan Ellman July 19, 2020 7:30 am #

      Vinh,

      As long as we own the shares on the ex-dividend date, we, the option-sellers, capture the dividend on the pay date. Option buyers do not receive the dividends. They do have the right to exercise the option and take possession of the shares prior to the ex-date. In that case, the new share owners capture the dividend. THIS IS EXTREMELY RARE.

      I have written quite a number of articles on this topic. Here is one:

      https://www.thebluecollarinvestor.com/why-do-call-buyers-exercise-early-prior-to-the-ex-dividend-date/

      Alan

  3. Roni July 18, 2020 4:32 pm #

    Hi Alan,

    after expiration, today, almost all my trades were assigned, and my puts went worthless. So now I am almost 100% in cash, and we will have a 5 weeks options cycle.
    Five weeks is an awfull long time in my trading feeling.

    Questions: Do you start placing your trades next monday ? if yes, why ? Is there an advantage ?

    Roni

    • Alan Ellman July 19, 2020 7:41 am #

      Roni,

      To us, 5-weeks is an eternity. To most `stock investors, it is a nanosecond..

      With 5-week contracts, we do have a bit more flexibility and can enter our trades up to mid-week after expiration Friday. The rationale relates to Theta, time-value erosion; The time-value of our premiums decline logarithmically, slowly at first and then rapidly later in the contract. If we wait too long, our premium returns will be negatively impacted.

      Here is a link to one of the articles I published on this topic:

      https://www.thebluecollarinvestor.com/what-is-the-best-time-to-execute-our-trades/

      My plan is to enter my August contract trades tomorrow between 11 AM and 3 PM ET. I will immediately enter my BTC limit orders based on our 20% guidelines. There is nothing wrong with waiting until Tuesday or Wednesday.

      Alan

      • Roni July 19, 2020 9:50 am #

        Thank you Alan for your prompt response.
        I will do the same as you.

        Roni

        • Jay July 19, 2020 9:57 pm #

          Hey Roni,

          I am worried about my holdings this expiry so I definitely want to sell some covered calls this month for protection on the up days.

          No need to do it all at once, there could be more than one up day this week in a long expiry. Please do not sell them on a down day. I’ll layer into some further under the market csp’s on stuff I like on the wash out days. That combination usually works OK. – Jay

          • Roni July 21, 2020 11:12 am
            #

            Hi Jay,

            I did not see your post yesterday, so busy studying and placing trades.
            Thanks for sound advice.
            Finally, I placed only 6 August 21 CC trades : AVGO, CRM, DRI, RH, ULTA, VEEV, and found no other good candidates suited for my trading range
            It was an up day.

            Today (up day again) I added a 08/21 CSP trade for ADBE, aomewhat above my range.

            Still remaining 35% in cash, waiting for ER results this week.

            Take care – Roni

          • Jay July 22, 2020 2:01 pm
            #

            Thanks Roni, sounds like you have been busy!

            Those are all great stocks and I hope they serve you well this expiration. For whatever value seasonality has the markets have generally flattened if not gone down after this week often well into September so it’s a good period to overwrite holdings in my IRA and that’s what I am doing. I did not have to buy tickers for the process. Taking advantage of this extra week in a 5 week expiry I legged in and got some extra premium on continued up days. I will have them all in place by Friday.

            Yet I do have a hunch when the virus vacine is finally approved the market will really pop! So we shall see…

            All the best, – Jay

          • Roni July 22, 2020 5:22 pm
            #

            Jay,

            I agree about the post-vaccine pop.

            Here in Brazil, the state of Sao Paulo has started to test the Chinese vaccine today, with a young volunteer female doctor (27 years old). There will be 9000 volunteers total, testing throughout the country, where 50% will receive a placebo, unaware to them or to the researchers.
            They will receive a second shot in 14 days and will be closely monitored for 3 months.
            The authorities believe Brazil will probably become the first country to immunize the population in large numbers.

            Let us hope that they succeed, and the disease will be controlled by 2021/2022.

            Roni

      • Roni July 24, 2020 11:41 am #

        Alan,

        I have re-read the article from the link you sent me and tried to follow all the suggestions you mentioned in it.

        Today I finally placed my last CC trade for the 08/21 cycle. This was a challenging week, considering the ongoing ER season, but I am now 100% invested.

