After entering our put-selling trades, we can calculate the current status of our trades mid-contract with a few simple entries into our Trade Management Calculator. In this article, a real-life cash-secured put example with Bristol-Myers Squibb Comp. (NYSE: BMY) will be highlighted. Hypothetical examples of winning and losing trades will be detailed on the spreadsheet. Click here to read related article I published last week for covered call writing.
BMY initial trade details
- 7/5/2022: BMY trading at $76.84
- 7/5/2022: STO 1 x 7/22/2022 $75.00 OTM put at $0.78
- 7/12/2022: BMY trading at $80.00; $75.00 put option has an ask price of $0.20 (winning trade)
- 7/12/2022: BMY trading at $72.00; $75.00 call has an ask price of $3.20 (losing trade)
Initial trade entries and calculations
BMY: Initial Put Entries and Calculations
- Initial time-value return is 1.05%
- Annualized initial return is 21.31% based on an 18-day trade
- If exercised, BMY will be purchased at a 3.41% discount from the price when the put trade was initiated
Mid-contract status of winning and losing positions
BMY: Mid-Contract Status of Put Trades
When BMY moves to $80.00 (top rows)
- Net option gain of 0.78%
- Net cash profit of $58.00 per-contract
- Total % gain of 0.78% from 7/5/2022 to 7/12/2022
When BMY moves to $72.00 (bottom rows)
- Net option loss of 3.26%
- Total $ loss of $242.00
- Total % loss of 3.26% from 7/5/2022 to 7/12/2022
Important to note
- Be sure the mid-contract status calculations are deleted and final closing entries made to assess actual final contract calculations
- Mid-contract status calculations can be computed multiple times during the contract with no limitations
Discussion
The current status of our option-selling trades can easily be determined with a few simple entries into the BCI Trade Management Calculator. Based on these calculations, we can make decisions regarding the need for trade management implementation.
Coming Soon: A new streamlined version of covered call writing
For the past 3 years, I have been investigating ways to consolidate our rules and guidelines for covered call writing into a more user-friendly and time-efficient strategy. I have tested my ideas using real-life trading in my personal portfolios. This past year everything clicked, and I will be sharing this information with you in the 1st quarter 2023… a new game plan which will be especially appealing to those with busy schedules.
This unique blueprint for covered call writing will include a new book detailing every trade I made using this strategy with screenshots from my brokerage account. In addition, it will encompass 2 new spreadsheets dedicated to the new system.
I will share this information, first, with our premium members in the form of a live webinar. At a later date, it will be released to the entire BCI community. Stay tuned.
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Upcoming events
To request a private webinar for your investment club, hosted by Alan & Barry: [email protected]
1.Wealth365 Investors Summit
Week of January 16th – 21st
Topic, time, date and registration link to follow.
2.Long Island Stock Traders Meetup Group
Analyzing a 1-Month Covered Call Writing Portfolio from Start to Finish
Thursday February 16,2023
7:30 PM ET- 9 PM ET
A real-life example with a $100k ETF Select Sector SPDR portfolio
Covered call writing is a low-risk option-selling strategy that generates weekly or
monthly cash flow. This presentation will demonstrate how to implement this
strategy using a database of only 11 exchange-traded funds for a 1-month option
contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s
portfolios with screenshots verifying each trade. A final monthly contract result
compared to the performance of the S&P 500 will be calculated.
Topics included in this webinar:
What are the Select Sector SPDRs?
How to establish a covered call writing portfolio
What is the role of diversification?
What is the role of cash allocation?
Calculating initial returns
Analyzing each trade in the monthly contract
Final results
Next steps
Go to www.meetup.com/listmg
Click on join to become a member (Free membership)
Then click on RSVP (meeting is free) to obtain the ZOOM link.
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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
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Morning Alan,
Thanks very much for offering these materials. I’ve learned quite a bit from your books. They are quite unique and comprehensive. Now, I’m looking forward to learning more about your stock selection approach.
Something I haven’t seen yet in writing is this: is there any guidance about selling options on positions that are below their cost basis because the market for them dropped? I do this sometimes, using a low delta to reduce the risk, and avoiding a VIX above 30 to avoid volatility.
Also, is there any guidance on how to manage risk? Do you have some positions that are very aggressive and some less so? For example, I have a book that recommended setting a strike point with a delta between .3 and .4. I might do that sometimes if I have understood your stock selection methods. But I’m rarely in a strike with a delta above .25. I’m certain that I’m not optimizing my returns, but it’s safer and more consistent. And I benefit from doing something that does not seem too wild.
Thanks,
John
John,
Thank you for your generous comments.
Let me offer some perspectives that you should find useful regarding your statements and questions:
1. When we sell options on current holdings, previous prices of those securities are irrelevant … higher or lower. This assumes no tax concerns. If we once had $5k worth of a stock and now have $4k worth of stock, we base our investment decisions moving forward on $4k … that’s, in fact, what we have. It’s the cash that is important, not the vehicle that is carrying that cash. Same is true if the value was once $3k and now is $4k … we focus in on $4k.
2. Focusing in on low Delta is a viable strategy approach if our objective is to avoid exercise, but is that really our objective (again, tax issues aside)?
3. A VIX > 30 is uncomfortable for us, I agree. However, there are a myriad of defensive maneuvers we can put into place to mitigate volatile market environments. Here is a link to 1 of several articles I have published on this topic:
https://www.thebluecollarinvestor.com/comparing-implied-volatility-and-delta-when-establishing-projected-trading-ranges-during-our-option-contracts/
4. I typically do have a mix of aggressive and defensive positions in my option portfolios. I publish this mix in the BCI Market Tone section of our stock reports which is posted on the premium member site over the weekend. Currently, I lean bullish.
5. I frequently get questions regarding using specific Delta or Delta ranges (.3 to .4, in your correspondence) when selling options. Let’s think about this … what is our goal? Is it to achieve a specific Delta or is it to generate an initial specific time-value return goal range with a stated degree of risk? I submit that it is the latter. Now, once we structure a trade to meet our stated goals, that Delta may or may not end up between .3 and .4, but we must recognize that achieving a specific Delta is not our main objective.
If we decide that market volatility is uncomfortably high and we want to assume a defensive posture, we should consider in-the-money strikes which will offer additional protection to the downside due to the intrinsic-value component of the premium. By definition, these strikes will have Deltas much higher than the .3 – .4 range.
This applies to only favoring Deltas < .25. I hope you find these perspectives useful. Alan
Thank you for sharing your insights with me.
John
Hello, Alan.
I had a STO of 10 contracts of SBLK (which I owned) @ a strike of 19.50.
As of yesterday’s close, SBLK was at 19.54 and I only had 400 shares assigned. It looks to me like I still have 600 shares in my account. Is partial assignment fairly common?
As it sits right now, it looks like I can make some more option premium on Monday. I’m I interpreting this correctly?
Thank you!
Wes
Wes,
Partial fills are possible but rare. The typical threshold for exercise is when the strike is $0.01 or more in-the-money at expiration. Brokerages due have the flexibility to instruct the Options Clearing Corporation to set a higher threshold, but that, too, is rare.
This means that given SBLK options were $0.04 in-the-money at expiration, we would expect all shares to be sold by Monday morning’s open.
Aberrations do occur, let’s see what happens.
Alan
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 12/16/22.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
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Best,
Barry and The Blue Collar Investor Team
[email protected]
Premium members:
This week’s 5-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 performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.
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