Always avoid earnings reports when selling covered call or cash-secured put options. This is a BCI rule to protect against serious share price decline after a disappointing earnings release. This article will analyze a real-life example with Datadog, Inc. (Nasdaq: DDOG), which demonstrates how to incorporate weekly options during a month when an earnings release is due out.
On 4/29/2024, DDOG was an eligible stock on our premium member stock report, but its earnings report was due out on 5/7/2024. If we are abiding by the BCI earnings report rule, we cannot use the monthly 5/17/2024 contract expirations. However, DDOG does have weekly options and the 5/3/2024 expiration is not in conflict with the 5/7/2024 date. Let’s examine this potential trade.
DDOG data on 4/29/2024
- DDOG: $130.99
- On our premium stock list for 4 weeks
- High implied volatility (IV): 63.30%
- Industry segment rank: B
- $133.00 weekly call strike has a bid price of $2.49 (can be negotiated higher)
DDOG option-chain on 4/29/2024
With DDOG trading at $130.99, the $133.00 OTM strike shows a published bid price of $2.49, with adequate option liquidity (325 contracts of open interest).
DDOG initial 5-day calculations using this high implied volatility (IV) security
- Brown cells: The trade offers an initial 5-day return of 1.90%, 138.77% annualized (result of the high IV)
- Yellow cell: The breakeven price point is $128.50
- Purple cell: Upside potential (if the share price moves up to, or beyond the OTM $133.00 strike) is an additional 1.53%, for the 5-day trade
- The maximum 5-day return (with upside potential) is 3.43%, 178.36%, based on 52, 5-day trades
Discussion
In the BCI methodology, we avoid earnings report due to the risk incurred from a potentially disappointing earnings release. Stocks & ETFs that have associated weekly options, offer a technique to use these securities by sidestepping the week of the release.
BCI Expected Price Movement Calculator
The Expected Price Movement Calculator is designed to generate an approximate projected trading range for the underlying security, specific for selected contract expiration date. The at-the-money implied volatility (IV) of the stock or ETF (exchange-traded fund) is used to achieve this valuable information.
Inherent in the spreadsheet is a conversion formula that recalibrates the annualized IV stat into one specific for the contract being traded. Easily accessed option-chain data is entered into the white cells at the top of the spreadsheet and calculations will appear in the yellow cells below.
This tool will yield upper and lower ends of the trading range during the option contract being traded with an approximate 84% probability of accuracy. Watch this video for more information:
To view the video and purchase the BCI Expected Price Movement Calculator, click here.
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Alan,
I’m trying to understand the concept of ITM strikes for covered calls and the PMCC.
Can you help?
Thanks,
Ray
Ray,
ITM short calls will rarely work for the Poor Man’s Covered Call (PMCC). The reason is that the calculations will not pass the BCI trade initialization formula because the 2 strikes (LEAPS and short call) will be too close together. Therefore, when setting up our PMCC trades, we use OTM short calls and deep ITM long LEAPS.
For traditional covered call writing, we favor ITM call strikes in bear and volatile markets, or if our personal risk tolerance level wants that additional protection to the downside produced by the intrinsic-value component of the ITM premium. In return, we are giving up a possible second income stream from share appreciation, which is the advantage of OTM strikes.
Here is a link to an article I published, related to this topic:
https://www.thebluecollarinvestor.com/selecting-the-best-itm-strikes-for-covered-call-writing-a-real-life-example-with-etsy-inc-nasdaq-etsy/
Alan
Hi Alan,
Are there any resources on the website that discuss selling deep ITM cash secured puts?
I am trying to understand the concept of selling puts at a strike above the current market price.
What’s the premise of this?
Thanks,
Dave
Dave,
In our BCI methodology, we rarely use ITM cash-secured puts. Our goals, typically, are to generate cash flow and avoid exercise.
The main circumstance that would motivate us to sell an ITM CSP, is if we wanted to own the shares sooner rather than later and at a discount. Here is a link to an article I published on this subject:
https://www.thebluecollarinvestor.com/selling-in-the-money-cash-secured-puts-to-buy-a-stock-at-a-discount/
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 10/11/24.
