On April 8,2021, Nathan shared with me his covered call writing trade with PAVE which was initiated 3 days earlier. This exchange-traded fund had a strong technical chart but the price started declining immediately after the trade was entered. Nathan commented that he read in a technical analysis book that when share price breaks out above resistance, there will be at least 1 profit-taking event that will bring it back to the breakout point. Was this the case here? Should the option be rolled-down? Should the stock be sold? Something else?
Nathan’s trade with PAVE
- 4/5/2021: Buy PAVE at $25.53
- 4/5/2021: STO the April 16, 2021 $27.00 call at $0.15
- 4/6/2021 – 4/7/2021: Stock price declines to $24.81 and recovers to $25.11
- We will explore a 3-month price chart
3-month price chart of PAVE
- Red arrow: Breakout above resistance about March 10th
- Blue arrow: Price drops from above resistance down to support
- Green arrow: Price recovers to but not above resistance
- Currently the price is looking for direction
It is possible that profit-taking played a role in share price decline on April 6th – 7th. Whipsaws with a security like PAVE are somewhat predictable when looking at its implied volatility which is more than double that of the S&P 500. Nothing wrong with that but it does explain price movement. This is a good example as to why BCI implemented the 20%/10% guidelines as when to close our short calls. Rather than trying to figure out “why” (which can be quite challenging at times), we can determine “when”
PAVE closed on Friday April 9th at $25.35 with a trade breakeven at $25.38. Final results can go either way. At this point in time, the best action may be no action at all.
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1.Mad Hedge Traders and Investors Summit: Free webinar
September 15, 2021
11 AM ET – 12 PM ET
Covered Call Writing Blue-Chip Stocks to Create a Free Portfolio of Large Tech Companies
More information and registration link to follow.
2. Wealth365 Summit: Free webinar
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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.
Am I looking at this correctly?
Ok so here it is. CROX shares trading at $139.00. We buy 100 shares at $139. We sell a Sep 17 covered call at $140 and receive $7 in premium. That means our break even point is $132 (current share price – minimum the premium received). Delta for the $140 call is 50% meaning that we have a 50% chance to pocket our entire $7 premium + $1 in stock appreciation. So 50% probability to gain $8/share.
If the price went down from $139 all the way down to $130, we would lose our entire premium of $7 + $2 for a total loss of $9/share. Delta shows that the probability of the price getting to $130 is 28.5%.
So 50% chance of winning $8/share and 28.5% chance of losing $9/share. I know that the percentages don’t add up to 100% since they are different strikes. But am I looking at this correctly?
I seem to finally understand why we seem to have an edge. You kept saying we are reducing our cost basis but now I seem to actually see what you mean by looking at the probabilities. Please let me know if I’m looking at this correctly.
From a Delta-perspective, you are correct. There is a much greater chance of the $140.00 strike expiring with intrinsic-value than the $130.00 strike.
Since the breakeven, as you correctly stated, is $132.00, if share price declines to $130.00 the loss is only $2.00 per-share, not $9.00 per-share.
Finally, a share decline of $9.00 per-share would kick in our 20%/10% BTC limit order thresholds which will allow us to mitigate losses.
You’re on the right track.
Keep up the good work.
Got it. Thanks!
Many thanks for sharing the webinar Thursday night.
1. When trading the VOLQ strategy-Do you buy the at the money strike on the QQQ before selling the in the money call? If not the at the money strike, then what strike price do you buy the QQQ?
2. In your Nasdaq podcast you mentioned that you back tested the strategy. Will you share those test results?
3. Regarding the price of VOLQ and QQQ for calculations, are you using the closing price or the intraday prices?
4. Have you tried trading the strategy using the weekly’s? If so, with what success?
1. I have been using the VOLQ (implied volatility) strategy with traditional covered call writing, not The Poor Man’s Covered Call. The Qs are purchased at market value when I’m implementing the initial trades. The strike sold is based on the formulas I presented during the webinar.
2. Statistically, we should see share price drop below the low end of the projected trading range 16% of the time. For me, it’s been under 10% which, I believe, is the product of the bull market environment we have experienced since the COVID-crash of March 2020.
3. Intraday. I enter my trades during normal market trading hours usually between 11 AM ET and 3 PM ET to avoid early and late volatile institutional computerized trading.
4. I have been using Monthlys with this strategy but I see no reason why Weeklys would not work as well. The conversion factor is different as I showed during the webinar. I have been using Weeklys for the 10-Delta put strategy. I use these strategies in different portfolios so all my options expire on the same date for each portfolio.
a few days ago I attended a webinar in which you describe a low risk deep ITM covered call strategy on QQQ using the expected move. However, I don´t understand the benefit of that strategy as compared to a simple short put strategy at the same strike.
