Covered call writing (as well as put-selling) premiums are directly related to the implied volatility of the underlying stock or exchange-traded fund (ETF). Biotech stocks are particularly volatile due to the success (or lack thereof) of the pharmaceuticals they are developing. Highly volatile underlyings represent the good news of higher premiums and the bad news of greater risk. On 2/15/2019, I received an email from Hamish, a BCI member from Belgium, which represented a perfect learning tool for this type of scenario.

 

Hamish’s email

Hi Alan,

Over the past months, I sold several one-month option contracts against argenx SE, a Belgian biotech company with great fundamentals and impressive institutional ownership. As I’m also from Belgium, the options listed on Euronext Brussels are very liquid compared to those of the NASDAQ. Short story long, I continued to generate maximum profits of 8% as its technicals remain outstanding. Now, the stock has broken its main resistance level, and I asked myself whether to buy back my options contracts and sell calls if the stock starts to move sideways again. Initial time value returns for the at-the-money calls still generate a nice 5%. If I decide to buy back my contracts, I would still generate a maximum profit of 6% on a monthly basis, which is above my targeted range of 3%-4%. But I don’t want to get greedy as the risk for a correction grows. Your thoughts on this? Thanks in advance!

Best,

Hamish

 

Corporate profile directly from argenx SE (NASDAQ: ARGX) website

Argenx is a clinical-stage biotechnology company developing a deep pipeline of differentiated antibody-based therapies for the treatment of severe autoimmune diseases and cancer. We are focused on developing product candidates with the potential to be either first-in-class against novel targets or best-in-class against known, but complex, targets in order to treat diseases with a significant unmet medical need.

 

Technical chart for ARGX

 

technical analysis for covered call writing

ARGX Price Chart

 

The red arrows show the extreme price declines and the green arrows depict the price accelerations typical of high-volatility stocks. Option buyers are willing to pay more for these types of options than for lower-implied volatility underlyings. We become the beneficiaries of these higher premiums but incur the risk of the stock declining as shown by the red arrows.

 

My response to Hamish

Hi Hamish,

Let’s start with this: You have executed a series of extremely successful trades, so congratulations for that.

Now the stock has appreciated significantly to the upside so the question confronting us is: to roll or not to roll…allow assignment or stay with this security?

Analyzing the stock, we immediately come to the realization that it is a highly volatile stock because only such a security would offer an annualized return of nearly 100% (8% x 12) from selling near-the-money calls. This means that we are as susceptible to the downside as much as we are to enjoying the benefits to the upside.

We would consider the “rolling choice” if:

  • We were still bullish on the underlying
  • The calculations for rolling meets our established initial time value return goals (use the “What Now” tab of the Ellman Calculator)
  • Our personal risk-tolerance aligns with the danger of the trade
  • No upcoming earnings report

Basing our rolling decisions on these factors is a recipe for success.

Continued success,

Alan

 

Discussion

Stock selection is one of the 3-required skills for successful option-selling. Using stocks with high implied volatility offers the benefit of higher premium returns but incurs the risk of substantial share depreciation. Our decisions should be based on our personal risk-tolerance and return goals. Generally, these types of companies do not align with the conservative nature of option-selling strategies. When share price does accelerate above the strike sold, rolling considerations remain the same as for all other covered call positions. This example reflects the importance of mastering the 3-required skills:

  • Stock selection
  • Option selection
  • Position management

 

New tools update

Last week, I wrote about the BCI Trade Planner for covered call writing and put-selling. By using of the BCI Trade Planner, we can get a better picture of the end-to-end details of the trade…from initial analysis to final outcomes. We will have the opportunity to review our trades, better understand the trade outcomes, and add discipline to our trading process.

Another project we have been working on the past few months is a new Covered Call Writing Streaming DVD Program updating material found in the previous editions. My goal is to make this the most comprehensive DVD program on covered call writing found anywhere. Only you can decide if I’ve accomplished my goal. This edition is broken down into sections based on the 3-required skills (stock selection, option selection and position management). A 4th section is dedicated to special situations like writing covered calls on Dow 30 and S&P 500 stocks only. Much more on these new tools as launching nears… within the next 2 months.

 

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:

Alan,

Your books provide laser beam clarity on options for me. Your perspicuity is riveting. Thank you.

Brian K

 

Upcoming event

July 22: Chicago Traders Expo

All Stars of Options

1:30 – 2:15

Hyatt Regency McCormick Place

 

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Market tone data is now located on page 1 of our premium member stock reports.

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