Covered call writers and put sellers frequently inquire about generating positive cash flow when the market crashes or in confirmed bear markets as we had in 2008 (real estate crash) and in 2022 (COVID-related crash). Over the years, I have written about and produced videos detailing protective approaches we can execute in short-term bear markets. These have included using ITM call strikes, deep OTM put strikes, the PCP strategy, ultra-low risk Delta and (IV implied volatility) strategies among many others. In this article (does not apply to current market conditions), we will analyze one approach to making money in confirmed long-term bear markets using inverse ETFs.
What are Inverse exchange-traded funds (ETFs)?
These are securities that are constructed by using derivatives for the purpose of benefitting from the decline in the underlying benchmark. When the market goes down, these securities accelerate.
Inverse ETFs to consider
- PSQ: Short QQQ (Nasdaq-100)– Recently executed a 1-for-5 reverse stock split
- DOG: Short Dow 30 (DJIA)
- SH: Short S&P 500 (S&P 500)
- RWM: Short Russell 2000 (Russell 2000)
Inverse ETF Portfolio Setup
- Using a portfolio with $50k available and 4 ETFs
- 21-days to expiration
- Cash reserve guideline is $1k – $2k
- $48,670.00 will be spent to purchase the shares calculated
- A cash reserve of $1330.00 is available for potential exit strategy executions
Option-chain for PSQ on 4/1/2024
With PSQ trading at $8.76, the $9.00 OTM call strike generated a bid price of $0.05. Option-chains for DOG, RWM and SH were also researched.
Inverse ETFs: Initial Trade Calculations Using the BCI Trade Management Calculator (TMC)
- Pink cells: 19-days to contract expiration
- Yellow cells: Breakeven price points
- Brown cells: 19-day and annualized initial option returns
- Purple cells: Additional % upside potential returns
Inverse ETFs: Initial Portfolio Calculations Using the BCI Trade Management Calculator (TMC)
- 35 contracts sold
- $299.00 in option premium generated
- Additional $1330.00 in upside potential (share appreciation up to the OTM call strike)
- $48,670.00 invested in share purchases
- Flat 19-day return (no upside) of 0.61%, 11.72% annualized
- Total 19-day return with maximum upside is 3.35%, 64.36% annualized
Discussion
In confirmed long-term bear markets, we can turn to inverse ETFs to generate positive cash flow. Once these trades are entered, we immediately go into “position management mode” as we do when structuring our trades more conventionally.
Stock Investing for Students: A Plan to Get Rich Slowly and Retire Young
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New Video
The 5 Most Common Mistakes Made by Covered Call Writers
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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:
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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:
Alan!
My husband and I are so grateful we found you. Your books have truly shaped our financial foundation in terms of thoroughly understanding covered calls & cash secured puts – and giving us the confidence to take action on them!
I’ve read Stock Investing for Students twice. I’ll happily review Chapter 6 to put things in place for our daughter!
Wishing you the absolute best. Keep doing what you’re doing! You’re helping SO many people!
Cheers,
Cheryl & Ryan
Upcoming events
1. Mad Hedge Investor Summit
Tuesday September 17, 2024
11 AM ET – 12 PM ET
Zoom webinar.
Portfolio Overwriting: Covered Call Writing Our Buy-And-Hold Stocks
Increasing profits and avoiding tax issues
Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we potentially increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”.
Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk covered call writing-like strategy.
Traditional covered call writing will also be discussed to demonstrate comparisons between the 2 strategy approaches.
Topics discussed
Summary
Brief review of covered call writing
Option basics
What is an option-chain?
Option selection
Calculating covered call returns: Real-Life examples
Portfolio overwriting defined
Basics of strike selection
Pros and cons of portfolio overwriting
Why early exercise is so rare
Rolling options
Role of dividends
Locating ex-dividend dates
How to avoid early exercise
Avoiding earnings reports
Practical applications: Delta, implied volatility, annualized returns
Real-life examples with calculations
BCI Trade Management Calculator
2. Stock Traders Expo- live event in Orlando Florida
October 17 -20
- 2-hour Covered Call Writing Masters Class
- All Stars of Options class on Portfolio Overwriting
Details to follow.
3. American Association of Individual Investors/ Los Angeles Chapter
November 9, 2024
12 PM ET – 1:30 PM ET
Private webinar for members of this AAII investment club
4. Young Investors Club: University of Central Florida
Wednesday November 13, 2024
Private investment club
5. BCI-Only Webinar
Zoom
Thursday November 21, 2024
8 PM ET – (:30 PM ET
Covered Call Writing Dividend Stocks
Details & registration link to follow.
6. Long Island Stock Investor Group Part I
Zoom
February 13, 2025
7:30 – 9:00 ET
Details to follow.
7. Las Vegas Money Show
February 17 – 19, 2025
details to follow.
8. Long Island Stock Investor group Part II
March 13, 2025
7:30 – 9:00 ET
Details to follow.
Alan,
Love the new video. I must admit that I was guilty of all of them before I signed up with BCI.
One question please.
How did you decide on a range of 2-4% for monthly option returns and do you ever go higher?
Thanks a lot.
Carl
Carl,
The 2% – 4% initial time-value monthly return goal range was developed over several years of real-life trading.