The extrinsic value for both options Call (ITM) and Put (OTM) should be the same at the same strike and in both cases you can keep the extrinsic if QQQ stays above the strike at expiration. The breakeven price should also be the same since the extrinsic is the same. In case of the Covered Call, however, you need to buy the share before selling the call whereas in case of the short put you only need to deposit the money in case of an assignment as a collateral.
Is there anything I misunderstood which cleary favors selling DITM Covered Calls as compared to writing Short Puts at the same strike? I think the risk profile should be exactly the same.
Thanks for your reply and best regards from Germany.
Yes, you are 100% correct. The implied volatility/VOLQ strategy has applications for both covered call writing and selling cash-secured puts.
As a matter of fact, I will be presenting a webinar in October where I will show both applications.
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 08/20/21.
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:
On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top 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.
Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.
Since we are now in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
Barry and The Blue Collar Investor Team
Can this week’s ultra-low-risk strategies webinar still be accessed? Where can I access it?
The recording will be located in the “webinar” section of the member site. When ready, the link and notification will be sent to all premium members.
The Weekly Report has been revised and uploaded to the Premium Member site. There was a minor date change that does not impact and any stock or ETF selection decision. Specifically, the date in the yellow box in the “WEEKLY ETF SUMMARY” section…” Prices As of Close: ” was corrected.
See the report dated 08/20/21-RevA.
As always, I very much enjoyed you presentation on conservative covered call and cash secured puts strategies. I just have one quick question. I prefer to write weekly options. I may have missed it in your books and presentations, but how is the 20/10 exit strategy utilized for weekly options?
You have always suggested the 20/10 exit strategy, but with weekly options having such a short holding period, how do you set you stops? I have always utilized a 10% limit stop for my holdings, but am not sure if that is right? Do you set a 20% stop until mid week and then lower it to 10%, or do you something different? Thank you for your input in advance.
Yes, you are 100% correct. A weekly option is the same as the final week of a Monthly so the 10% guideline applies.
I have a question about the put selling 3% rule. In the below example (screenshot), would I really only lose $0.35/share if the price declined from the current price of $208.16 to $194? That doesn’t seem right since I would think the way the option would be priced, my loss would be a lot higher. Seems too good to be true :-).
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The 3% guideline is used to mitigate losses and potential greater losses. In the case of NVDA, if share price drops from $208.16 to $194.00 (3% guideline), we have a problem and must take action.
The spreadsheet shows the BE price point to be $194.35 resulting in a loss of $0.35 per-share if shares are “put” to us at $194.00. This represents the (put strike – put premium).
This stat does not include any exit strategy executions. If we bought back the put option as share price declined, the loss would be ($5.65 – cost-to-close the $200.00 put).
This would result in a ls loss greater than $0.35 per-share but would also mitigate additional losses on a security that has declined in value substantially in this hypothetical.
Not all trades will be winners. Our job, as CEOs of our own money, is to mitigate losses and enhance gains.
For a covered call, do I take the IV for the strike price of the option? Say the stock is trading at 360 and I want to write a covered call for 365, should I look the 360 IV or the 365 IV when looking to write a weekly or monthly covered call?
Favor the near-the-money strike. If the vendor provides an average IV for calls and puts, go with that stat.
Good morning Alan,
I was playing around with the new strategy you taught last week and looked at some options with QQQ,
I did four different strike prices starting at in the money and going pretty deep into the money. The results are kinda outstanding!
Would you please take a quick look at the attached spread sheet
and let me know where my thinking is going astray? It looks like going with the $350 strike price nets a healthy premium with a small chance of being called. What am I missing? $1775 for ONE week is amazing.
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You’re entering call premiums instead of put premiums. The annualized returns should be in the 8% – 10% range.
This is an oversight made by most option traders from time-to-time and easily corrected.
BCI-only webinar recording now available to premium members:
1. Login to member site.
2. Scroll down on left side to “Blue Hour Webinar” section.
3. Select and click arrow on BCI Webinar as shown in the screenshot below.
I hope you enjoy and, most importantly, financially benefit from this presentation.
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Alan & the BCI team
thank you for sending the information about the recording. The webinar was really helpful for me.
I have one question to it: In the case of CS Puts you tend much more to the use of weeklys than you do in the case of CC’s. What is the reason for it ?
