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Blackjack and Covered Call Writing: Throwing the Odds in Our Favor with PayPal Holdings Inc. (NASDAQ: PYPL)

Covered call writers and all investors using stock options strategies have one thing in common: we all want to achieve the highest possible returns within the framework of our own personal risk tolerance. The focus of this site and The Blue Collar Investor is to provide the education and to share ideas that will help achieve these goals. Education is power and that is our starting point but where do we go from there? In this article, I will focus on the thought process that can be used to become an elite covered call writer and how it reminds me of the casino game of blackjack.

Members have frequently approached me with a valid question: If I achieve a 2% return on the sale of my option and one of my trades turns against me, I will end up with less than a 2% return…should my goal be higher than 2% to end up with that objective? So the question becomes how can we generate an initial return and protect and manage our positions such that it will coincide with our final returns or at least as close as possible. The answer lies in throwing the odds in our favor in ways that few covered call writers ever think of. Let’s turn to blackjack first just for the fun of it. I am no expert in this card game but when I do play, I have all the charts memorized. This information tells me that given my 2 cards and dealers one up card, what the computers say is the best play…take a card, stand pat, split, double down. If we have a 2-card total of 11 and the dealer is sitting with a 6, we double down (double our bet) and take advantage of a situation where we can increase our returns. If we are sitting with a 6 against a dealer’s ace, we take a card hoping to improve a losing situation. Each situation is handled on its own merit as we strive to move the odds in our favor and much like covered call writing, it all starts with education. The major difference between these two strategies is that covered call writers will make money in the long run and most blackjack players will lose money (casinos don’t exist to lose money!). The main point here is that Blue Collar Investors must take advantage of all aspects of our BCI methodology to throw the odds in our favor and that is what will make us elite covered call writers.

The 3 aspects of the strategy that will give us opportunities to generate the highest possible returns are:

  • Stock selection
  • Option selection
  • Position management

By selecting the best performing underlying securities from fundamental, technical and common-sense perspectives, we begin the process of throwing the odds in our favor. Option selection is based on overall market assessment, personal risk tolerance and chart technicals. Let’s look at a real-life example for PYPL, a stock on our Premium Stock List at the time I am penning this article.

 

PayPal option chain

With PYPL trading at $88.77, here is the options chain for April 15, 2019, a 6-week return:

covered call writing calculations

PayPal Option Chain for April 15, 2019

 

PayPal calculations with The Ellman Calculator

We will evaluate the in-the-money $85.00 and $87.50 strikes as well as the out-of-the-money $90.00 and $92.50 strikes as we feed these stats into the “multiple tab” of the Ellman Calculator (free in the “free resources” link @ the top black bar on this site):

covered call writing calculations

PYPL CALCULATIONS USING THE ELLMAN CALCULATOR

 

 

Evaluating option returns using the Blackjack model

Now it’s time to throw the odds in our favor. In a bull market environment with chart technicals favorable, we are sitting with an 11 against the dealer’s 6. Time for an out-of-the-money strike. These will generate excellent initial returns (2.9% and 1.7% in yellow field) but also give us the opportunity for additional income streams from share appreciation (1.4% and 4.2% more). This is like doubling down in blackjack or taking advantage of a favorable situation to elevate our returns.

In a bear market environment or with chart technicals mixed, we need an insurance policy to protect our capital. We are sitting with a 6 against the dealer’s ace. We throw the odds in our favor by selling an in-the-money strike, both of which return decent initial option profits (2.1% and 2.9% in brown field) and also offer decent protection of that option profit (4.2% and 1.4%). So what we have accomplished here is to generate some protection against a potential losing trade and to enhance profit potential for winning trades and this will allow us to achieve our goals in normal market conditions.

We are not finished yet because we haven’t started to execute our exit strategy opportunities. Some (“hitting a double”, the “mid-contract unwind”) will allow us to generate a 2nd income stream in the same month with the same cash) and others (like rolling down or closing the entire position) will allow us to mitigate losses. These strategies are discussed in detail with examples in my books and DVD Programs.

