beginners corner
Archive | Investment Basics RSS feed for this section

What is a SPAC (Special Purpose Acquisition Company)?

Are SPACs reliable candidates for our covered call writing and put-selling portfolios? This article will define and explain the anatomy of a SPAC so we can decide if they deserve a place in our conservative option-selling portfolios.   SPAC defined This is a company with no commercial operations (products or services) that is created to […]

38 Comments Continue Reading →

Should I Roll-Out When My Option is DITM Mid-Contract?

Exit strategy opportunities for covered call writing must be recognized and acted upon when indicated. It is important to understand when and how to react to these situations and determine the best exit strategy, if any.  In October 2020, Patrick shared with me a covered call trade he had executed and was considering closing the […]

26 Comments Continue Reading →

Implied Volatility (IV), IV Rank and IV Percentile: Defined and Practical Applications

When writing covered calls and selling cash-secured puts, the implied volatility of the underlying securities is directly related to the premiums we receive and also measures the risk we are taking with our option-selling trades. We protect ourselves from using IVs that are too high or too low by defining our initial time-value return goal […]

16 Comments Continue Reading →

How to Execute a Covered Call Trade with a Buy/Write Combination Form

Covered call trades can be entered by legging-in (2 separate trades) or via the buy/write combination form (1 net trade). When available, the latter is an effective, and perhaps cheaper, way to execute our covered call trades when the bid-ask spreads of our options are narrow. This article will explain how to use the combination […]

18 Comments Continue Reading →

When Our Covered Call Strike Moves $1000.00 In-The-Money

This really happened. From March to August 2020, many of the large cap technology stocks were on fire. Thor shared with me a covered call trade he executed with Amazon.com, Inc. (NASDAQ: AMZN) where the strike moved $1000.00 in-the-money (ITM) as share price headed to the moon. As you read this article, see if you […]

29 Comments Continue Reading →

Adjusting Our Portfolio Mix to Achieve Diversification and Cash Allocation

To decrease portfolio risk for our covered call writing and put-selling portfolios we must be well diversified and allocate a similar amount of cash per position. The allotment of cash per-position will rarely be precise but it is a goal we must incorporate into our methodology. In this article, I will describe the process for […]

43 Comments Continue Reading →

Establishing Our Cost-Basis for Long-Term Holdings

When we initiate a covered call trade by first buying a stock and then selling a call option, our cost-basis, in the BCI methodology, is the lower of the stock price or strike price. If we sell an in-the-money (ITM) strike, we deduct the intrinsic-value component of the option premium from the share price bringing […]

32 Comments Continue Reading →

How to Select the Best Strike Prices for Collar Trades: Real-Life Example with Advanced Micro Devices, Inc. (NASDAQ: AMD)

Covered call writing is associated with 2 legs: we are long the stock and short the call option. If we add a protective put, we have converted the covered call trade to a collar trade which has both a floor (put strike) and a ceiling (call strike). The traditional collar trades uses out-of-the-money strikes for […]

31 Comments Continue Reading →

Poor Man’s Covered Call: Selecting the Best LEAPS Strike

The Poor Man’s Covered Call (PMCC) is a covered call writing-like strategy where deep in-the-money LEAPS options are used in lieu of long stock positions. Short-term out-of-the-money call options are sold against the long position. The technical term is a long call diagonal debit spread.  When setting up the initial trade, decisions must be made […]

24 Comments Continue Reading →

Establishing Our Cost-Basis When Rolling Out-And-Up on 2 Different Days

One of our covered call writing exit strategies is rolling-out-and-up. We use this position management technique when our short call is in-the-money (ITM) as expiration approaches and we decide to retain the shares for the next contract month (or week). For example, had we bought a stock for $38.00 and sold the $40.00 call and […]

35 Comments Continue Reading →