As I mentioned in the webinar, both strategies will work well with Weeklys or Monthlys. Weeklys will, most likely, generate higher annualized returns but require more time and effort.
I wanted to show both time frames but we should feel free to convert either strategy to the time frame that best aligns with our trading style and goals.
Are there other websites to receive free Ask Bid prices. I know you have mentioned Yahoo Finance before but as you can see from screenshot, they don’t always have them listed?
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Every online discount broker will provide bid-ask prices. Another reliable free site:
Some vendors will not show previous bid-ask prices after hours when market-makers are re-setting their prices. If this occurs (as in your screenshot) check one of the other sites.
Hi Alan, in a recent weekly report, you mentioned that you currently favor out of the money strikes 2 to 1 over in the money strikes. I understand that you choose the ratio depending on market tone, but my question is, how do you decide which stocks will be ITM and which will be OTM?
Here is a general response:
If I am selling multiple contracts on a specific stock or ETF, I use the ratio I state in our premium reports. As an example, if I am selling 6 contracts, I will sell 4 OTM and 2 ITM.
When selling options on smaller quantities (1 or 2 contracts), I will favor OTM for securities that appear in bold in our reports (all bullish technical indicators) and ITM for mixed technicals.
Just wondering if you have any criteria when buying new stock at the beginning of a new contract month (like this week for for example). Do you time your purchases waiting for some sort of pullback in the stock or the markets in general?
Since most of us are undertaking 1-week or 1-month obligations, we must factor in Theta or time-value erosion of our option premiums. Therefore, I enter my new monthly trades on the Monday or Tuesday after expiration Friday.
I know of no trader who can accurately time the movement of a stock on a consistent basis. All we can do is throw the odds significantly in our favor and that is precisely what we do when using the BCI methodology: stock selection, option selection and position management.
Thanks Alan. So if some of the stocks you have selected to purchase on Monday or Tuesday have gone up considerably (let’s say 1% to 3%) on either of those days, you still buy or do you try and wait for a slight pullback intraday?
I buy based on the BCI screening process: fundamental analysis, technical analysis and common-sense principles. If we have an eligible security that meets our rigorous screening process and initial time-value return goal range, I’m in.
The question isn’t where will share price be today or tomorrow but rather in a month at 4 PM ET on expiration Friday. We also have our exit strategy arsenal locked and loaded if those opportunities present.
Hi Alan, thanks for the great presentation last week.
I noticed that the VOLQ is at a relative low right now around 15%. Does it make sense to be more cautious when it is at a relative low? Or do you find that over time this doesn’t impact your success on the QQQ VOLQ low risk trade?
No change in strategy at all. VOLQ or IV is a reflection of the market’s anticipation of price movement over the next 30-days as expressed in annualized terms based on 1 standard deviation.
As a matter of fact, a low VOLQ/IV usually means the security or overall market is doing well. For years, I have been writing about the inverse relationship between the VIX (CBOE Volatility Index) and the S&P 500.
This strategy will have (approximately) an 84% probability of success based on VOLQ/IV whether high or low.
This Monday, I reinvested most of my cash (97%) on tickers selected from the watch list, and I noticed that the majority was ATM, approx. 3% ROO.
As I favor monthly CCs, the OTM and ITM strikes were minimal, and many were almost insignificant, so I did enter the ATM trades.
Well, in my opinion, 3% is excellent, but I wonder if you encountered the same situation?
This will come up from time-to-time with options that trade in $5.00 increments. As long as we are prepared with our 20%/10% BTC limit orders in place, we are in a position to act if the trades turn against us.
We should also be prepared to execute the “mid-contract unwind exit strategy” should share price accelerate exponentially.
The fact that a majority of the strikes were ATM in order to meet the initial time-value return goal range was an aberration.
Thank you, Alan.
I noticed that this was kind of strange.
All my buy-back orders at 20% are in place as always, and I keep a close watch every day and will not hesitate to execute the MCU exit strategy (gladly) if a stock price accelerates enough to allow for an advantage for a new trade.
The BCI methodology is certainly the best for my style and risk tolerance.
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 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.
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Alan and the BCI team
Alan is the IV you discussed in the webinar as related to covered calls the “S&P 500” or the IV of the individual stock?
This morning I was going to try paper-trading the S&P 500 had a IV of 16.xx and my Schwab information for the strike price was 22.xx. Maybe I missed something in the presentation.
When using IV or VOLQ to determine expected trading range, use the IV of the individual stock or ETF we are trading. If the vendor has an average or mean IV, use that stat. If not, use a near-the-money strike.