 

Discussion

Throwing the odds in our favor and taking advantage of exit strategy opportunities are factors that distinguish Blue Collar Investors from all the others. When we’re sitting with a 16 against the dealer’s ace, we do not sit there like a deer in headlights with sweat pouring down our foreheads…we take a card. There may not be a great play all the time but there is always a best play and it’s all about throwing the odds in our favor like nobody’s business (an expression my mother uses).

 

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 appreciate your work. Thank you for opening my eyes on obvious and simple patterns that changed my investing life.

Guillaume

 

Upcoming event

August 15, 2019: San Francisco Money Show

Master Class

9:15 AM – 12:15 PM

Workshop

6 PM – 6:45 PM (subject to time change)

 

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Market tone data is now located on page 1 of our premium member stock 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.

45 Responses to “Blackjack and Covered Call Writing: Throwing the Odds in Our Favor with PayPal Holdings Inc. (NASDAQ: PYPL)”

  1. July 27, 2019 2:39 am #

    Alan and Barry,

    What volatility would you use on the ETF’s.

    The ETF report uses the top 3 which have high volatility like in the 20’s for an example.

    I’ve never sold a covered call on an ETF so I want to mirror you guys approach.

    I don’t know what to expect.

    Is it more worry free with less position management?

    How much safer is it that you don’t lose money compared to stocks?

    Thanks,

    Jack

    • July 27, 2019 6:33 am #

      Jack,

      Think of an ETF as a basket of stocks. The reason we include implied volatility (IV) stats in our ETF Reports is that some investors think that all ETFs are low-risk. This is generally true but not in all cases. As an example, gold ETFs have had a presence on our lists recently and many of these have high IV.

      The best way to manage IV is to set an initial time-value return goal for near-the-money strikes based on our personal risk-tolerance. Time-value is directly related to IV. For me, that goal is 2% – 4% and 1% – 2% in my mother’s more conservative portfolio.

      There is less position management for ETFs in that earnings reports are not a factor. Otherwise, management is the same.

      Alan

  2. July 27, 2019 4:37 am #

    Alan,

    I’m interested to know if selling CC using ETF can be just as lucrative as equities.

    I see the weekly ETF report and certain percentages. Are those percentages 3 month returns?

    I like the fact that they don’t have ER and some can trade weeklies. I may be interested in trading the top 3 ETFs in the report as part of my portfolio. What do you think?

    I really like the Daily CC checklist spreadsheet that member created. Is there one that can add additional rows since it only provides 9 at the moment? I’m not that technical to know how to add more rows. Otherwise, I copy and pasted all the calculations to another worksheet.

    Also, it would be nice to include a column for next ER, just a suggestion.

    Thanks,
    Alan

  3. July 27, 2019 7:52 am #

    Alan,

    The premium returns for ETFs are generally lower than those from individual stocks because ETFs have lower implied volatility (IV). There are exceptions.

    Yes, the percentages depicted in our ETF reports are based on a 3-month analysis and updated weekly.

    To add rows to the Daily Covered Call Checkup Spreadsheet:

    Highlight 1 or more blank rows
    Right click on these rows
    Insert
    Entire row

    You may be interested in our upcoming BCI Trade Planner (almost ready). This tool contains cells for earnings report and ex-dividend dates. The spreadsheet allows us to define our trades and initial exit plans. It is a great management and educational tool.

    Alan

  4. July 27, 2019 3:23 pm #

    Trade Planner Image:

    CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

  5. July 27, 2019 7:00 pm #

    Alan,

    Will the BCI Trade Planner be included with Premium subscription and will it functionally be a replacement for the Daily Covered Call Checkup spreadsheet.

    Thanks,

    Chris

    • July 28, 2019 4:16 am #

      Chris,

      The BCI Trade Planner has many more components than the DCCC spreadsheet. It can replace or be used in conjunction with the latter. The DCCC spreadsheet remains free to premium members and the Trade Planner available at a discount price to premium members. Look for an early-order promo code.

      Alan

  6. July 28, 2019 1:11 am #

    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 07/26/19.

    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 in 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/

    Please note that the ETF report for next week will be uploaded on Thursday.

    Best,

    Barry and The Blue Collar Investor Team

    [email protected]

  7. July 28, 2019 10:48 am #

    THE ODDS

    When iniciating a trade, we are always bullish about the underlying stock.

