In August 2018, Duminda shared with me a successful collar trade he executed with Attlassian Corp (NASDAQ: TEAM). He was considering 2 exit strategies:
- Closing all legs of the trade and using the cash to enter a new position
- Allowing assignment and selling the put, if any value at expiration
Initial structuring of Duminda’s trade
- 7/30/2018: Buy TEAM at $71.32
- 7/30/2018: Sell-to-open the August 17, 2018 $75.00 call at $0.80
- 7/30/2018: Buy-to-open the August 17, 2018 $65.00 put for $0.50
- 8/9/2018: TEAM share price accelerates to $78.23
BCI Collar Calculator: Initial results
With TEAM trading at $78.23 leaving the $75.00 strike in-the-money by $3.23 and the $65.00 put deep out-of-the-money. The calculator shows that if share price moves above the $75.00 strike, the 18-day return is 5.58%, 113.16% annualized (red arrows). With only 8 days until contract expiration, put value is approaching zero.
Philosophical approach to collar trade exit strategies
This is a covered call writing trade. The protective put aspect must not cloud that fact. When share price moves well above the call strike sold, we look to the mid-contract unwind exit strategy. If the time value component of the call premium approaches zero mid-contract, we may close the entire position and use the cash to generate a second income stream in the same contract month. With only 8 calendar days until expiration, additional income generation is unlikely, but possible and worth a look. If share price remains above the call strike and the mid-contract unwind exit strategy does not offer significant benefit, then we allow assignment at expiration or roll the option depending on our decision to retain or sell the underlying security.
Collar trades should be viewed as covered call writing trades with an insurance policy, the protective put. Trade management should be executed using covered call writing exit strategies, the same ones as we would use if the put was not in place. Initial trade calculations take into consideration the debit to purchase the put and therefore meets our initial time value goals. When share price remains the same or rises (as is the case with TEAM), we have executed a successful trade.
***For information on the BCI Collar Calculator click here.
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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 share some of these testimonials in our blog articles. We will never use a last name unless given permission:
First and fore more, let me thank you for the monumental work you are doing in creating hundreds of smart investors. I have done a lot of fine-tuning as I watched your videos.
August 15, 2019: San Francisco Money Show
9:15 AM – 12:15 PM
6 PM – 6:45 PM (subject to time change)
Market tone data is now located on page 1 of our premium member stock reports.
I was wondering what you do when the markets turn bearish or become extremely volatile just like during the latter part of last year. I know we should have exit strategies in place to guide us through these challenging periods, but I’m now sitting on realized option profits of 41% this year by August expiration. With the latest trade war tensions, softening economic growth outlook, I was thinking about a very ‘heat’ autumn just like last year. I don’t want my profits to be wiped out when we eventually turn negative just because of greed and staying in the market way too long, especially when chart technicals point to a breakdown. Maybe I just take my chips off the table and wait for some stabilization. Thanks for all you do.
Congratulations on your impressive results.
We all must trade within our own personal risk-tolerance profile. In bearish or volatile markets, we may move to cash or invest defensively by selling out-of-the-money cash-secured puts to enter covered call trades (PCP strategy), use protective puts (collar strategy), use low implied volatility stocks or ETFs, use deeper in-the-money calls and out-of-the-money puts.
When the market goes way up or way down, the ultimate parking place is usually somewhere in between. With interest rates so low, where else can we make money that will beat inflation?
That said, if we are uncomfortable in the current market environment, we should move to cash until parameters change. One size does not fit all.
Wow………. your results are fantastic!!!!!
Great question too. We all have the same issue when we have a successful period.
Alan has given you the best alternatives.
In my opinion, if your total cash is invested in the stock market, this is a good time to stay on the sidelines.
But, if you are trading with only a portion of your money, you could continue the great job you are doing.
As earnings season is now almost over, there will be 3 months of opportunities.
Nobody can tell what will come next.
On the other hand, next year will be ellection year, and that is always uncertain for stocks, therefore, a good time to stay in cash.
Happy Sunday. Wishing all friends here a successful new week.
I am not a Trump supporter but I have to be objective when I look at the election cycle from a market perspective. If we set a stake in the ground this October on the market: SPY/QQQ/DIA/IWM I will be shocked if they are not all higher at that time next year going into the US elections.
Trump equates market performance with his effectiveness, which is helpful for stock investors. I am looking for a dip in the months to come to down around S&P 2500. I will then be buying because there is no way Trump will let the market tank in his re-election year. That’s just my opinion.
We mark a sad milestone up here in the States today with our latest mass shooting. This does not happen at this frequency in any other country. The shootings occur too fast for the press to keep up. This article from yesterday is already out of date. The count is now 251. I wish I had the answer. – Jay
Hello Jay, Joanna, and Hammish.
