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Covered Call Writing with a Biotech Company: A Real-Life Example with Argenx (NASDAQ: ARGX)

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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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

26 Responses to “Covered Call Writing with a Biotech Company: A Real-Life Example with Argenx (NASDAQ: ARGX)”

  1. July 6, 2019 2:12 am #

    Allan when there are stocks on your premium list and we’re in the middle of the month now and they don’t pay much as far as selling covered calls but I can buy one for $50 that looks extremely promising technically and also fundamentally is that a viable alternative.

    Thanks,
    Jack

    • July 6, 2019 7:21 am #

      Jack,

      The reason we provide updated weekly stock lists to our premium members is that we have up-to-date screening information if we should close a position mid-contract and need a replacement stock. If our initial time-value goal range is 2% – 4% then mid-contract it may be 1% – 1 1/2%. In the last week of a contract, Theta has eroded time-value so much that there are fewer opportunities. We do have members who write Weeklys so there is value with covered call writing even with 1-week expirations (my preference is to use Monthlys).

      That said, we also have members who have successfully used our stock lists to just buy and sell stocks but these lists are geared specifically to short-term option-selling. I do not like the idea of buying a stock and writing the call a few weeks later. So, we identify the strategy, set our rules and guidelines and focus, like a laser, on staying within the structure of those parameters.

      Bottom line: Take that $50.00 stock and see if 1% – 1 1/2% can be generated by contract expiration. If not, find another… it’s there. Or, put the stock in a different, longer-term buy-and-hold portfolio perhaps with a 10% trailing stop-loss order (described in my book, “Stock Investing for Students”).

      Whichever direction you decide to take, use the most up-to-date stock list. There’s a new one being published to our member site this weekend.

      Alan

  2. July 6, 2019 5:08 pm #

    Alan,

    Do you ever roll out in the middle of a contract month or do you always wait until expiration Friday? I have several options in the money this month.

    Thanks,
    Marsha

    • July 7, 2019 8:08 am #

      Marsha,

      I rarely roll-out mid contract for a couple of reasons:

      1. The time-value cost-to-close will generally be too expensive because of the logarithmic nature of Theta (erodes slowly at the start of the contract and “falls off a cliff” in the latter part of the contract). If the time value is close to zero mid-contract, it is because share value accelerated exponentially and by rolling out, we are exposing ourselves to potential profit-taking in our, now longer-term, obligation.

      2. I find it more practical to have all,my positions with the same expiration dates. This is not a critical requirement of the BCI methodology but for those with a substantial number of positions, it makes it easier to facilitate trade management.

      That said, if share value appreciates to the point where the time-value component of the premium approaches zero, we should consider the mid-contract unwind exit strategy:

      The Complete Encyclopedia- Classic edition: Pages 264 – 271

      The Complete Encyclopedia- Volume 2: 243 -252

      Alan

    • July 8, 2019 12:16 pm #

      Marsha,

      I agree 100 % with Alan.

      The way I see it, when a stock goes above my strike at mid contract, cheers, I am hoping it will stay there until expiry.

      When you roll out, mid contract, you normally will get a debit, (not pleasant), and you will have to wait in agony for expiry in six or more weeks.

      For me, 4 weeks is plenty time for unexpected things to happen in the stock market.

      My motto is: Money left on the table is not important. Forget it and move on.

      Roni

      • July 8, 2019 12:24 pm #

        Alan and Roni,

        I now get it. Learning the exit strategies is one thing. Knowing when to use them is another.

        Thanks for your help.

        Marsha

  3. July 6, 2019 9:58 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 07/05/19.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    http://www.youtube.com/user/BlueCollarInvestor

    Best,

    Barry and The Blue Collar Investor Team

  4. July 8, 2019 12:32 pm #

    Friends,

    I have had a “love/hate” relationship with Biotech stocks over the years :). Even before ObamaCare and then certainly thereafter when more people had health care and were getting prescriptions the sky was the limit for most of the sector. I recall tickers like ILMN, JAZZ and GILD were fixtures on the Premium Lists. The irony then was that it was very difficult to keep up with stocks like that even writing way OTM which I found frustrating so I stopped covering them for a while.

    As time went by both political parties began bashing the sector hauling Pharma CEO’s into Washington to testify about drug prices. And a whole new dimension of political risk started to haunt the sector.