    Selling covered calls immediately after buying the shares will throw the odds slightly in our favor.

    Stock Selection and Option Selection require a lot of careful work and attention to all the details recommended by the BCI methodology.

    But, In my opinion, the most difficult skill to master, is POSITION MANAGEMENT. (I am still working on it)
    You must watch your trades constantly, like a hawk.

    When the underlying stock moves down, you must be ready to act fast and without hesitation.
    My finger goes to the trigger as soon as the trade is losing more than 2%.

    Reminder: Some earnings reports are announced in the morning, before the market opens.

    Roni

    • July 28, 2019 6:26 pm #

      Hi Roni,

      So that I can understand and learn from your current position management approach let me please share my two reads of your 2% guideline and please tell me which is the closer to what you do. Thanks.

      To use a simple example:

      You buy 100 shares of BCI at $50 and same ticket sell an ATM covered call for $2. Your BCI cost basis is now $48.

      My clarifying question is which “2% move” would trigger your mid contract unwind buying back the call, selling BCI and seeking a different stock? Is it:

      1. A 2% drop in your BCI purchase price which would mean $1 if it hits $49?

      Or,

      2. A 2% drop in your adjusted cost basis which would be $48 x .98 or when BCI hits $47.04?

      Either approach would make you “crash proof” since both are tight stop parameters. You would likely also be subject to a lot of whip saws making a lot of trades. More so in #1 than #2. But I know your losers have been few of late and capital preservation is your goal.

      I have read articles attempting to answer the question “What is the perfect stop loss level?” The writer’s intentions were good: we should all answer that one for ourselves,

      But the question is as unanswerable and funny as asking a group “What’s the perfect shoe size?” :Kind of depends on your foot, type of shoe and style you like, huh ?:). – Jay

      • July 28, 2019 9:00 pm #

        Hi Jay,

        To follow up on your and Roni’s ideas about determining where to place an exit point to exit your long stock position, you might want to think about the wider topic of risk management. At the front end of risk management is the topic of when to exit the trade. Investigation each of the following ideas is beyond the scope of this brief blog response.

        Some of the ways you can determine when to exit the long position are:

        [1] Set a percentage loss or a specific price target as you are discussing with Roni.
        [2] Use a break below a moving average. The 20 EMA is a good place to start.
        [3] Break below a known support level. You can determine this from your chart.
        [4] Break below a trendline. Again, you can set this up on your chart.
        [5] Break below a Fibonacci level. This is a controversial tool, but many users swear by them.
        [6] Use the “Parabolic SAR” and exit when the indicator switches from below the price to the above price on a price chart. Be aware that this might give some whipsaws.
        [7] Exit when the stock drops below an “ATR” (Average True Range) level. You can use 1.0 ATR, 1.5 ATR, or 2.0 ATR typically.

        As I mentioned, the details are beyond the scope of a blog response. You can find details at the free website “stockcharts.com” and click on the “Chart School” tab. There you can enter a search term and find in-depth information on each of these topics.

        I hope that this might stimulate your thinking.

        Best,

        Barry

        • July 29, 2019 4:44 pm #

          Hey Barry,

          Excellent thoughts as always! Thank you for joining our conversation.

          I tend to use items 2,3 and 4 in your post above. I try to look at individual stocks in the context of what the broader market and the sector they are in are doing. Gosh, we all know solid stocks with no fundamental issues go down for no other reason sometimes than just “a bad day in the market”! So I would not sell BCI without fundamental bad news like if you had left it if BCI was keeping pace with the XLF and SPY even if down a bit :)! Or maybe BCI would be in the XLY :)?

          Stop loses are a tough. Set too tight you more often than not bail out sooner than you should and end up kicking yourself on the rebound. Don’t use them at all or have them out there too far and small loses become big ones before you know it.

          I made a terrible trade this year on Boeing (BA). After the second Max crash the stock declined and I saw that as a buy opportunity. I bought a Jan 20 LEAP call ATM for about $2800. As it became a systemic, fundamental issue for BA and that airplane – their biggest seller – I should have gotten out right there because this tragedy became more than something that passes with the news cycle. It changed the company. But I didn’t. I ignored my own rules. Now to sell would be pure capitulation. I have to “hope” things get better for BA in the 4th Qtr. But hope is a lousy investment strategy :). – Jay

      • July 29, 2019 12:53 pm #

        Hi Jay,

        Your second alternative is the one I use.

