In 2020, BCI developed 2 ultra-low-risk option strategies, one using implied volatility and the other using Delta to establish low- and high-end trading ranges during our covered call writing and put-selling option contracts. We will use 5 real-life examples to analyze the trading ranges predicted by each approach. The data was taken on 8/30/2021 for the 10/1/2021 contract expirations.
Strategy goals
- Generate weekly or monthly cash-flow with ultra-low-risk 84% probability trades
- Establish a trading range for the specific option period using implied volatility and Delta
- Craft the strategies to align with defensive and capital preservation trading using deep ITM calls, deep OTM calls and deep OTM puts
What is implied volatility (IV)?
IV is a forecast of the stock’s price movement as implied by the option’s price in the marketplace. It is based on 1 standard deviation (68% accuracy) and expressed in annualized terms. Therefore, a conversion factor is used to align with days-to-expiration. Since 16% of the data points will fall above the range and 16% below, the probability of a successful trade is 84% (68% + 16%). This means that there is only a 16% chance of the price ending below or above the range.
What is Delta?
Delta has multiple definitions. The one we are using on this topic is the probability of the option expiring in-the-money or with intrinsic-value. To compare apples-to-apples with IV, we will use Deltas of 16% which aligns with our 84% probability IV trading ranges.
Real-life examples used in this article
- Nike, Inc. (NYSE: NKE)
- ETSY, Inc., (Nasdaq: ETSY)
- Invesco QQQ Trust (Nasdaq; QQQ)
- Vaneck Vectors ETF (Nasdaq: SMH)
- PayPal Holdings, Inc. (Nasdaq: PYPL)
IV trading ranges established with the BCI Expected Price Movement Calculator (available to premium members for free)
NKE: Expected Price Movement Using Implied Volatility
Delta trading ranges established by viewing 16 Delta strike prices for calls and puts
NKE: Put 16-Delta Strike to Establish Low-End of the Trading Range
A 16-Delta call strike is used to establish the high-end of the range.
Final results
Implied Volatility and Delta Comparison Results
Both approaches will work. The ranges were quite similar, but the ranges established via Delta were wider is some cases and therefore safer. Not all options had Deltas of precisely 16 so some calculations will need to be done for greater accuracy. IV calculations were based on mean averages for a wide range of both call and put options. The range established by the calculator needed no adjustments.
Discussion
Using either Delta or implied volatility to establish trading ranges specific for option contracts will result in highly accurate results. Delta has the advantage of slightly wider and, therefore, safer ranges (but lower premiums) but many options do not have Deltas of precisely 16. Implied volatility will create ranges specific for every IV stat. So, what do we want for dessert… a banana split or 7-layer chocolate cake? Either will work well.
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 share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Hi Alan,
Another fantastic month. $2563 profit for the expiration cycle ending on 11/19!
Thanks again for your terrific service. The Weekly Stock Screener along with the BCI Elite-Plus Calculator have proven to be invaluable.
Bruce (NY)
Upcoming events
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Free event
Wednesday January 12th
12:10 PM ET – 12:40 PM ET
Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow
The PCP Strategy (Put-Call-Put or “wheel” strategy)
2.Wealth365 Summit: Free webinar
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January 17th
4 PM ET – 5 PM ET
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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.
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Alan,
Do you have to sell a call option if you buy a leap? Can you just sell to open Leap on a stock you already have? or does that not make sense?
Tom
Tom,
We do not have to sell a call option against long (purchased) LEAPS. This would be analogous to buying a stock and not selling covered calls with the caveat that options expire, and stocks do not (with rare exceptions).
We can sell LEAPS against shares owned as with all option expirations for that security. The premiums will be robust but much less than the annualized returns of shorter-term options.
Also, with shorter-term options, we have the ability to reassess our bullish assumptions on the underlying security on a frequent basis.
Alan
Hi Alan,
In your experience, what is an optimal number of stocks to write monthly covered call options on in any given month to ensure not only good diversification but to also ensure that a decline in one or two holdings don’t wipe out the premiums received in the month? Hypothetically speaking, assuming a $200k portfolio value, how many stocks would be optimal?
Thanks,
Roger
Roger,
You are 100% correct in stressing proper diversification. The appropriate number of positions will vary from investor-to-investor depending on one’s comfort level in managing positions.
That said, I’m happy to provide you with a guideline that, I believe, most retail investors will find practical … 8 – 12 positions are reasonable.
Here’s a good way to proceed; Start with 8 positions and work your way up until you find the precise number that aligns with your comfort level. Take your time… no rush.