    Just last week Trump threatened an Executive Order against Big Pharma and the XBI, XLV and other related indexes dropped immediately. So now there is not only drug risk, FDA approval risk, lawsuit risk but political risk in the sector. All of that can be great as volatility pushes up option premium for us option sellers but now the risk of stocks/ETF’s out running their coverage to the downside is larger than it used to be.

    That is not to say big money can no longer be made there. Mergers happen all the time. Treatment breakthroughs happen all the time. We are not getting any younger so the medical science business is still a growth opportunity in my view. I hold long interests there. But if it was ever easy pickings to just buy almost any Bio/Pharma/Healthcare stock and watch it run those days may well be behind us :)? – Jay

    • July 8, 2019 6:19 pm #

      Hello Jay,

      I guess you are right, but…..

      For my diversification purposes I alway pick 2 or 3 health related tickers.

      I agree, there is no big money involved, but the risk is manageble.

      Also, there are really not so many choices.
      The blue chips and other more stable tickers, have very low premiums for monthly CC trades.

      Please comment.

      Roni

      • July 8, 2019 8:12 pm #

        Hey Roni,

        Always great to chat with you! Like the rest of us I am only “right” for me and my view of things. So all I do is share what is on my mind for what it is worth!

        Alan’s subject for our blog this week got me thinking about my experiences with the Biotech Sector. it has been an interesting ride! I hold investment positions in larger Bio (XBI) and small cap Bio (SBIO). The later is purely a growth hope with thin option volume. The former I will over write OTM when bearish or neutral the sector or S&P. I also hold XLV and LEAPS out into next year on UNH and MRK. I overwrite some of the XLV but have not made PMCC’s out of the LEAPS yet since I am simply hoping for option appreciation there.

        So it is not like I am avoiding the health related tickers. I have simply noted a sea change in how the marquee names in Biotech perform now versus how they used to.

        From our chats I think you construct and manage a diversified CC portfolio each month. Congrats, by the way, I recall in a not too distant up date you are enjoying a great year!

        And you are right, the stocks off the Blue Chip list are better for those looking for more premium than ETF’s but less relative risk/volatility than the main selections. That’s why I was surely just one of many who complimented Barry and Alan when they added it. It’s also a good source for LEAP/PMCC ideas.

        It’s therefore important to note you and I pursue our shared goal of making money with different tactics. I have an investing portfolio where I use CC’s and CSP’s selectively and a trading portfolio where I do crazy things like option spreads I have put a lot of self education into. But you run a real business in addition to your CC business! I am just a retired person turned hobbyist options market junkie 🙂 It is my “job” a few hours a day!

        What I was trying to convey above is the Bio/Pharma/Health business is no longer the “easy money” it once seemed to be. Yet that is no reason to not include trending tickers from it every month in a diversified covered call stock portfolio. – Jay

        • July 9, 2019 11:52 am #

          Thanks Jay,

          I appreciate your insight.

          It is true, I am very focused on monthly CC writing, and I have not much time for anything else.

          My year is pretty good, but I have not yet fully recovered my losses from the October 2018 correction. I’m working hard and hope to get there by the end of this year.

          On the other hand, I can see that you are expanding your trading skills dramatically, and handling many quite complex trades like a pro.
          This is an extraordinary achievemet for someone who claims to be just having some fun. 🙂

          Take care – Roni

          • July 9, 2019 2:37 pm
            #

            Thank you for your always kind comments Roni!

            We humans are funny creatures who recall pain a lot longer than pleasure :). I remember my worst trades vividly but can’t really tell you about the great ones though there have been some! So I would just let 2018 be and make the most of July 2019….

            Trading is fun for me but I regard it and treat it as a business. I am – as Alan and Barry say – CEO of my own money. I retired on a nest egg. I do not have a pension and I am too young for what we call “Social Security” up here in the States. Most people can’t live off that anyway. So I need to generate sustainable income on a monthly basis. That’s where the options market comes in for me. I compare monthly what I make from options trading to what I spend. Some months are better than others :). – Jay

          • July 9, 2019 4:20 pm
            #

            You are right Jay, let’s talk about July.