        When an underlying stock drops sharply, (like ADSK, or VEEV today), I subtract the stock loss from the option gain, and if the result is above 2%, I am ready to unwind the trade.

        As I write, I have liquidated my ADSK trade at 3.2% loss, and VEEV at 2.9%. Ouch…. $2530.00 loss 🙁

        Roni

        • July 29, 2019 1:04 pm #

          Hi Roni;

          Just a follow up question if you don’t mind. Does this mean that you don’t consider the 20% and 10% buy back of the options? Jump straight into sell (convert dead money).

          Thanks;
          Terry

          • July 29, 2019 6:01 pm
            #

            Yes Terry,

            I do ignore the 20/10 guideline when there is a major gap down, like today for example, at noon, VEEV was down 6% and ADSK 4%.

            Please keep in mind that I focus exclusively on monthly CC trades, and these two were OTM, 08/16 expiration, entered last week.

            I tried to find out the reasons, and looked for news at Finviz and Yahoo, but there was nothing there. ???
            So, my paper losses were above my limit, and I decided to run, before it got worse.

            I will now select other tickers, with better chances for success.

            But this does not mean that I ignore the 20/10 rule all the time. Sometimes I wait to hit a double, or simetimes I roll down to mitigate, etc.

            Each situation is different, and the 20/10 guideline is normally a very sound exit strategy.

            Roni

        • July 29, 2019 4:59 pm #

          Thanks Roni,

          That is what I figured and it makes sense.

          August and September are seasonally volatile so I expect to see a lot of chop in the market. My only friendly suggestion is consider using a wider stop. If the Fed drops rates Wednesday ADSK and VEEV will go up with the rest of them and your prudence cutting losses may leave you with some second guessing? -Jay

          • July 29, 2019 6:13 pm
            #

            Jay,

            you are right, I should have considered the Fed meeting.

            Maybe I can find some other tickers to replace the losers tomorrow, and take advantage of your tip.

            Roni 🙂

          • July 29, 2019 7:14 pm
            #

            Thanks Roni,

            I couldn’t find anything out of the ordinary on ADSK other than maybe profit taking. Citigroup has a price target of $210 on it when it’s at $163 now. VEEV has had several recent news reports about insider selling and that never helps.

            You have a sell methodology and system. Please never feel anything but good about that! Most traders just go with the wind.

            If you ever feel you are getting a little bit whip sawed an experiment you can try is buy 200 shares of the same stock in the same trade and cover it with 2 contracts at the same strike and price also at the same time. Now you have apples and apples. Use your 2% system on one contract and maybe 10% on the other and see which does better? One month is not a trend so you may need to try it a few times. Naturally in a rising market you will be glad you had the wider 10% stop so one day doesn’t derail your train. And in a falling market your tighter stop will work better. But it might be interesting to try :)? – Jay

          • July 30, 2019 9:05 am
            #

            Thanks Jay,

            I will try out your suggested method.
            It is good to have alternatives.

            Roni

  8. July 29, 2019 5:13 am #

    Hello Alan
    I wanted to ask about the use of options as a value investor.

    I use the writing of options in part of the investment portfolio on stocks as I learned from your books, very successfully.
    Another part of the portfolio is made up of shares that I think are sold at a low price relative to their real value, sometimes up to 50%. These shares I intend to hold for a long time until they reach the value I think should be.

    In this case, I will usually try to sell a put option and buy the stock at a discount and when it reaches the full value to sell a call option.

    The question : what is the method of selling call options, on shares that I would like to hold for a long time until they reach the price that I calculated? (Over time until stock reaches full price)

    Thank you very much for all the knowledge you teach, it really changed my life.

    Garoda

  9. July 29, 2019 9:16 am #

    Premium Members,

    There was a typo in this week’s Premium Member Weekly Stock Report. The stock TEAM should show that there ARE weekly options available. A thank you to Edmund for noticing the typo.