        Thank you again for the very appreciated help – Romi

  4. Barry B July 18, 2020 9:30 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor premium member site and is available for download in the “Reports” section. Look for the report dated 07/17/20.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    http://www.youtube.com/user/BlueCollarInvestor

    Since we are starting Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:

    https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

    The BCI team has added additional information, improved the format of our weekly ETF Reports, enhancing the quality of these reports, and making them more user-friendly and time-efficient. Here is a link to a video overview of these new upgrades:

    https://youtu.be/-wgqoyjP5bQ

    On the front page of the Weekly Stock Report, we now display the Top 10 ETFs, the Top 3 SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.

    Best,

    Barry and The Blue Collar Investor Team

    [email protected]

  5. Alexander July 19, 2020 2:23 am #

    Hello Alan!

    I am sure you must get fan mail all the time. I want to add mine to the pile. I’m writing to say a huge THANK YOU for your books and YouTube videos. I bought the Covered call Writing and the Selling Cash Secured Puts books. They gave me the confidence to finally start selling both. My wife would vouch your name is a household name. (“Alan would say….”). After following the BCI principals to Sell my first ever monthly Options, I had 6 Puts & 5 Calls expire yesterday. I made money on all of them! I even “hit a double” with one!! I’m so amazed. Literally amazed. I have two questions for you that I’m not able to find the answers to. If you find some free time and don’t mind answering, I would be so appreciative:

    1. I’m not understanding the term “Expiration Friday”. How is “Expiration Friday” always the 3rd Friday of the month when options expire on other Fridays as well? Should astute BCI investors only participate in Options that expire on the 3rd Friday?

    2. I don’t recall you ever saying it was important to B-T-C our Options on the date of expiration that are very, very near the strike price in case after market trading pushes the price ITM (and we wish to keep the shares or not be assigned). Is B-T-C something that should be done as sort of an insurance policy? Yesterday I had this exact scenario with a Call I had sold on MRK 7/17 @ $80. At market close the price was $79.87. After hours trading closed at $80.03. I really have no idea if my shares will be called away on Monday or not. To make matters even more confusing, I called my brokerage (Merrill Edge) today and they could only give me their “best guess” (this after 2 reps & a manager got involved since the Options desk was closed until Mon am) that the shares would *not* be called away. (My wife, of course, suggested “Write Alan, he will know!”). What I’m reading online even from the OCC is confusing. Any clarification you can provide would be much appreciated, Alan, but I understand if you want to be doing something other than sitting in front of a computer this weekend. If I knew for sure my MRK shares will be called away I would buy another 100 shares on Monday morning to replace them before the share price moves much.

    3. We are in the midst of Earnings season. I know smart BCI investors avoid this time but I’m not sure when is it “safe” to start selling Calls & Puts again after earnings? The next day? Several days? After the price has stabilized?

    Be well and thanks again, Alan!

    Alexander

    • Alan Ellman July 20, 2020 5:50 am #

      Alexander,

      Thanks for your generous comments and I’m delighted to learn of your recent success.

      Monthly options expire on the 3rd Friday of the month, 4 PM ET. Weekly options expire every Friday.

      When a stock is trading just below the strike as expiration approaches, there is a possibility that the strike could trade at or slightly above the strike as final trades settle after 4 PM ET. This is known as “pinning the strike”. Here is a link to an article I published on this topic 8 years ago:

      https://www.thebluecollarinvestor.com/pinning-the-strike-a-covered-call-writing-consideration/

      Keep up the good work.

      Alan

  6. Clark July 19, 2020 11:55 am #

    Hey Alan,

    I have been studying implied volatility a bit and I notice that on the ETF’s the IV is listed on the individuals against the S&P benchmark. Is there a % amount that you tend to shy away from as a general rule regardless of the underlying and chart characteristics?

    The securities have no IV listed but the beta is. I did find where you wrote,

    As a general guideline, I prefer to avoid stocks with betas > 1.5 unless we are in a strong bull market and the stock chart is strongly bullish and confirming. Are we to use the beta versus the IV with these?

    In my error with the purchase of MGM you indicated that it had 4 times the IV of the S&P. Might you please tell me where I can find the IV on securities not listed on the BCI list? I looked around a little but was unable to find anything.