Alan
Hi Alan,
I wrote to you a few weeks ago, and you were kind enough to steer me in the right direction in order to learn about the BCI method of selling covered calls. I have read your book, which I found to be quite thorough and very interesting. I believe I understand the great majority of the information you provided. At this point, I have just a few more questions, if you might be kind enough to respond….
1. I have not yet purchased the DVD course on selling covered calls. I am willing to do so if you think that this course will add significantly to what was in the book that I have just read.
a. Do you think it is prudent for me to take this DVD course as well?
2. My intention is to become a Premium member. While I am willing to do the work necessary to follow my covered call investments by making exit strategy decisions, etc, I have the strong sense that I can save much time and effort; and enhance the quality of my decisions, by using your screener to pick the underlying securities that will increase the likelihood of success.
a. How much time might I expect to spend if, for example, I sell-to-open 5 covered call positions
at the beginning of an option contract period using monthly options? As I mentioned, I am willing to do some work to follow my positions and to make decisions during each month, but I do not wish to spend 3 or 4 hours each and every day on this process. Is this realistic, given that I am willing to become a Premium member?
b. Is there a process by which a premium member might get answers to specific questions?
For example, if I found myself wondering whether to roll out vs roll out and up in a specific case, is there a way to get that help? I do understand that the decisions are mine alone, but is guidance available?
Thank you again for your help. I look forward to hearing from you soon.
Best wishes,
Lou
Lou,
I would like to believe that all our educational products and tools represent assets to our members and certainly the covered call writing online DVD course with downloadable workbook is no exception. Within the last year, it was updated and enhanced for the 3rd time in the history of BCI.
The premium membership is a huge time-saver as we provide 4 screening reports to our members that will reduce the universe of over 4000 securities down to a few dozen. These are not “magic stocks” that only go up in value but are elite performers from fundamental, technical and common-sense perspectives at the time of publication. Yes, a significant time-saver.
The screening benefits are only part of membership perks. There is an educational component with, now, over 200 training videos, expanded calculators, E-Books and much more.
As a guideline, if we are managing 5 positions per-month, after mastering the system, expect to devote between 3 – 5 hours per-month into entering and managing the trades. Most of that time is spent when the contract positions are initiated and on or near expiration Friday.
We do our best to respond to our emails. Placing questions on the most recent blog commentary sections is a good place to ask questions as well. We also have a 1-on-1 coaching program where questions are answered as you view our computer screens. This program is based on your specific needs and inquiries.
Alan
Alan,
In the 01/21/2022 options cycle, out of twelve of my CC positions, ten have declined significantly, and their buy-back orders were filled at 20%, and now I have accumulated quite a lot of paper loss.
Next week I will need to decide about my exit strategies, some of them will probably be very painful.
I wonder what exactly has happened to the market?
I have got the feeling that an important sea change has occurred, and if we must redirect our stock-picking approach?
Could you please let us know your considerations?
Thanks – Roni
Roni,
I believe there was an unsubstantiated market over-reaction to the hawkish Fed minutes released late Wednesday.
I, too, had many of my 20% BTC limit orders executed last week, and my plan is to roll-down to OTM strikes after 11 AM ET on Monday. This gives us a chance to assess the market’s demeanor as the new week begins. I plan no alterations in my position management approach.
Here is my market assessment that will be published in this weekend’s upcoming premium member stock report:
“This was a challenging start to the new year with the market down nearly 2%. This related to the unexpected hawkish sentiment in the mid-week released Fed minutes. I feel this was a gross overreaction. Interest rates cannot be raised dramatically in 2022 with the large deficit we are dealing with. This was exacerbated by a disappointing jobs report on Friday although the unemployment rate dropped to 3.9%. I had several 20% BTC limit orders executed, and several puts exercised as well. This weekend, I will change to 10% BTC limit orders and manage the same way I have been for the past 2+ decades. Keep in mind that we still have 3 weeks of earnings in January that are projected to be strong and bullish. There will be weeks when the market appreciates by 2% Weeks like those, and this week are atypical. We must stay calm and focused”.
It will be interesting to see which and how many stocks survived last week’s nearly 2%market decline.
Better days are ahead.
Alan
Alan,
Thank you for the clear and prompt response. I will do the same as you and hope for the best.
Roni
Dear Alan
Do you mind to further explain your considerations for Rolling down on Monday (beginning of the 4th week) instead of waiting until the last 5th week? I always hesitate between waiting for hitting the double or rolling down. Now, it is a general decline of the market and not the decline of a specific share.
Best regards
Alex,
Yes, recently we have experienced a general market decline impacting many of our securities.
