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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. 

This book should be treated as an adjunct to the original. After reading and mastering each chapter in the original Complete Encyclopedia (guess it wasn’t “complete” after all!) the reader can then read the corresponding chapter in Volume 2. Why not know more than everybody else? Why should the learning process ever end?

Click here for more information.


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

  1. 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.

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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:

Hi Alan,
 
I am grateful for your course material (my covered call portfolio is up over 30% this year).
 
Best regards,
Ken
 
Recent Quasar Market Live interview
 

Upcoming events

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February 13, 2025

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Covered Call Writing Dividend Stocks

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3. Long Island Stock Investor Group Part II

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Cash-Secured Puts: 2 Outcomes

4. Money Masters Symposium Dallas 2025

Saturday April 5, 2025

Hilton DFW Lakes

Saturday April 5, 2025

Hilton DFW Lakes

2 events:

45-minute workshop

Selling Cash-Secured Puts to Buy a Stock at a Discount or to Enter a Covered Call Trade
 
Selling cash-secured puts is a low-risk option-selling strategy which generates weekly or monthly cash-flow. This presentation will detail how to craft the strategy to buy a stock at a discounted price or to initiate a covered call trade. Topics included in the webinar include:
  • Option basics
  • The 3-required skills
  • Practical applications
    • Traditional put-selling
    • PCP (Put-Call-Put or wheel) Strategy (adds covered call writing)
    • Buy a stock at a discount instead of setting a limit order
Real-life examples along with rules, guidelines and calculations are included in this presentation.
 

All Stars of Options panel discussion

Details to follow.

5. Money Masters Symposium Miami 2025

Thursday May 15, 2025

Details to follow.

Alan speaking at The All Stars of Options event in Las Vegas