When I posted last Friday, I never expexted the huge gap-down of today.
I was referring to the 1974 Mel Brooks movie “Young Frankenstein”.
As I remember it, Gene Wilder (Dr. F) and his strange assistant Marty Feldman (hunchback) are looking for a corpse in the cemetery, at night, in the dark, and after several mishaps, Wilder is very pissed. Marty says: “it could get worse”.
Dr. F asks : “yes?… How”. Marty responds: ” it could be raining”….. and almost immediately it starts pouring.
Well folks, today it is pouring, and I am glad we all stayed safe and dry.
Thanks for your useful comments. I decided to roll down my strikes this morning (I’m a European investor). Why the heck would I even consider doing that? I traded some of my profits in for additional downside protection of my gains. And with volatility popping sharply, the profits I’ve lost by being conservative can be regained next month because of higher premiums but still very attractive downside risk protection. I’d like to call it anticipating before getting hit. Despite the current pullback, I feel much more comfortable than last year when option selling was a secondary component to my overall portfolio. Love these strategies and the supporting feedback of the BCI community. Know I understand why option selling offers smart investors a substantial edge :-))
Regarding “STO” contracts on stock you may already own that is “below” the strike price. My question, “is it typical and okay to open a STO contract on stock that is under the strike price and depend on the exit strategies to protect against loss?
Example: I own “X” stock at $16 per share and want to open a contract with a $15 strike price.
This may be elemental, but I’m reluctant to try this approach if it’s not acceptable. Can you give me some advice on this?.
Selling in-the-money (ITM) strikes, as in your example, is absolutely acceptable under certain circumstances. The premiums of ITM strikes consist of intrinsic-value + time-value whereas ATM and OTM strikes have only time-value. Therefore, our cost-basis (Breakeven) is lower with ITM strikes. I use these in bear and volatile markets. The disadvantage of ITM strikes is that we cannot take advantage of share appreciation due to our contract obligation. Here is a link to an article I recently published on this topic:
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 08/02/19.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
Since we are 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
ALLAN, IF A STOCK IS ENTIRELY REMOVED FROM THE LIST DOES THIS MEAN IT IS TIME TO EXIT THE POSITION?
No. Once a position is entered, it is managed as described in the exit strategy sections of my books and DVDs. Last week, several “eligible” candidates failed our technical screens as a result of the general market decline from tariff concerns. Many of these companies remain outstanding stocks, just not the best of the best at this point in time. If we are looking for a replacement stock mid-contract, we select from the most current list.
I watched your video on you tube.
Would like to ask you :
How to find the best cash secured
The same stocks that are the best candidates for covered call writing are also outstanding choices for put-selling. The 3-pronged screening process is the same: fundamental analysis, technical analysis and common-sense screening (like diversification, avoiding earnings reports, minimum trading volume etc.). Stock selection represents the 1st required skill for maximizing option-selling returns. The other 2 are option selection and position management.
But where and how to screen for such a stocks??
I respect all the entry rules (no earnings, no ex Div date, 6 % yearly performance goal), but sometimes the call option will be in the money.
What is better: to role the options inmediately, when it runs in the money or wait to expiration friday, when the time value is near to zero.
If I select role only on expiration friday, the loss could be very high. In my 50 portfolio positions, the 5 or 6 monthly looser trades loose more money than the 44 or 45 winner trades, so that finaly a monthly loss is there. Sure the stocks appreciated, but the monthly loss means, that I would have more money in my account, if I would’t sell calls on my portfolio positions,.
1) Is it better, to roll earlier in order to avoid the big losses in my call options?
2) Or is the best solution, to sell only calls on my portfolio stocks, when they are in a downtrend or sideways?
Thank you very much
Matthias from Berlin
Generally, it is best to roll options close to 4 PM ET on expiration Friday. With portfolio overwriting, we are writing 1-month out-of-the-money calls with a targeting annual return, 6% in this case. Most of these strikes will also allow for 3% – 5% of share appreciation as the Deltas will be quite low. If the strikes moves to in-the-money and we are abiding by the earnings report rule, a quick check of the news (finviz.com is a good resource) would be in order to evaluate the reason for the gap-up. There may be rare scenarios when closing the short call mid-contract would make sense but again, rare.
The process is detailed in my books and DVDs (3 chapters). You can join our premium membership and the BCI team will do the screening for you. I would still recommend learning and understanding the process. If you need further guidance, let me know.
To the BCI community,
The last few days have been rough ones. Nobody can predict what the market will do short-term but the market fundamentals and current earnings season are still reading bullish. With interest rates globally low, the dividends on the S&P 500 are greater than the 10-year Treasury. Investors will turn back to the stock market once tariff concerns are mitigated. If history repeats itself, that could be soon. Stay strong and non-emotional.