    My regards,
    Clark

    • Alan Ellman July 20, 2020 6:08 am #

      Clark,

      We added IV stats to our ETF reports a few years ago when we noticed that some new members assumed all ETFs were safe, conservative underlyings because they were baskets of stocks. The IV stats were published to allow members to view the specific ETF IVs compared to that of the S&P 500. Each investor must decide on the appropriate IV that aligns with their personal risk-tolerance and strategy goals. The best way to accomplish this is to set an initial time-value return goal range (2% – 4% for me) which has IV “baked into” this range. This applies to individual stocks as well. Stocks with extremely high IV will return 1-month (can be re-calculated to other time-frames) returns much greater than my 2% – 4% goal. Once we set our range that is appropriate based on the parameters I mentioned, we don’t have to view IV stats.

      Beta is published in our stock reports as a secondary parameter. Using the initial time-value return goal range is most important.

      Here is a link to access IV stats:

      https://www.ivolatility.com/options.j?ticker=SPX&R=0

      Alan

  7. Marcus July 19, 2020 11:58 am #

    Alan,

    I am reading about your 20%/10% sell rule. How do you know that the stock price will not stay where it is so the option will just expire worthless? I have some stocks just fall for a few days and shot right back up again. If I bought back my option and sold the stock, I would have missed a lot of nice gains.

    Thanks,
    Marcus

    • Alan Ellman July 20, 2020 6:13 am #

      Marcus,

      The 20%/10% guidelines assist us as when to buy back the short call. It does not necessarily mean that once the call is closed, we must sell the stock.

      In the hypothetical you stated, buying back the short call and then share price shot back up again, we have a classic scenario where we could “hit a double”

      Had we not closed the initial short call, we would have missed that exit strategy opportunity.

      Alan

      • Marcus July 20, 2020 8:51 am #

        It costs to buy or sell options. If you wait for an option to expire worthless, you save on commission. I am still trying to figure out when it is the best time to close the option AND stock.

        • Alan Ellman July 20, 2020 4:15 pm #

          Marcus,

          Trading commissions on stocks are zero and on options between $0.50 – $0.75 per contract. Commissions are now a non-event. It will NEVER benefit us to make trading decisions based on broker commissions.

          We close both legs of the trade if the stock is under-performing and we want to move on to another security. Some may use a 7% decline from when the trade was opened. The short call must be closed prior to selling the stock.

          Another reason to close both legs relates to the “mid-contract unwind” exit strategy. Here is a link for information:

          https://www.thebluecollarinvestor.com/mid-contract-unwind-exit-strategy-at-the-end-of-a-contract/

          Alan

  8. Mark July 20, 2020 1:17 am #

    HI Alan:

    I hope your staying safe and healthy down in Florida where you are located.

    I have a quick question? When placing covered call trades, do you look at the deltas of the options in deciding on what strike price to pick?

    Thanks,
    Mark

    • Alan Ellman July 20, 2020 4:33 pm #

      Mark,

      I am amazed as to how many times I get this question. The answer is “no”

      We have several goals as option-sellers and none of them include achieving a specific option Delta. Now, every strike we select will obviously have a Delta but that will be a product of decisions based on our strategy goals, market assessment and personal risk-tolerance. Selecting a Delta first implies that 1 Delta will cover all our strike selections.

      Here’s how we do it in our BCI methodology:

      1. Determine our initial time-value return goal range. The higher returns will mean higher risk trades. For me, it’s 2% – 4% per month for 1-month near-the-money strikes.

      2. Determine the “moneyness” of our strikes based on overall market assessment and chart technicals.

      3. Examine an option-chain for ITM or OTM strikes that meet our time-value return goal range.

      Our strike selection will then be based on strategy goals as well as on our personal risk-tolerance, not on a random number that may or may not apply at that moment in time.

      Once we select that strike, it will have a Delta and most will fall in the 30 – 70 range for call options.

      Alan

  9. MarioG July 20, 2020 10:14 am #

    Alan,

    In your Resources, Dow_30_stocks.pdf

    Remove UTX United Technologies
    Add RTX Raytheon Technologies

    This change occurred on April 3, 2020

    Mario

    • Alan Ellman July 20, 2020 11:01 am #

      Thank you, Mario… Alan

  10. Michael July 21, 2020 1:31 am #

    Hi Allen,

    Hope this finds you well.

    This trade occurred today while I was placing a covered call order for CHGG. This is my second CC on this stock as it expired and was called July 18.

    My price for the stock today was $76.84.
    The strike price was $75.
    The options chain was for August 20 (32 days) and a $75 strike published price was $1.60.
    (I know there is an earning report due on 8/3/20).

    As I set up the order I noticed the premium was approximately $7.50 versus the published option chain price of 1.60. I triple checked the in-process option order metrics and option chain and it was still at $1.60.