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.
IMPORTANT:
Alan and I will be attending and presenting at “The 2024 Orlando MoneyShow” from Wednesday, 10/16/24 through Saturday, 10/19/24. As a result, The Weekly Stock Screen And Watch List for 10/18/24 will be uploaded either late on Sunday night, 10/20/24, or early Monday, 10/21/24.
Barry and The Blue Collar Investor Team
Hi Alan,
I am trying to learn from my trades. Can you offer any suggestions on this one?
7/22/204: Buy 200 x XLY at $188.94
7/22/2024: STO 2 x August 16, 2024 $189 calls at $4.30
8/2/2024: BTC 2 x August 16, 2024 $189 calls at $0.46 (20% guideline triggered after gap down)
8/5/2024: STO 2 x August 16, 2024 $168 calls at $6.40 (rolled-down)
The stock dropped on Thursday and had a gap down on Friday, triggering the 20% BTC order. I decided to see what happened on Monday. When I checked Monday, the stock had another gap down. If I remember correctly, the market was doing the same thing because of an employment number. I was not sure if it would continue down or start to level off/recuperate. This was going into week 3.
Would you consider this technical deterioration for the stock?
I think at the least I should not have rolled down so far, locking myself into a significant loss. I rolled the stock out-and-up the following month to $169 making a small premium and appreciation.
Thank you.
William
William,
You’re almost there. I congratulate you on actively managing your trades. Many option traders do not.
You had the 20% guideline in place but, unfortunately, due to the gap-down, it wasn’t closed at $0.86 but rather at $0.46. Nothing we can do about that.
The roll-down on 8/2 – 8/5 was appropriate, but not to the $168.00 strike. I pulled up a price chart and it appears that XLY was trading near $176.00 on 8/2 and I prefer rolling-down to an OTM strike, to allow for some share price recovery. It would have made a big difference in the trade outcome. This is the main takeaway as far as learning from our trades to become better investors. As I said, you are close and doing great.
As an aside, there may have been an opportunity to “hit a double” in the 2nd half of the contract. In the screenshot I created below, we can clearly see the classic V-shaped pattern developed as share price recovered. Would I have waited this long? Probably not. I would have done what you did but at a higher strike.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Premium members,
The latest Blue Chip report of the best-performing Dow 30 stocks for the November contracts has been uploaded to your member site. Look on the right side in the “resources/downloads section and scroll down to “B”
The new ETF Report will be publaihed tomorrow evening.
Alan & the BCI team
Hi Alan,
I am planning to set up my portfolio this week.
I am going to have 50kUSD available.
Is it better to invest it all in 5 different stocks or perhaps 4 stocks and 1 ETF? Is there any advantage of stocks over ETFs?
My funds should be available in the account on Thursday. Shall I buy stock and sell the monthly options (with the expiration in Nov) on Thursday, Friday or wait until this expiration Friday is over and make all the decisions on Monday?
Thank you,
Natalia
Natalia,
The advantage of stocks is that they (generally) generate higher premiums because of their higher implied volatility. There are exceptions. The advantage of ETFs is that they provide greater diversification since they represent baskets of stocks.
We are currently entering earnings season, so many of our elite-performing stocks will not be eligible until after they report earnings. ETFs do not have earnings reports.
A reasonable combination would be 1-2 stocks and 3-4 ETFs.
Now, when to enter the trades. Here’s how I would manage this situation:
I would wait until Monday to avoid the weekend risk.
Since you are a premium member, it allows you to wait for our latest stock watch list which will be uploaded to your member site late Sunday or early Monday morning. We usually upload the stock report late Saturday evening, but my team and I will be presenting seminars in Orlando through Saturday.
You can combine that watch list with our latest ETF report for the November 2024 contracts, which will be uploaded to the member site this evening after the market closes.
Alan
Premium members:
This week’s 4-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
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Alan and the BCI team