Well said Alan, thank you! I have not sold anything. I actually added to my QQQ today.
I may have posted last thread that when Trump went after China again last week I loaded up on puts since I knew the other shoe would drop. It did today and I took some profits.
Covered call writers are always better off than their buy and hold peers when markets hit skids like this. So I always remind myself panic is not a strategy :). Kind regards to all. – Jay
Rough ride today. I am disappointed that we didn’t close on the low. It may not matter this time but there will come a time when it will.
I didn’t sell anything today, didn’t buy either. I decided to work out in the fields on my tractor. It was a lot less stressful, probably.
See my post (below) of July 22 this year. We are there now. S&P down 4.6% post to date. GLD at $138 (almost $140).
July 22 post:
I am intrigued by your planned trade.
I have been thinking about a similar strategy.
GLD is at a height not reached since August of 2013. GLD has under performed the S&P since that time(Aug 2013). Typically GLD goes up when the S&P goes down, but not always. GLD really ran up in 2011 & 2012($177 & $172).
If Dr. Jay is right(see immediately previous blog), and I suspect he is, then we could easily see a 5% correction in the S&P in the month of August. Such a move would normally create a similar rise in GLD putting it at around $140.
In my opinion a bullish bet on GLD is a bearish bet on the S&P. If my assumptions are near true then I think the short call should be Aug 30 where strike premiums more than cover the PMCC formula. I would probably close all legs when the short call became ITM.
Here again, this is just one man’s opinion and, of course as with all positions this one would should be closely monitored. But you have set up what I think is a highly probable profitable trade.
To paraphrase Paul Kangas, “Here’s wishing you the best of good buys.”
“Where have you gone Dr. Jay? Our community turns it’s lonely eyes to you. What’s that you say Mrs. Robinson? Jolting Jay has left and gone away. Hey, Hey, Hey”. 🙂 With apologies to Simon and Garfunkel’s Mrs.. Robinson.
Remember, ” Losing money in the stock markets hurts a hell of a lot more than making money in the stock market feels good.”
I love Simon and Garfunkel too!
I think I have been consistent here saying I went short when Trump did his latest tariff fiasco. I added QQQ calls today since I expect a reaction bounce up but I could be wrong. This is a terrible time of year for the market. Trump makes it worse.
Cash will be king for a while. If any friends have profits I suggest taking them on bounce days and building a dry powder stash for lower prices to come! – Jay
I have been building cash too. I am now between 10-15% cash. Usually 100% invested. Had a close friend call me at 3:30 today. I just happened to be stopped and heard the phone. He wanted to know if today would be a good day to put a 5 figure investment in. I told him I had really not kept up with the market today. All I knew that it was down about 835 at the time. I told him it would probably go lower tomorrow but that today would be better than any of the last 7 days. Don’t know what he did.
Met my son at the Biergarten tonight. He told me he had added to his positions today at 3:45.
Tomorrow should be interesting.
Since they were just small trades I sold my calls on QQQ at the open for a 60% over night gain. I got lucky. It was just a hunch. Most of them don’t work out that way :)! I trade small.
I put the proceeds into EEM puts since I don’t like the overall market or the direction of the dollar right now.
Trading is a lot of fun. But please no friends here do it to the extent it keeps you awake at night :)! – Jay
I am digging through the tons of information you got on your members page. And was just wondering if covered call writing on ETFs works exactly the same way as with stocks. It is probably the best way to start with a smaller budget.
Besides that, I would love to know what you think of the narrowing between the 2 year and 10 year treasury yields. Do we risk a full inversion? Can the FED mess with the long end as well as with the short term interests? Would inverted ETFs help for capital preservation in this environment?
Sorry, I know I shot off a lot of questions at once.
Thanks for your attention.
Yes, ETFs are a good way to initiate our covered call strategy for new option-sellers and for modest accounts. It is managed the same as traditional covered call writing with stocks with the exception that we don’t need to factor in earnings reports.
I am not an expert of yield curves but most economists do believe that an inverted yield curve is a reliable predictor of recessions. Some are concerned because of the flattening of the curve the past 3 months but there are many other more bullish factors that are leading economists to the conclusion that a recession is not a given, at least not now.
Inverse ETFs are useful underlyings in confirmed, strong bear markets but, in my humble opinion, we are not close to considering these securities. 2008 was a perfect year to benefit from Inverse ETFs. This is not 2008. Let’s end this tariff war and normalcy will be restored.
Love your stuff and I’m a BCI member. Question, if I enter a covered call position, and 10 days later my option is bought back due to the 20% of initial premium rule, and at that time the stock is NOT listed as one of yours on the Weekly Stock Screen and Watch List, should I sell the stock and enter another position in another stock, or stick with it and sell another call on the same stock?