It took me some time to determine my personal risk-tolerance comfort level and then get an accurate feel for the relationship between implied volatility with the risk and initial returns of our trades.
I will, in extreme bull markets, go as high as a 6% initial time-value monthly return, but these scenarios are rare and must be in confirmed strong bull markets.
Alan
Alan and Barry,
I know you like the monthly options the best, but I can see where weekly’s can come into play.
How far from expiration do you suggest purchasing a weekly to maximize the premium. Is two weeks the sweet spot or further out?
Joe
Joe,
I do favor monthly expirations, but I also have several portfolios dedicated to weekly expirations, both calls & puts.
I enter my trades on Monday and exit on Friday. There are times I will roll a weekly option if the calculations are to my benefit.
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 09/13/24.
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:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium Member’s pricing is locked into your current rate and you will never see a rate increase as long as the membership remains active.
Please note that we have restored the large print section at the end of the weekly report.
Barry and The Blue Collar Investor Team
Alan,
Just came across something additional while reading the CEO strategy pdf.
There is a sample trade were you used SPDR S&P Biotech ETF (NYSE: XBI. This got me to wondering if the SPDR industry ETFs are eligible for the CEO strategy if the sector is outperforming the S&P.
For example could you look at XBI if XLV healthcare is outperforming the s&P and a check of XBI shows that it is also a match both in relation to the S&P and technically?
Joe
Joe,
Good question.
You are correct that XBI was used in the CEO book, but it was for a real-life example when discussing exit strategies, not as a replacement for XLV in the healthcare sector.
There are significant differences between the 2 securities. XBI is much more volatile than XLV and, therefore, represents greater risk. This may be appropriate for some investors, but not all.
If we created comparison charts of the two, the differences would be dramatic.
I created a screenshot below, showing the top 10 holdings of each security. Note that there are some similarities but not many.
Bottom line: When using the CEO approach to covered call writing, an extremely conservative one, I prefer utilizing the 11 Select Sector SPDRs.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Hi Alan,
Regarding the 20/10 Option exit. When your at the 10% in the second week of a monthly, how far into the second week do you maintain the 10% in place?
Thanks Tom
Tom,
I leave the 10% BTC GTC limit order in place unless I can be at my computer to monitor my trades through expiration.
Even if the threshold is reached and we buy back the option with 1-3 days remaining, it may create a rolling-down opportunity or even “hitting a double” in volatile market conditions.
Here is a link to an article I published regarding this subject:
https://www.thebluecollarinvestor.com/hitting-a-double-on-the-last-day-of-a-contract/
Alan
Premium members,
The new Blue Chip report of the best-performing Dow 30 stocks for the October 2024 contracts has been uploaded to your member site.
Login and scroll down to “B” on the right side (“resources/downloads”).
Alan
Alan,
In your “weekly options pros and cons, what do you mean by “Can circumnavigate around ex-dividend dates”
I take it you’re not a fan of weekly’s.
Dan
Dan,
I do favor monthly expirations but also have portfolios using weekly expirations for both calls and puts. I utilize and benefit from both.
Weekly expirations are quite useful to avoid both earnings report and ex-dividend dates.
Let’s say an ex-date is in the 3rd week of a 4-week monthly contract. We can sell options for weeks 1, 2 and 4 and avoid the week of the ER or ex-date.
Alan
Alan,
I feel I might be taking up your time asking questions that you answer elsewhere but why do you avoid x dates and or forgo dividend?
Dan
Dan,
Happy to respond and clarify.
1. Ex-dividend dates should be avoided if retention of the shares (avoiding exercise) is critical to our strategy. An example of this would be if we own the shares at a low cost-basis in non-sheltered accounts and don’t want our shares sold, resulting in negative capital gains consequences. Ex-dividend dates are the main reason for early exercise. If share retention is not an issue, neither are ex-dates.
2. I have no problem collecting dividends. However, my main focus is on option premiums and consider dividends “icing on the cake”, as they will pale in comparison to our option premiums.
Here is a link to an article I published on this topic:
https://www.thebluecollarinvestor.com/early-exercise-due-to-dividend-capture-theoretical-and-practical-applications/
Alan
Alan,
When you were in the early stages of developing your method, did you have specific questions you asked yourself about losing trades for the purpose of self improving your results?
I’m thinking that I make one or two types of mistakes – 1) did I pick a good stock off the weekly list and 2) did I exit well. Is there anything like that you can share?
Regards,
John
John,
For nearly 30 years, I’ve been evaluating both losing and winning trades. How could I have mitigated losses? How could I have enhanced my gains? Could I have done better? This is how the BCI methodology was developed and continued to add new products and tools.
Now, if you select a stock or ETF from one of our watch lists, you know it is an elite-performer at the time of the trade. It was not a decision in error as long as it aligns with our personal risk tolerance and adheres to our diversification and cash allocation guidelines.
Have you seen my most recent video on this topic?
5 Most Common Mistakes Made by Covered Call Writers:
https://youtu.be/4SgpTF1szeM
Alan
Premium members:
This week’s 5-page report of top-performing ETFs, along with our sample trade of the week, has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
We have also included a sample trade taken from one of our BCI watchlists.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
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