    I then cancelled the order and started again. The $80 strike was approximately $5.42 and also was not published in the option chain. I then reprocessed a new order the same as the previous cancelled order and the premium remained at around $7.50. I then placed the order but a message flashed that eTrade was checking the order seeking approval and could not be cancelled. The market closed but the CC was approved shortly thereafter.

    The return on the option is a whopping 7.6% or $752.00. Even for an AA rated stock the premium seems high. The fact that the premium was only available when setting up the order is very strange.

    Can you explain?

    Thank you,

    Michael
    Premium Member

    • MarioG July 21, 2020 1:24 pm #

      Trading Experiences 7/22/20:
      Michael,

      I have Etrade and Fidelity accounts. I will show below the values for Option Chain that I saw and also the ROO% for ITM and OTM. Then I will discuss the high ROO% for this stock.

      Using Chrome Browser:
      I was able in Etrade to open up the Options Screen and setup a covered call for CHGG and correctly see the Bid / Ask for Strike 75 as 7.4/7.7 and for Strike 80 as 5.24/5.50.

      See attached graphic (captured later in time) which you can get if you go to the Trading drop down and select Options. If you enter CHGG and set up a Buy-Write Covered call, you will see the screen attached.

      Fidelity had the identical Bid / Ask values for both strikes.

      Using Power Etrade (from the Complete View Screen):
      I also loaded up Etrades Platform, Power Etrade and in the Options screen, I also was able to load in Chrome Power Etrade and saw the correct bid / ask values.

      Regarding the high option return that you saw of 7.6%:
      Using the above bid Ask value,

      Strike 75; Avg Bid/Ask = 7.55, Intrinsic 2.01, TV=5.64 ROO% = 5.64/75 = 7.39%

      Strike 80: Avg Bid/Ask=5.35, TV =5.35 ROO% = 5.35 / 72.01 = 6.9%

      So the values you calculated for ROO% are correct. I do not know why your option chain says 1.60. You may be looking at another parameter – something is not right. CHGG does not have weeklies so that is not the issue. Suggest calling Etrade for help.

      Regarding the high ROO%, big reason is the implied volatility for both strikes. That is the main reason for the high return value.
      Strike 75: IV = 72.67
      Strike 80: IV = 72.59

      As a comparison, AAPL has an IV of 35.61, GDXJ (ETF) has an IV of 48.75.

      Viewing implied Volatility with Etrade;
      Using the Browser:
      To see the implied volatility using the browser, you do not see the IV in the options screen I discuss above. To view it requires several extra steps for an options table.
      * In any Etrade screen type the symbol name in the top right in the Symbol entry box, enter
      * In the CHGG research screen, select the options tab in the middle of the page
      * In the Options screen, for Strike 75, select Details. (You can also open a new TAB in Windows with a right-click/open in new Tab) so you do not lose the Options screen)
      * In the next screen, at the bottom, you will see the Option Analysis Tool, which show the Implied Volatility of the strike.

      Using Power Etrade platform for Etrade (from Complete View screen), you can select the Option view and you should see the Implied Volatility Column (may have to program the columns to view it.)

      I did have to call Etrade support to learn how to view the Implied Volatility with the browser. They were very helpful. I also talked to them about their Watchlists as a comparison to the Fidelity Watchlists.

      Using Fidelity: By the way, if you want to be able to view Fidelity’s Option tables (Implied volatility is shown) or other Fidelity online information, you can create an account for free and not fund it. I recently called them about this. You can then use and learn about Fidelity’s system easily. I have recommended this to BCI members some time back. Well worth the time, IMHO. You can then also ask for support as a new account member.

      Hope this helps. Appreciate any feedback.

      Mario – MarioG

    • Alan Ellman July 21, 2020 3:45 pm #

      Michael,

      Let me add this to Mario’s meticulous response:

      As soon as I read the initial parameters, I knew the $1.60 premium was impossible.

      1. With CHGG trading at $76.84, the $75.00 strike is $1.84 in-the-money so the premium will be $1.84 + the time-value component. $1.60 is impossible.

      2. You astutely alluded to the 8/3 earnings report. This takes a typical time-value component and raises it significantly since the earnings occurs prior to contract expiration.

      3. Given #2, the 7.6% makes sense As always, high returns mean high risk and we have that 8/3 report lurking behind us.

      I tried to think of a parameter that would account for a $1.60 figure but could not come up with a reasonable consideration.