            It is a favorable options cycle for all of my positions:

            NVTA, PYPL, and CYBR (left over from last cycle, and sold OTM CCs again).

            VEEV, ULTA, FB, GLOB, and ADBE new entries. All expiring 07/19.

            Roni

          • July 9, 2019 7:39 pm
            #

            Great stuff Roni!

            We beat SPY one month at a time. it all adds up in the end. – Jay

    • July 9, 2019 8:36 am #

      Jay,

      I am in agreement with you on Biotechs. The situation couldn’t summarized any better.

      The most money I ever made on a single stock was Medivation MDVN.It was one of two stocks recommended by Elaine Garzarelli many years ago on Nightly Business report when Paul Kangas was the host. Great guy by the way. Still have the other, Seattle Genetics SGEN. MDVN went through the roof and was bought by Pfizer PFE. SGEN has been dead money the last few years. Waiting on a buy out.

      But buyouts in this arena are not going to carry the premiums that we have been accustomed to in the past. The US is the only place left of any size that hasn’t put a lid on prices of drugs. But it is coming.

      They have become too much of a political risk. If our Big Pharma has to sell their drugs here for what they now sell them in other countries we must find a different way to incentivize innovation.

      I still will occasionally put a straddle on a Biotech but mostly I leave them alone.

      Hoyt

      • July 9, 2019 12:28 pm #

        Jay,

        Speaking of Straddles, I put one on ADBE yesterday around 11:00. Sold the Put at a loss 53% loss at 10:40 this morning. Still have the long Call at 66% profit as of now. Since Calls were more expensive than the Puts I’m showing a real nice profit so far.
        Position expires Friday. Probably should close today for a good profit but sometimes I get greedy.:)

        An old friend once said, “The greedy soon join the ranks of the needy”.

        Hoyt

        • July 9, 2019 2:58 pm #

          Nice ADBE trade Hoyt!

          Straddles are tough because you pay for both outcomes and hope the break out is greater than the sum of the parts. If it does not move much you get nibbled on both ends so good job!

          I love the “greedy become needy” line :). – Jay

          • July 10, 2019 10:08 am
            #

            Jay,

            Yes, again you are absolutely right. Straddles should only be applied if the premiums are cheaper than what the IV predicts will be the up or down movement in the underling, usually a stock. This often happened in the old days with Biotechs.

            In my case, ADBE, since the IV was on the lower end of it’s normal range I was betting on an increase. I was going to buy Puts just in case ADBE might go lower so I thought, “What the hell?”, let’s do a Straddle. Normally I would have gone deeper OTM.

            As I write this ADBE is up $4.63 and my options are up $4.15. Whoopee!

            Today appears to be exactly what the markets want. We are less than 2 points away from S&P 3000.

            Happy Hunting, or maybe Harvesting.

            Hoyt

          • July 10, 2019 1:20 pm
            #

            Hoyt,

            Very nice, ….perhaps it’s time to take your profit?

            Roni

  5. July 9, 2019 1:45 am #

    Alan,

    Thanks for all the info you provide. I’ve read both volumes of your Covered Call Encyclopedia and have learned a ton. Thank you!

    I have a quick question: how do you calculate the BEP when you roll out and up? I’ve included a hypo below.

    In June:
    Purchased PLNT @ price of $75.58/share.
    Sold June PLNT 75 @ $2.70/share.

    On 6/21:
    BTC the June PLNT 75 Options @ $1.10/share and sold the July PLNT 77.50 @ $2.00
    The PLNT share price on 6/21 was $76.01/share.

    What is the BEP for the July Options?

    When calculating the BEP for the July PLNT options, should I use the share price of $76.01 (i.e., the share price the day I closed the June option and sold the July Options), or do I use 75 (the strike price of the June options that I closed)?

    Also is the BEP then simply calculated by subtracting the option premium for the July sold options from this number?

    I think the confusion I’m having is what happens if we are in a month where the underlying shares were not purchased that month, perhaps I purchased the original underlying PLNT shares 2 months ago and have just continued to roll out and up. What number should I use as the “share purchase price” when calculating the BEP or when using the “Unwind Now” or “What Now?” tabs?

    Hope this makes sense.

