Comments on: Converting High Volatility ETFs to Conservative Cash-Generating Positions: A Real-Life Example with Global X Lithium & Battery Tech ETF (NYSE: LIT) https://www.thebluecollarinvestor.com/converting-high-volatility-etfs-to-conservative-cash-generating-positions-a-real-life-example-with-global-x-lithium-battery-tech-etf-nyse-lit/ Learn how to invest by selling stock options. Thu, 08 Jul 2021 22:54:09 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/converting-high-volatility-etfs-to-conservative-cash-generating-positions-a-real-life-example-with-global-x-lithium-battery-tech-etf-nyse-lit/#comment-434631 Thu, 08 Jul 2021 22:54:09 +0000 https://www.thebluecollarinvestor.com/?p=19989#comment-434631 In reply to Dennis.

Dennis,

Typically, the collar strategy consists of an out-of-the-money (higher than the price of the stock) call and an out-of-the-money (lower than the price of the stock) put.

The net premium should result in a credit that aligns with the strategy initial time-value return goal range. The BCI Collar Calculator will assist with the trade structuring.

Here is a link to an article I previously published on this topic:

https://www.thebluecollarinvestor.com/protective-puts-and-the-collar-strategy-selecting-the-best-strike-prices-last-chance-for-holiday-orders/

Alan

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By: Dennis https://www.thebluecollarinvestor.com/converting-high-volatility-etfs-to-conservative-cash-generating-positions-a-real-life-example-with-global-x-lithium-battery-tech-etf-nyse-lit/#comment-434505 Thu, 08 Jul 2021 13:44:40 +0000 https://www.thebluecollarinvestor.com/?p=19989#comment-434505 Hello Alan,

Can you advice on the Strike Price for the Protective Put?

Are you suggesting the same Strike Price as the Covered Call?

Regards
Dennis

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By: Alan Ellman https://www.thebluecollarinvestor.com/converting-high-volatility-etfs-to-conservative-cash-generating-positions-a-real-life-example-with-global-x-lithium-battery-tech-etf-nyse-lit/#comment-434471 Thu, 08 Jul 2021 10:52:38 +0000 https://www.thebluecollarinvestor.com/?p=19989#comment-434471 In reply to Jash.

Jash,

Our covered call trades incorporate 2 positions… we are long (own) the stock and short (sold) the call. When instituting exit strategies, we must first close the short call so the stop is placed on the option side of the trade.

In the BCI methodology, for declining share prices, we set up buy-to-close limit orders on the short calls immediately after entering the trades. This is based on our 20%/10% guidelines detailed in the exit strategy sections of my books and online videos.

If and when these thresholds are met and the BTC trades are executed, we will have the flexibility to roll-down if that is the best path to take.

Alan

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By: Jash https://www.thebluecollarinvestor.com/converting-high-volatility-etfs-to-conservative-cash-generating-positions-a-real-life-example-with-global-x-lithium-battery-tech-etf-nyse-lit/#comment-434193 Wed, 07 Jul 2021 14:58:57 +0000 https://www.thebluecollarinvestor.com/?p=19989#comment-434193 Alan,

Sorry to bug you. But I could not figure out from your e book where to put stop loss order. I would like to place a stop order where stop will not trigger before I get a chance to roll down the position. Can you suggest me how far below the stock trade trade price, we should put a stop loss order?

Thank you’
Jash

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By: Alan Ellman https://www.thebluecollarinvestor.com/converting-high-volatility-etfs-to-conservative-cash-generating-positions-a-real-life-example-with-global-x-lithium-battery-tech-etf-nyse-lit/#comment-434132 Wed, 07 Jul 2021 10:27:32 +0000 https://www.thebluecollarinvestor.com/?p=19989#comment-434132 In reply to William.

William,

If the 20%/10% BTC thresholds have been reached and the short calls closed, we check the news to see the reason for the decline especially when there is an under-performance relative to the S&P 500. If no specific negative news is found, I will favor waiting to “hit a double” early in the contract and rolling-down later in the contract. If the divergence between the 2 continues, I consider CDMCP.

There is no specific guideline divergence % for when to sell the stock but rather a pattern. For those looking for a specific guideline % when to sell the underlying, a drop of 7% – 8% from when the trade was entered is reasonable.

The 20%/10% guidelines are based on entire premiums including intrinsic-value for ITM strikes.

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/converting-high-volatility-etfs-to-conservative-cash-generating-positions-a-real-life-example-with-global-x-lithium-battery-tech-etf-nyse-lit/#comment-434131 Wed, 07 Jul 2021 10:15:51 +0000 https://www.thebluecollarinvestor.com/?p=19989#comment-434131 In reply to John W.

John,

As Roni stated, the stock dropped 5%, not 20% – 30%. We may retain a stock that has dropped 5% but not one that has declined 20% – 30%. In the latter case, we would have been out of that position well before the final drop price.

In the 5% example, eliminate choice #4 which would bring us through multiple earnings reports and decrease our annualized returns. We consider retaining the security based on our screening parameters. Is the share decline a result of overall market decline and not specifically corporate- related? If so, we may opt to retain the stock. If the stock is under-performing the market and chart technicals look poor, we may sell and move to a better-performer.

Strike selection is based on our initial time-value return goal range and has nothing to do with the initial higher price, or any past price, we paid for the stock.

I will almost never retain a stock that has dropped 20% – 30% and rarely go more than 1-month out in my option-selling portfolios.

Alan

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By: Roni https://www.thebluecollarinvestor.com/converting-high-volatility-etfs-to-conservative-cash-generating-positions-a-real-life-example-with-global-x-lithium-battery-tech-etf-nyse-lit/#comment-433946 Tue, 06 Jul 2021 18:44:22 +0000 https://www.thebluecollarinvestor.com/?p=19989#comment-433946 In reply to John W.

John,

In your example, the stock dropped 5%, and you may have received a 2% premium. Therefore, in my opinion, the best choice is the first choice; sell the stock at a 3% loss, and move on.

If you choose to mitigate, you will probably be waiting another 4 weeks, and hoping to end up with a frustrating zero-sum result.

Roni

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