The 20%/10% guidelines are so named because it gives us flexibility in our trading decisions while, at the same time, providing and overall structure as when to close the short calls.
If the thresholds are reached and short calls closed, we also have flexibility regarding our next-step exit strategy selections. The guidelines are to favor “hitting a double” in the first 2 weeks of a 4-week contract and in the first 3 weeks of a 5-week contract. We favor rolling-down in the last 2 weeks of a monthly contract.
When rolling-down, I generally favor rolling-down to an OTM strike to allow for some share recovery.
Once again, these are guidelines that I have found over the past 2+ decades work best. I have no issue if our members tweak these to align with their specific trading style and personal risk-tolerance.
Alan
Alan;
Would you also consider a stock repair strategy on the stocks that are under water for a position management approach?
Thanks;
Terry
Terry,
Yes. Once we close our short calls, we are no longer option sellers but rather share owners and the stock repair strategy is available as an exit strategy choice for our long stock positions.
We must understand the pros & cons of this strategy:
• Own shares at a price higher than current market value (unrealized loss)
• Willing to forego potential profit in exchange for lowering the breakeven price point
• Not willing to add additional funds to the current losing position
• Instead of buying shares at the lower price to “average down”, an at-the-money (near-the-money) call option is purchased and funded by selling 2 out-of-the-money call options
• 2 long positions (stock and ATM or NTM call)
• 2 short positions (OTM calls covered by long positions)
• This action will lower the breakeven price point
• The strategy does not protect against additional downside loss
• The strategy does cap the upside
The BCI Stock Repair Calculator will provide clarity regarding the pros and cons of this exit strategy for all current and future price possibilities.
Alan
Alan and Terry,
I have tried the stock repair strategy several times with negative results and also noticed that it confuses my position management reasoning during the rest of the monthly options cycle.
I guess it is above my trading skills level.
Roni
Mine too, Roni.
Hoyt
Hi Alan,
I am a great fan of BCI and I am actively following it for last couple of years. Thanks for your tremendous input!
I have a question. I am little confused.
I have a lot of AAPL Poor Mans Covered Calls in my Portfolio and I want to clear out how to consider my PnL.
Let me explain:
When my Long leg (LEAP) is In The Money ( and after some weeks this happens quite regularly) then I roll it to a much further Expiration by selling this LEAP for a healthy profit and simultaneously buying another one in future Expiration ( a new LEAP).
Question: Should I consider the profit received by selling my Long Leg (LEAP) or not? This according to my logic is a realized profit which I have received.
With respect,
Andrew
Andrew,
With the PMCC strategy, we typically purchase in-the-money LEAPS. We want that security to simulate the price movement of the underlying so a Delta between .75 and 1.0 (or 75 – 100 for the contract) is preferred. Deltas between .5 and 1.0 reflect in-the-money strikes.
The BCI guideline for rolling PMCC LEAPS is 90 days prior to contract expiration. Use the Rolling LEAPS tab on the BCI PMCC Calculator (red arrow in the screenshot below) for these rolling calculations. Since the time-value in the contracts we are closing is less than the time-value of the later-date LEAPS, we will incur a net debit, usually about $2.00 – $3.00 per-share (an estimate- blue arrow in the screenshot below).
Here is a link for more information on our BCI PMCC Calculator:
https://thebluecollarinvestor.com/minimembership/poor-mans-covered-call-calculator/
Bottom line: Rolling LEAPS results in a reduction in our profits for our PMCC trades.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Hi Alan,
I bought the course regarding the PMCC and I would like to thank you for the great course.
I have a short question regarding the earnings.
My question is regarding the leaps option before earning, should we sell it or it is OK to hold it?
Thanks in advance,
Amir
Amir,
The PMCC strategy is, traditionally, a long-term commitment to the underlying security. In our book, “Covered Call Writing Alternative Strategies” and in our online PMCC video course, I identify this premise as one of the disadvantages of the strategy. All strategies have their pros & cons.
Therefore, we hold the LEAPS through all earnings reports, but the short calls are another story. As with traditional covered call writing, we (almost) never sell a covered call option that expires after a projected earnings report date.
If the underlying security has weekly options, we sell weeklys that contract month and skip the week of the report. If not, we sell the call after earnings if earnings report is early in the monthly contract or sell a 2-month option if the earnings date is late in that monthly contract. Although, in the latter scenario, earnings is reported before expiration of that 2-month contract, early exercise is rare if the contract expiration is more than a month from the ER date.
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 01/07/22.
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:
http://www.youtube.com/user/BlueCollarInvestor
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.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan,
I must again ask the question based on the attached Nike example.