    Thanks,
    John

    • July 9, 2019 7:53 am #

      John,

      I’m glad you asked this question and provided this example because understanding our calculations is so important to our success. There are 2 types of calculations addressed in your inquiry: short-term and longer-term. When we roll and-and-up, we are first calculating stats to help us make the best possible trading decisions at that point in time. When we view the overall breakeven of a position since its inception, we are taking a much longer perspective of a series of trades.

      When PLNT was rolled out-and-up on 6/21, we use $75.00 as our cost-basis because that is what our shares are worth prior to rolling the option (because of our contract obligation). That’s our short-term analysis.

      Now, when viewing our BE point since the trade was first initiated on the date when PLNT was first purchased at $75.58, we deduct option credit or debit to determine BE. In this case, the 2 option premiums generated less the BTC of $1.10 comes to +$3.60. This amount is deducted from $75.58 to get to a BE of $71.98 as shares are currently trading at $76.01.

      If PLNT moves above the $77.50 strike by July expiration and we are considering rolling the option (watch earnings!), the cost-basis at that point in time would be $77.50.

      One set of calculations is for making the best trading decision at that point in time, the other is a long-term perspective on a series of trades relating to a specific security.

      Alan

      • July 10, 2019 2:03 pm #

        Alan,

        Thanks very much for the quick reply and explanation. Very helpful!

        John

  6. July 9, 2019 2:11 am #

    Alan,

    Need Advice…

    I have 1 covered call contract on TWLO 41 July 19 weekly.

    ER is July 30 so I will not sell covered call for next cycle.

    I bought at 125 and now it is trading at 144.

    Intrinsic value is about $3.5 out of $7 current price
    .
    My initial premium was $7 collected.

    It probably will be assigned at my 141 strike price and I’ll lose all the upward profit if TWLO keeps going up and I think it’s still uptrening. Should I just close prior to expiration and sell after ER at OTM strike?

    For BCI method, I would sell Aug 16 so that’s fine.

    Also, TWLO has no Sept expiration month. Do I sell CC out to Oct 18?

    In Earnings Whisper, I don’t see beyond the TWLO July 30 ER
    so I don’t know if Oct has ER. Is there another way to find out?

    Thanks,
    Alan

    • July 9, 2019 8:20 am #

      Alan,

      I can’t give specific financial advice in this venue but I can make some general statements that should be useful.

      1. When a strike is in-the-money at expiration, we can close the short call to avoid exercise or take no action and allow assignment.

      2. Stocks with Weekly options can be used to sell options even in the contract month of an earnings report and simply avoiding the 1 week when the report is made public. The shares can be sold (favored most of the time) or retained through the report and a new covered call position entered after the report passes. If a report is coming out the 3rd week of a 4-week contract, covered calls can be written on weeks 1,2 and 4.

      3. All stocks with options will have expirations every month. In this case, the September expiration month is not yet published… it will be after the July contracts expire.

      4. If TWLO has an upcoming ER on July 30, we can make a reasonable assumption that the following report will be on or near October 30th. One way to “possibly” access that information would be to check the company’s website or call investor relations at PLNT.

      Alan

  7. July 10, 2019 3:33 am #

    Alan.

    I hope you are well. Maybe you can help me with some ideas. I find the reports and all BCI site very useful and I get tens of candidates for options strategies but I have a problem: commissions with my broker are very expansive, I will move to Interactive brokers but in order to avoid triangulation I most wait a couple of months, so I most think about trading ETF options in order to achieve diversity without spending too much in commissions. Until now I had been selling cash secured puts with SPY strike below EMA50, with options expiring monthly it’s a conservative approach that is giving me 0.44% monthly. How can I improve the income using only one or two ETF or stocks, yet having diversity?

    Diego.

    • July 10, 2019 5:54 am #

      Diego,

      Good for you for not putting up with high trading commissions.

      One way to diversify with only a few underlyings is with ETFs, so you are on the right track here. I can’t give specific financial advice in this venue but you may want to have a look at our premium ETF Report. Pages 3 and 4 focus in on the SelectSector SPDRs which break down the S&P 500 into 11 sector index funds. We chart the top 3-performers and provide information on all 11. This way, if you decide to stay within the S&P 500, you can focus in on and invest with only the best-performers within this index.

      There will be a new ETF Report published on our member site this evening.

      Keep up the good work.

      Alan

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