    Best,

    Barry

  10. July 29, 2019 3:15 pm #

    IF GWRE PRICE IS AT $ 102.22 AND I BUY ONE COVERED CALL AND I HAVE A DEBIT OF APPROX $ 101.09 AND MY STRIK PRICE IS $ 105.00 AND THE BID PRICE IS $ 105.00 I KNOW IF I REACH $ 105.00 I MY GROSS PROFIT WOULD BE $ 391.00 IF I ONLY REACH $ 104.00 WOULD MY PROFIT BE THE $ 105.00 OR MORE AND IF SO HOW WOULD I FIGURE OUT HOW MUCH IT WOULD BE WITH OUT THE BROKER DOING IT FOR ME?

    • July 29, 2019 3:24 pm #

      Ralph,

      If we sell an out-of-the-money strike and the price at expiration is above the stock value at the start of the contract and below the strike, the profit is:

      Option side: Realized profit of: (Premium less commission)… $105 in this case (less trading commission)

      Stock side: Unrealized profit of: (price at end of contract) – (Price at start of contract)

      If the stock is sold, it will all be realized profit.

      So, if GWRE closes at $104:

      Realized option profit of $105/contract

      Unrealized stock profit of $178/contract

      Alan

    • July 30, 2019 3:02 am #

      Ralph,

      Alan described how to analyze your profit by looking separately at the debits and credits to your Cash Balance for the Option and Stock sides of the trade.

      If I understand your trade correctly, when you bought the Covered call your debit was 101.09/share to your cash balance. With the purchase price of the stock at 102.22 (debit) , your option premium (credit) was 1.13 (102.22 – 101.09).

      Case 1-Price at 105:
      As you stated, with the stock price at 105 or above at expiration, your short option position is assigned, the option expires with value = 0 and your stock is sold at 105. Your total Gain/Loss or profit is 1.13 (option – Sell at 1.13, Buy at 0) + upside potential (stock – Sell at 105, Buy at 102.22) (105-102.22)= 1.13 + 2.78 = 3.91/share. Net profit $391 per contract.

      With the Return cost basis (RCB) = 102.22 (for an OTM CC). your total ROO% = 3.83% (3.91/102.22).

      Break Even method:
      I also like to calculate the Break Even point and use point to help me calculate my profit at any price easily. Since your initial debit was 101.09, that is also the Break Even point. With the assigned price at 105, the G/L = 3.91 (105-101.09) and your %G/L (ROO%)=3.83% (3.91/102.22).

      Case 2 – Price at 104:
      At expiration, the option expires worthless and your stock, if held at 104, has an unrealized gain and return.

      Stock/Option:
      G/L = 1.13 (Option – Sell at 1.13, Buy at 0 -worthless) + 1.78 (Stock Sell 104, Buy at 102.22)=2.91
      %G/L = 2.85% (2.91 / 102.22).

      Break Even method:
      Break Even = 101.09, Return Cost Basis (RCB) = 109.22
      G/L = 2.91 (104-101.09). %G/L=2.85% (2.91/102.22).

      Mario

  11. July 31, 2019 3:09 pm #

    So, the market got the rate cut it was looking forward to, yet it’s throwing a temper tantrum right now. I don’t get it.

    • July 31, 2019 3:56 pm #

      Hi Joanna,

      Yeah, it surprised me too! I guess it’s the difference between what people hope for and what they get? Here is a pretty good article I just read:

      https://www.cnbc.com/2019/07/31/the-two-words-from-jerome-powell-that-rocked-the-financial-markets.html

      • July 31, 2019 5:42 pm #

        Jay,

        They say, “hindsight is the best sight”.

        So after today’s close I looked at the trades I liquidated 2 days ago at a loss, as comented above.

        VEEV, that I sold at 160.00 is back to 165.90, and ADSK sold at 161.00 is down to 156.17.

        Bottom line: YOU CAN NEVER TELL.

        Therefore I will stick to my guns: “Better safe than sorry”

        Roni

        • August 1, 2019 12:23 am #

          Thanks Roni,

          Amen on sticking to your guns :)! It is always better to have a system, a discipline and a rudder in the water than drift about aimlessly. – Jay

          • August 1, 2019 10:42 am
            #

            Jay,

            Amen.