When using the expected price formula what IV % do you use?
The current price at strike time IV or the strike price IV?
I think the example is a bit unclear on this.
Sorry to be dense but want to be accurate; I have asked this before as a premium subscriber.
Thank you.
Bob
Bob,
There are 2 choices regarding the IV stat we use for successful implementation of this strategy:
1. Some vendors provide a mean IV of all calls and put IVs for that security.
2. We can also use the IV for the ATM strike at the time of trade execution. This is the one I used in this article as shown in the screenshot below.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Hi Alan
I was going over a blog from Willian on a NUE trade which he bought back mid contract.
This blog example is still on the member site.
My question is wouldnt he have made more money just letting the option expire in the money for a 3.2% win +$490. Instead after BTC and then STO he only made 2.7% +$261. total. Or did I miss somethig?
Thanks,
Stan
Stan,
The reason we may consider implementing this strategy (mid-contract unwind or MCU) is that, although it did cost 0.44% to close the trade, there were still 2weeks remaining until contract expiration.
The cash generated from the sale of the stock could then be used to generate a 2nd income stream in the same contract month with the same cash investment.
The BCI guideline for initiating the MCU strategy is to assess if we can generate at least 1% more than the time-value cost-to-close.
In this case, our goal would be 1.44% or more for the 2nd trade. If there were no such opportunities, we would not move forward with MCU.
Alan
Alan
Thanks, so I sold my NUE stock at a higher price so I can reinvest that money. When you reinvest mid contract, say there were 2 weeks left in the contract, do you reinvest in another contract for 2 weeks or for 1 month at that time?
Stan
Stan,
Our goal is to generate a 2nd income stream in the same contract month (same expiration date) with a new underlying security thereby creating an opportunity to receive more than the initial maximum return.
Alan
Hello Alan,
I recently signed up for premium membership and was watching the explainer video on how to read the reports and read the last few weeks reports.
I saw that the last two weeks mention limit orders for BTC in the BCI comments section but I don’t see any reference to this being a limit buy, limit sell, a put, etc.
Can you shed some light onto this please so that I can make sure I am executing properly?
Finally, I don’t see any reference for the strikes you are looking to select for the stocks on the watchlist. Should we just select a strike based on the delta’s you discuss in the books?
Thank you!
Matt
Matt,
Here are links to articles I published on these topics:
https://www.thebluecollarinvestor.com/automating-the-20-10-guidelines/
https://www.thebluecollarinvestor.com/delta-and-strike-price-selection/
https://www.thebluecollarinvestor.com/delta-as-the-sole-criteria-for-covered-call-writing-strike-selection/
Alan
Hi Alan,
What if during bear market conditions we find it hard to identify 8 to 12 good candidates? Do we simply leave more in cash?
I believe I read that there were times you would be 50% in cash.
Do you have any guidelines that would have helped in the bear market of 2008 or in some more recent market corrections when good stock candidates were hard to come by?
Thanks,
Roger.
Roger,
Between our stock, ETF and Blue Chip premium member reports, we will almost always be able to populate our portfolios with 8 -12 eligible securities (usually a lot more).
In a confirmed bear market like we had in 2008, here are solid ideas for our option-selling trades:
1. Deep ITM covered calls
2. Deep OTM cash-secured puts
3. Combined PCP strategy using both deep OTM puts first and then deep ITM calls when puts are exercised
4. Inverse ETFs (extreme bear markets)
5. Low IV underlying securities and lowering our initial time-value return goal range to convert to an even more conservative portfolio approach
I am almost always fully invested. Rare exceptions have included:
September through March (2008 – 2009)- 100% cash
Prior to the 2016 and 2020 presidential elections- 100% cash
Pre-Brexit- 50% cash
All other times, my portfolio reflects current market conditions.
Alan
hi Alan,
are the 2 ultra-low-risk option strategies, one using implied volatility and the other using Delta to establish low- and high-end trading ranges during our covered call writing and put-selling option contracts, developed by BCI in 2020 covered in the revised editions of your e-books?
Leung,
These 2 strategies have been included in the recently updated put video course linked below. Check sections 5 & 6. These concepts, rules and guidelines can be applied to covered call writing, selling cash-secured puts and their related strategies.
Here’s the link for more information:
https://thebluecollarinvestor.com/minimembership/selling-cash-secured-puts-basic-and-advanced-principles-2-part-dvd-series-workbook/
Alan
Hi Alan,
I’m looking at the CBOE IV data.
Let’s say the IV is .35
Do we enter it as .35 or 35% when using the Expected Price Range Calculator.
– Ted
Ted,
Enter 35 and the % symbol will appear automatically.
Alan
Hi Alan,
I recently purchased a subscription to your Premium Member Site. The information on the members page is very informative and helpful.
Today I clicked on a link to a YouTube tutorial on “Setting Up Portfolio with Premium Report and Elite-Plus Calculator”. Where do I find this particular calculator?
There are several calculators on the members page, including one titled “CALCULATOR-ELITE For Covered Call Writing-2020”, but they appear different than the calculator featured in the YouTube tutorial.
Could please let me know how to access the “Elite-Plus Calculator”? Thank you.
Sincerely,
William
William,
The Elite Calculator is used for covered call writing and free to premium members on the member site and available to all others in the BCI store.
The Elite-Plus Calculator, our best calculator, applies to both covered call writing and selling cash-secured puts and produces individual and total portfolio calculations. Here is a link to a video which provides information regarding this calculator and how to purchase this product:
https://thebluecollarinvestor.com/minimembership/calculator-elite-plus-calculator/
Alan
Alan,
Excellent overview of the cash secured puts. Do you only select strike prices when selling covered calls that return greater than 2% ROO if this makes sense? Do you sometimes choose less returns based on the situation?
Regards,
Russ
Russ,
In normal to bull market environments, my initial time-value return goal range is 2% – 4% and I’ll allow myself to go as high as 6% in strong, confirmed bull markets. This is my approach in the bulk of my portfolios.
In my blue chip portfolio (small %) and in my mother’s portfolio, I use 1% – 3%. I have also developed a few ultra-low-risk strategies (10-Delta, for example) where my goal is lower than for traditional option-selling.
Each investor must align their initial time-value return goal range with their personal risk-tolerance… one size does not fit all.
Bottom line: Yes, 2% is typically my minimum goal.
Alan
Hi Alan,
I watched the program today but my computer frozen before I could ask a question,
If you sold an ITM covered call why would the option not get assigned right away since it is below the underlying securities price?
Tom
Tom,
ITM strikes will have a time-value component. Let’s say a stock is trading at $32.00 and we sell the $30.00 ITM covered call for $3.00. Of that $3.00, $2.00 is intrinsic-value (the amount the strike is lower than current market value) and $1.00 is time-value (our actual initial profit).
If exercised immediately, the option buyer purchases the shares for $30.00 and has an unrealized profit of $2.00 ($32.00 – $30.00). Instead, the option buyer could have been sold the option for $3.00.
Early exercise of all options is extremely rare and, when it occurs, it is usually associated with an ex-dividend date.
Alan
If the option buyer, paying $3.00 for the option, exercises the option at $30.00, and the stock is trading at $32.00, the option buyer has lost $1.00.
Many ITM options are not exercised because of the extrinsic value in those options.
Market makers will not exercise on ex-dividend date unless the dividend is greater than the extrinsic value. Often, though, amateurs will. I have had short calls exercised even though the extrinsic value exceeded the dividend. Brokers just shake their heads. 🙂
If you are assigned on ex-dividend date, then you will have to pay the dividend.
I avoid ex-dividend dates just as I do ERs.
Hoyt
Premium members:
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.
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
Alan,
Since we will be entering a rising interest rate environment and your IBD list mainly consists of high growth/momentum stocks, will you be including more value stocks in your weekly lists?
Also, if we are entering a stock correction period, would you recommend selling puts instead of covered calls?
What did you do with your positions during extreme down markets? (2020, 2018, 2008, etc.)
Thank you.
Larry
Larry,
Each month, we provide 3 reports of eligible securities to our premium members, weekly stock and ETF reports and a monthly blue chip (Dow 30) report.
The weekly stock report does contain mainly growth companies but the ones that have performed well in the current market environment. Our members do have the opportunity to select from the other 2 reports of the best-performing blue chip stocks and ETFs.
When we have assessed current market conditions as bearish or volatile and want to take a more defensive approach in our option-selling portfolios:
In a confirmed bear market like we had in 2008, here are solid ideas for our option-selling trades:
1. Deep ITM covered calls
2. Deep OTM cash-secured puts
3. Combined PCP strategy using both deep OTM puts first and then deep ITM calls when puts are exercised
4. Inverse ETFs (extreme bear markets)
5. Low IV underlying securities and lowering our initial time-value return goal range to convert to an even more conservative portfolio approach
I am almost always fully invested. Rare exceptions have included:
September through March (2008 – 2009)- 100% cash
Prior to the 2016 and 2020 presidential elections- 100% cash
Pre-Brexit- 50% cash
All other times, my portfolio reflects current market conditions.
Alan