Once we enter a position, it is managed as detailed in my books and DVDs (exit strategy chapters). The decision whether to sell the stock (unexpected negative news, substantially under-performing the S&P 500 etc.) or write another call (roll down, wait to “hit a double” etc.) is not made on the removal of the stock from our watch list. It may re-appear next week. If we decide to sell a stock, its replacement is selected from the most recent report.
This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.
New members check out the video user guide located above the recent reports.
For your convenience, here is the link to login to the premium site:
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Alan and the BCI team
I am new to covered call writing. I’m having trouble understanding why we would write In The Money covered calls. Why would we buy a stock at a higher price and then sell a contract where we could lose the shares at a lower price? I appreciate your education serious but do have trouble understanding the employment of ITM contracts.
When we sell an ITM strike we are paid a premium that compensates us the amount we will lose on the stock side + a little bit more. That “little bit more” (time-value) is our actual initial time-value profit. The advantage of this approach is that we create more protection to the downside. The disadvantage is that we sacrifice potential share appreciation which is provided with OTM strikes.
Here is a link to an article I published on this topic:
If we have PMCC trade in margin account and the price of underlying increases significantly leaving the short call deep ITM and we need to buy the short option back, let’s say for $7500, but we have only $5000 cash in our account, will the broker allow us to make such trade in a margin account?
I’m re-reading yours “Covered Call Writing Alternative Strategies” where you suggest to have unattached LEAPS to cover the buybacks. It seems I missed this point and now I’m trapped with PMCC on TLT after TLT went up in price this week.
Do you have any suggestions?
In the book, re-read pages 117 – 133, which details how to structure the initial PMCC trade. If the formula is adhered to, it will facilitate a positive outcome in just this situation as both legs of the trade are closed. The formula requires the difference between the strikes + the initial short call premium must be greater than the cost of the LEAPS. When the price moves up significantly, we can exercise the ITM LEAPS (buying the shares “on paper”) and then simultaneously selling at the sort call strike. You may very well have a winning trade right now!
***The first tab of the BCI PMCC Calculator deals with initial trade structuring.
Do I understand the 20 10% rule correctly Alan right now we’re close to the end of the contract. for the month and my premiums have almost doubled all of the time value is very small like $0.15 but the intrinsic value is what’s high so my question is are we taking the 20% or 10% times the original premium without regard to time value.?
The 20%/10% guidelines apply to a declining stock price. In your situation, intrinsic-value is accelerating and time-value declining meaning share price is moving up. The exit strategy that applies when this occurs would be the “mid-contract unwind exit strategy” but that is most appropriate early to mid-contract, not late contract.
It appears your trades are currently at maximum profit and rolling the options may be considered as 4 PM ET on expiration Friday approaches. Use the “Unwind Now” tab of the Ellman Calculator to assist with those decisions.
All is well with these trades.
Keep up the good work.
In your CSP book chapter on Exit Strategies, I have a question about the $100 shown in the second link below. The first link just shows the heading for that discussion. Sorry, I don’t know how to reference a page in a Kindle book!!!
In the following link how does the $100 fit in? Where does it come from?
The $100 figure represents the current loss on the stock side. The put strike is $50 and the current market value is $49… $100 for the 100 shares per contract. Factoring in the $150 generated from the put sales leaves us currently with a $50 per contract (1%) credit.
Thanks! My 77 year old brain wants to use the $51 stock price as the basis here, but obviously the put seller is only obligated at the $50 strike. Obvious? I could have used a different word! It takes a bit of cogitating for me to get there, but it’s slowly happening. I appreciate what you’re doing! I’m keeping the brain cells active with your blog and site. Suspect I will be joining soon
Need your counsel about how to place stop loss orders.
This week I got burnt by placing a Stop market order on AAPL when it tanked all the way from 204 to 197. I had thought about placing Stop limit order but wasn’t sure about the limit price.
Since I owned the shares at 205, would a better risk management strategy have been to instead purchase slightly OTM puts? And perhaps sell (ITM?) calls to offset some cost of the puts?
We must first define the strategy and strategy goals. If we are using the stock for appreciation and possibly dividend income, I prefer an OTM call funding an OTM protective put so that we have opportunity for share appreciation. This is the standard definition of the collar strategy.
If we didn’t want to cap the upside but wanted protection to the downside in a stock-only (no option component) portfolio, we should consider the “trailing stop-loss order”. In this case, a percentage figure is selected (10% is a typical threshold) and the broker is instructed to sell if the stock price declines by that % from its highest price. This allows for unrestricted appreciation and locks in profits at 10% below its high once from when the trade is entered.
I discuss this broker instruction in my book, “Stock Investing for Students”
Here is a link to an article I published where I allude to this strategy: