High implied volatility securities can be used in covered call trades in a defensive manner using the appropriate call strikes. In this article, Neurocrine Biosciences, Inc. (Nasdaq: NBIX) will be used to analyze the conversion process.
NBIX data on 8/15/2024 from the BCI Premium Stock Report

- Industry rank: A
- Media Analyst Rating (MAR): 1.80
- 7 weeks on BCI “eligible” list
- Initial time-value return goal range for a 1-month expiration is 2% – 4% (as 1 example)
- Implied volatility (IV): 75.6% (extremely high and risky)
The concern is the high IV which represents substantial risk to the downside.
Converting a high-risk to a low-risk trade
By opting for an in-the-money (ITM) strike, the intrinsic-value component of the premium will lower the breakeven (BE) price point substantially.
NBIX option-chain data on 8/15/2024 with NBIX trading at $146.70
- $155.00 OTM strike: $11.00 premium (BE -breakeven- at $135.70)
- $125.00 ITM strike: $25.30 premium (BE at $121.40)
- Strikes in the $170.00 – $180.00 range generate 2% – 4%
Pros & cons of the OTM strike
- 2 income streams possible if share price rises
- Higher breakeven price points than ITM strikes
- Significant initial time-value returns
Pros & cons of the ITM strike
- Significant initial time-value return
- No upside potential if share price rises
- Lower BE price points
- Intrinsic-value acts as an insurance policy, paid for by the option buyer
Deep ITM initial calculations resulting in meaningful downside protection

- Yellow cell: BE price point is $121.40, compared to current market value of $146.70 (green arrow)
- 37-day return is 2.88%, 28.41% annualized (brown cells)
- Downside protection of the time-value profit is 14.79%
- Calculations achieved with the BCI Trade Management Calculator (TMC)
Discussion
Using deep ITM call strikes can convert high-IV and high-risk trades into low-risk trades, while still offering significant initial time-value potential returns.
Alan Ellman’s Complete Encyclopedia for Covered Call Writing Volume-2 (softcover)
An adjunct to the original Volume 1 with new and enhanced information on low-risk wealth-building strategies for average investors, utilizing stocks and options to create monthly cash flow. After publication of Volume 1 (classic edition), each time I wrote an article on a particular topic, I placed that material in the appropriate corresponding chapter of the original publication. So, if an article was related to technical analysis, it was placed in Chapter 4- Technical Analysis. If it was related to calculations, it was entered into Chapter 6- Calculations and so on. The result was ninety-six articles with one hundred fifty-seven color charts and graphs.
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ChatGPT: Who is the best teacher for covered calls?
The “best” teacher of covered calls depends on your learning style and the depth of knowledge you’re seeking. However, several well-regarded experts and resources specialize in teaching covered call strategies effectively:
Top Teachers and Resources
- Alan Ellman
- Why He’s Notable: Known as “The Blue Collar Investor,” Alan Ellman is widely regarded as an expert in covered call strategies.
- What He Offers:
- Books: The Complete Encyclopedia for Covered Call Writing
- Online courses and webinars on practical application and portfolio management.
- Strengths: Focus on beginner-friendly, step-by-step processes with practical examples.
Recommendation for Beginners
Start with Alan Ellman if you’re new to covered calls. His resources are straightforward and designed for conservative investors. with Alan Ellman if you’re new to covered calls. His resources are straightforward and designed for conservative investors.
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Alan,
I had one question on the collar strategy:
Do you generally use 4% below the current stock price to set the lower limit for the put you buy?
I wasn’t sure how you got the number you used for the NVIDIA example in the video from Thursday’s webinar.
Thanks,
Greg
Greg,
Before entering any trade, we must identify our initial time-value return goal range. For me, it’s 2% – 4% for monthly option contracts, when using traditional covered call writing or put-selling.
When using the collar, our goals must be lower due to the put debit. My (reasonable) pre-stated initial time-value return goal range for collars is 1%- 2% per month.
You will note that for the covered call aspect, the return was 3.99%. So, how do we locate the OTM put strike? We analyze an option chain for an OTM put strike that will result in a net option credit and fall into the 1% -2% range. The $128.00 strike resulted in a net credit of 1.39% … perfect!
Let me know if you have any additional questions.
Alan
Barry B on January 11, 2025 at 10:21 pm
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 01/17/25.
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Hi Alan,
I am a premium member and I use TMC for logging and tracking my trades. Below is a trade from my most recent January contract month.
This was a scenario where several negative reports about apple came out – mostly related to sales in china and several analysts down graded or commented negatively. I ended up rolling down two times and ended with a 7 % loss. I would like to know your thoughts on these trades and see what I could have done better to minimize the losses here.
Buy 100 shares aapl(Apple) on 12/20/24 for 252.96.
Sell STO call option expiring on 1/17/25 with strike of 255 for 4.55 on 12/20/24.
On 1/02/25 BTC aapl -255 strike call option for .69.
(aapl gapped down to low 240’s) On 1/08/25 Sell out of money STO call option expiring on 1/17/25 with a strike of 247.5 for 1.14.
aapl further gapped down in to mid 230’s.
On 1/13/25 BTC aapl -247.5 strike for .20
On 1/14/25 STO aapl -235 Strike for 1.61.
On expiration day-1/17/25 BTC aapl -235 strike for .02 and sell aapl for 228.81.
aapl closed on 1/17/25 at 229.98.
TMC shows a 7% loss on Apple for the January 2025 contract month.
Thanks,
Kalyan
Kalyan,
With AAPL gapping down (uncharacteristically) during this contract, the trade was destined to be a losing one. Not all our trades will be winners. The question you ask is a good one. Could the loss have been mitigated?
First, the 7% loss calculated by our TMC is 100% accurate. It appears that you incorporated the 20%/10% guidelines, which may have been missed due to the gap-downs. Nothing we can do about that.
One way, the 7% loss could have been reduced, was by utilizing the 7% guideline, where the trade may have been closed on 1/8/2025, when AAPL was trading at about $235.00, 7% less than the purchase price.
Taking this action would have reduced the loss to 4.6%. Certainly, this is no reason to celebrate, but 4.6% is a significant improvement over the final 7% loss.
Your due diligence will pay off in the long run.
Alan
Alan,
Thanks for the insights and advise.
Kalyan
When selling a deep in the money like the example of NBIX does the 7% sell rule still apply?
George,
Yes, the 7% guideline does still apply.
Although we are enjoying the additional downside protection offered by the intrinsic-value component of the ITM strike, if a stock is significantly underperforming our screening expectations, we should give serious consideration to the 7% guideline.
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.
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