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BCI PODCAST 65: The 20%/10% Guidelines for Covered call Writing and Selling Cash-Secured Puts

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Position management for option-selling is critical to achieving the highest possible returns. Both covered call writing and selling cash-secured puts have 20%/10% guidelines but are used differently; one for mitigating losses and the other for enhancing gains. The relationship between share price and option value as well as the importance of Theta in our trading decisions are incorporated into this podcast.

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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.

2 Responses to “BCI PODCAST 65: The 20%/10% Guidelines for Covered call Writing and Selling Cash-Secured Puts”

  1. William Miller August 25, 2021 1:04 pm #

    I am studying the BCI methodology and am trying to figure out which way to view the technicals. In this case it is after the trades have been made.

    On 8-23-2021 I made these paper trades (green arrow on the chart):

    BTO 200 XLU @ $69.60
    STO 2 Aug 27 ’21 $69.50 Call @ .54

    The stock has declined into losing territory. What attitude should I take from looking at today’s chart? Is today’s chart (attached) an “I need to close this position chart”, call this Frame 1, or an “I need to watch this and maybe roll down if the 10% BTC is triggered chart”, call this Frame 2?

    Frame 1 might look at it like this: all indications are this stock is going to go down! The price is declining, the MACD looks like it is going to do a bearish crossover of the trigger line, the histogram has just crossed the centerline, the stochastic oscillator has crossed the 80% line, and the negative volume is slightly up. I need to act now! I need to stop loses as quickly as possible! I should roll down even though the 10% BTC hasn’t been triggered or take a loss and completely get out of this position before I lose even more.

    Frame 2 would look at it more like this: I am not certain what the price will do. It could just as easily turn around. The MACD is still above zero and the price is above the 20-d EMA. I should let the 10% BTC trigger and then reduce my loses by rolling down, or perhaps close the position and look elsewhere if doesn’t look like it will improve.

    My question is what frame of mind is the winning frame of mind between the two? Or does it matter which one I choose? Is there a better frame of mind that I am missing?

    Hope my question is clear.

    Thanks,
    William

    • Alan Ellman August 26, 2021 7:54 am #

      William,

      I have this one as well but I sold Monthlys.

      Technical analysis is critical to our success but only a part of the mosaic we develop in deciding on eligible securities. The price chart is still generally bullish but what the last 2 days of the contract holds for this security is undetermined (up slightly pre-market).

      You have set up the trade correctly by incorporating a 10% BTC limit order. If that threshold is reached, a rolling-down opportunity may present itself.

      Pre-market on Thursday, the trade is $0.35 per-share in the red. The final outcome is yet to be determined. My vote is for frame #2.

      Alan

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