      For future reference, I would check another venue for option-chain information, perhaps http://www.cboe.com or http://www.finance.yahoo.com for free sites to confirm broker option-chain information when that information is questionable..

      Alan

      • Michael July 22, 2020 1:55 pm #

        Hi Allen….

        Thank you for clarifying that trade. I rechecked the eTrade tables again yesterday and the published price of the Aug 21 75 was approx 2.20 which is incorrect.

        Yahoo published the correct price today at 6.90. The eTrade option chain table remains in error today.

        Best Regards,

        Michael

        • Roni July 22, 2020 5:46 pm #

          Hello Michael,

          7.6% gain sounds terrific, but the market reaction to ERs is unpredictable.
          Therefore it becomes a gamble.
          The BCI methodology strongly recommends avoiding options trades with ERs preceding expiration.

          Good luck – Roni

        • Alan Ellman July 23, 2020 6:05 am #

          The original numbers made no sense. It’s surprising the error hasn’t been corrected…

        • MarioG July 24, 2020 6:01 pm #

          Michael – Strange, I get the correct numbers as I mentioned in my post of 7/21.

          Did you try clearing the cache in your browser? Or loading a different browser? You can also load the options table on your cell phone. Just some ideas.

          Mario

  11. Dan July 21, 2020 3:12 am #

    Hi Alan,

    Just a quick thank you and two quick questions for the Poor Man’s Covered Call training and calculator I recently purchased. Great stuff and I’m looking forward to paper-trading this approach to see how those results develop. Thank you for the great insights.

    May I please ask the following questions:

    1: In selling covered calls using a LEAPS to cover our short calls, are we wanting to get assigned to enjoy any stock appreciation we might secure (in addition to the premium we received on the short call) or should we consider rolling our sold strikes up if the short call goes ITM to avoid assignment?

    2: If we want to get assigned, how do you see LEAPS as better than short-term protection like a 1, 2 or 3 month long call which would be less expensive than the LEAPS?

    Thanks for any feedback you can provide….
    Dan

    • Alan Ellman July 21, 2020 4:09 pm #

      Dan,

      The traditional PMCC trade implies a long-term commitment to the underlying, similar to portfolio overwriting. Our goal is to leverage the underlying to write monthly (or weekly) short calls to generate premium at a lower cost-basis than traditional covered call writing.

      The trade is structured, such that, if the stock price accelerates exponentially, and we are forced to close the entire trade, it is closed at a profit. See chapter 16 in our book, “Covered Call Writing Alternative Strategies” which gives the precise formula for initial PMCC trade structuring.

      Using 1-3 month long calls is a different form of spread trading and beyond the scope of the BCI site at this time.

      Alan

  12. Terry July 22, 2020 9:13 am #

    S&P 500 is now positive year to date, while the Nasdaq composite is up 20%, which is really amazing.

  13. Alan Ellman July 22, 2020 5:24 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs and analysis of the top-3 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

  14. Sean July 23, 2020 1:08 am #

    Hi Alan,

    I have a question about the weekly stock screen and watch list regarding the BCI weekly summary section. I copied and pasted the sentence that I have a question for:

    “For the August contracts, I will remain 50% in cash and favor OTM calls 2-to-1 for the best-performing stocks and ETFs. ”

    My question is: What does “2-to-1” mean? Are you going 2 strikes OTM for calls?

    Thanks,

    Sean

    • Alan Ellman July 23, 2020 6:12 am #

      Sean,

      Favoring OTM strikes 2-to-1 means that for every 2 OTM strikes I write, I will write 1 ITM strike. If my portfolio consists of 75 contracts, 50 will be OTM and 25 ITM.

      The specific strike selection is based on previously determined initial time-value return goal range for 1-month near-the-money strikes (2% – 4%, for me).

      Alan

  15. Terry July 23, 2020 7:55 am #

    Silver is on a rocket ride…15.6% up in the last two days. Someone should call the Hunt brothers.

    • Alan Ellman July 23, 2020 8:52 am #

      You bet. Silver ETFs have held a heavy presence in our premium ETF reports the past several weeks. Gold, as well.

      Alan

    • Hoyt T July 23, 2020 10:49 am #

      Hi Terry,

      You are showing either your age or an astute command of history. I remember Bunker and Herbert well. Bunker died in 2014. 88 years old. Herbert, I believe, is still alive at 91.
      One of them, I don’t remember which, told a congressional attorney, at a congressional hearing on their attempt to corner the silver market, who asked him if he would produce a net worth statement, replied something like this, “No sir, I can not. When you are as wealthy as I am your net worth fluctuates by the millions daily. So by the time we calculate my net worth, it has changed.”