            Roni 🙂

  12. July 31, 2019 4:36 pm #

    Hi Joanna and Jay,

    I watched Powell and then listened to Steve Liesman afterwards.

    I think Steve nailed it. Steve believes that Powell believes he(Powell) is a great communicator. He obviously is not. Janet Yellen thought she was a poor communicator and chose your words accordingly. Powell does not.

    Today’s action, I believe, without the comments would have been neutral to positive. Apple had set the market up for a good day if not for Powell’s words.

    It was obvious that what people heard was not what Powell meant for them to hear. You could tell that by the questions and his answers.

    In my opinion we are in a schizophrenic market, or maybe better expressed as bi-polar with the Fed being the provider of the Lithium, or the with holder of Lithium.:)

    Hoyt

  13. August 1, 2019 6:24 am #

    I have PMCC trade, 10 contracts of TLT 08/02 $130.5. LEAPS are Jan 2020 $125. Yesterday I got an early assignment of 08/02 option.This is the first time I’m dealing with such situation when having PMCC trade.

    Now I owe 1000 shares of TLT. Is it better to buy shares at the market price and sell LEAPS option or is it better to exercise my LEAPS option? I never did it before. Do I need to contact my broker for this?

    Sunny

    • August 1, 2019 3:53 pm #

      Hi Sunny,

      Just came in and saw this. Sorry I didn’t see sooner.

      My broker is e-trade. In the exact same position as you I would not have to do anything. E-trade would automatically take my stock or ETF and pay me the assigned price.

      If I wanted to continue with a PMCC on TLT, I would purchase another set of contracts and sell more covered calls.

      As to your last question. I would do the PMCC rather than tie up more of my portfolio in this one position. It’s called Poor Man’s Covered Call but it could just as well be called Frugal Man’s Covered Call.

      Sorry not to have gotten back to you sooner.

      Good luck,

      Hoyt

      • August 1, 2019 4:57 pm #

        Hoyt T,

        I didn’t paid attention that there was a credit of $130.500 ($130.5 x 1000) in my trading account and now I’m short 1000 shares of TLT. I thought I won’t have enough funds to buy and deliver the shares, so I need to exercise the option (or my broker will exercise it automatically) to meet the obligation.

        I received $2.02 per contract when selling calls and bought LEAPS for $8.95, so if I get it right, TLT trading at $135.26 and $125 LEAPS bid price being $10.60 the loss (without commisssions) will be 130.500 – 135.260 + 2.020 – 8.950 + 10.600 = -$1090

        And if exercised the loss will be 130.500 – 125.000 – 8.950 + 2.020 = -$1430

        So if I got the math right, it’s not worth to exercise LEAPS option.

        Unfortunately this time rolling down didn’t worked well.

        Thanks for your help!

        Sunny

        • August 2, 2019 9:14 am #

          Sunny,

          Your loss was $1.43 per share, $143.00 per contract and $1430.00 total. Your calculation using the “if exercised loss” formula is correct.

          My observations, and they are worth exactly what you are paying me for them:),are as follows:

          #1. I don’t believe this trade met the BCI PMCC criteria to begin with and this was really where you made your mistake. The formula to prevent an early exercise loss, which is what you experienced, is the difference between the strikes(130.50-125=5.50)plus the sold covered call(2.02) which is 7.52 must be greater than the cost of the LEAPS contract(8.95). So you started your position set up for a 1.43 loss if early assignment occurred.

          #2. The current price of the underlying or of the LEAPS is irrelevant. They do not factor into your losses neither do they provide you any exit options. Once you have been assigned it is out of your control.

          #3. If we are to use the PMCC strategy it is imperative that the BCI formula be followed precisely because if we don’t we are subject to early assignment loss. See #1 above.

          #4. Where to go from hear? Lessons learned by losing money are sometimes painful but usually stick with us so that we do not repeat them. Been there done that. Every investor or trader has stories of lessons learned.

          Keep at what you are doing you will become better with experience. We all do. It seems like I learn daily. The people on this blog share their experiences and expertise. They all want to help each other. No one has a personal agenda other than to be of help.