      My dream starting then, was to one day be able to say the same thing. That dream never came true.:)

      I guess I could leave out the millions daily and say, “During market hours, my net worth is constantly changing” and be telling the truth,:)

      Hoyt

      • Terry July 23, 2020 11:54 am #

        Hi Hoyt;

        Yes…definitely showing my age.

        I love that story. Thanks for sharing it.

        Best;

        Terry

  16. Gary July 23, 2020 4:07 pm #

    Hi Alan,

    I recently purchased the Covered Call Alternative Strategies ebook, had a quick question:

    In Chapter 19 (Exit Strategies/Position Management) pages 150 & 151, you outline an example about what happens if a stock price moves up significantly, and both long and short calls are at parity.

    • XYZ is trading at $48.00
    • Buy the $30.00 LEAPS at $19.00 ($18.00 intrinsic value
    + $1.00 time value)
    • Sell the $50.00 1-month call at $2.00 (time value greater
    than that paid for LEAPS)
    • Net debit = $17.00 ($19.00 – $2.00)
    • Stock price moves up to $60.00
    • Intrinsic value of LEAPS = $30.00
    • Intrinsic value of short call = $10.00
    • Sell LEAPS and buy back short call for net credit of
    $20.00
    • This will result in a profit due to our initial structuring
    formula (Chapter 5 of this section)
    • We are directionally correct and enjoy a profit

    In the example, one of the bullets days “Sell LEAPS and buy back short call for a net credit of $20.”

    1. How do you get the $20 net credit?
    2. Also, what would happen if you forget to ‘sell back’ the short call at expiry and get assigned? What happens at your brokerage?

    Thanks for your time!

    –Gary

    • Alan Ellman July 24, 2020 5:58 am #

      Gary,

      Since both call options are trading at “parity” (intrinsic-value only, no time-value), we have a credit of $30.00 for the long LEAPS positions ($60.00 – $30.00) and a debit of $10.00 on the short call position ($60.00 – $50.00). This results in a net credit of $20.00.

      Another way to look at this is that option buyers have rights and option sellers have obligations. In the this PMCC trade, we have the right to buy the stock for $30.00 and obligated to sell at $50.00. This results in a net credit of $20.00 per share.

      Pages 117 – 134 of this book was written precisely for this reason… allowing us to close a PMCC trade at a profit when call strikes trade at or near parity.

      Alan

      • Gary July 24, 2020 10:39 am #

        Alan, Thank you!

        So regardless of whether you ‘buy back’ the short call on expiration day, or forget and let it assign (becomes a debit in your account), you would still realize a $10 debit.

        1. Stock at 50, you buy back a $40 call for $10 (debit of $10).
        –or–
        2. You forget to buy back, you are ‘short’ 100 shares at $40 (by your broker), but they are selling for $50. To resolve with your broker, you would be debited $10.

        I am clear on #1, does #2 sound correct to you?

        –Gary

        • Alan Ellman July 24, 2020 12:13 pm #

          Gary,

          You are using different numbers from the original example but the concept is the same.

          If the short call is trading at parity with intrinsic-value of $10.00, that $10.00 represents a debit if we buy back the short call or if assignment requires us to provide the shares at a price $10.00 higher than current market value.

          If we exercise the long call, we are buying the shares at $30.00 (in the original example) and selling at $50.00 for a total net credit of $20.00. This is the probable path we would follow for a traditional PMCC trade.

          If we close the short call and do not exercise the long call, we have an unrealized credit of $30.00 on the long leg of the trade.

          Alan

    • MarioG July 24, 2020 2:22 pm #

      Gary,

      Regarding your second question: What happens if you do not buy back the short call before expiration and let the call be assigned? The assigned short call means you will owe some shares of stock to the option holder (of the short call) that was exercised at expiration Friday.

      Every time I call Fidelity regarding a similar question, they reply that the system will recognize you have a long call open position and exercise the long call to satisfy selling the stock to a holder for the assigned short call.

      Remember they would not have let you sell the short call unless you had a long position to protect it, otherwise you would have traded a naked call (uncovered call – which requires a higher level of approval).

      Mario

  17. MarioG July 24, 2020 11:59 am #

    Perfect example of why we have to watch for Earning Reports (7/23/20) – INTC down 15 plus percent today. Downgraded by an analyst did not help as well.

    MarioG

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