          Wishing you the best of good buys,

          Hoyt

  14. August 1, 2019 10:48 am #

    Terry,

    Feed back:

    Today I used the 20/10 guideline to buy back my 20 AA 08/16 OTM CC at 15% of premium received, and I am holding the stock, waiting for a rebound.

    Roni

    • August 1, 2019 1:17 pm #

      Roni, Hoyt, Jay,

      Assuming you bought AA at 22.98 (Price on Monday 7/22 start of cycle), it gapped down today to the current price of 22.01. That is a loss of 22.01/22.98 = 4.05% in the stock price.

      I have measured for several years the stock price decline at the 20% Buy Back point for many trades. The range has been generally 4-8% of the stock price.

      Looking at the big picture, with an OTM CC and average 2% ROO%, the position loss you can extrapolate to be 2-6%. That can set you back several cycles of income if you entire portfolio behaved in a like manner and your invested stock(s) did not recover in price after the buyback.

      With an ITM CC, part of the loss is absorbed by the Downside Protection of the trade with its Intrinsic Value coming into play.
      Assuming 1% downside protection, then the position loss is 1-5%.

      Trading ETFs, where the average ROO% is less, the stock price is still 4-8% at the 20% buy back point. The overall position loss is therefore higher because of the lower original ROO% of the trade.

      Mario

  15. August 1, 2019 5:31 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

  16. August 1, 2019 6:26 pm #

    Well done Mario. You are very close.

    I bought 2000 shares AA on July 24/25 at average $23.22, and sold 20 – AA 08/16/2019 24.00 C for 0.46 (2% ROO).

    This morning I bought back the options at 0.07 (= 15%) following the 20/10 guideline.

    AA closed @ 21.33, and my paper loss is 1.89 per share, minus options result 0.39 (0.46-0,07) = 1.50.

    Therefore = 6.5%

    The choices now, as Alan says, are:

    1 – Wait for rebound
    2 – Sell lower CCs to mitigate loss
    3 – Exit and look for better soldiers

    Roni

    • August 1, 2019 8:48 pm #

      Hey Roni,

      I think Alcoa (AA) is a great company. I have made money with it in the past. It’s in a tough spot now since it is sensitive to both the trade war and the dollar. Some would argue this is a good time to accumulate more.

      And while 2,000 shares of a $21 stock is a handsome position my hunch is your future does not depend on it :). So you have the luxury of many choices in addition to the 3 you articulated. If I may add to your list:

      4 – Keep some as a long term investment and overwrite per Alan and Barry’s current book. Sell the rest
      5 – Put the cash into something sexier at the moment like a bio tech, defense or cloud company
      6 – Keep it all, overwrite half NTM and give it time
      7 – Please see #3 above 🙂

      – Jay

      • August 2, 2019 11:54 am #

        Thanks for your help Jay,

        today it looks quite worse, but, as you say, it will not kill me.

        The company is an excelent company, but the market is not interested in companies.
        What matters is the mood, and the mood changes without notice.

        I do not expect this ticker to bounce back to $23.00 any time soon, therefore, I am cutting my losses, and moving on.

        Roni

  17. August 2, 2019 11:44 am #

    Being tired of this dog and pony show, I totally tapped out of all my trades this morning. It was painful, but since I sold calls it wasn’t so bad.

    • August 2, 2019 12:00 pm #

      Way to go Joanna.

      As the hunchback said to Dr. Frankenstein, “it could get worse”

      Roni

    • August 2, 2019 2:11 pm #

      Hi Joanna,

      I absolutely don’t blame you and as Roni joked with the hunchback “It could get worse”.

      I added a bunch of short term bearish put trades yesterday as soon as Trump announced his next tariff wave and they paid off today – I have already been able to take off enough to make the rest risk free. But I added them because I expected immediate retaliation from China. We have not even gotten that yet and the tape is ugly.

      So caution, having dry powder, selling calls closer to the money and being patient are always a great prescription for August and September but particularly so, it seems, this year. – Jay

  18. August 2, 2019 7:05 pm #

    Jay,

    I see you did well toiday, congrats.

    I’m back to square 1.

    But maybe next week will be better.

    I still am 50% invested: AVGO and PANW are surviving my 2% limit loss rule, GLOB and NFLX are ITM.

    This is my last post in this thread.

    Have a nice weekend – Roni

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