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Creating Multiple Income Streams in the Same Month when Selling Puts

Selling cash-secured puts allows us to generate a monthly cash flow by undertaking the option obligation. There are many occasions when we can enhance these returns to even higher levels using our position management skills. This article will highlight several put-selling trades executed in the same contract month by one of our members, Dan of Minnesota.

 

Dan’s trades

2/23/16: Sold 1 contract of $30.00 NVDA MAR 16 PUT at $0.70

3/2/16:  Bought back 1 contract of $30.00 NVDA MAR 16 PUT at $0.14 (20% rule)

3/3/16:  Sold 1 contract of $25.00 SWHC MAR 16 PUT at $1.30 (after the bell SWHC reported a big upward earnings surprise)

3/4/16:  Bought back 1 contract of $25.00 SWHC MAR 16 PUT at $0.25 (20% rule)

3/4/16:  Sold 1 contract of $27.50 SFM MAR 16 PUT at $0.55

3/11/16: Bought back 1 contract of $27.50 SFM MAR 16 PUT at $0.35
3/11/16: Sold 1 contract of $32.00 NVDA MAR 16 PUT at $0.56
3/16/16: Bought back 1 contract of $32.00 NVDA Mar 16 PUT at $0.16 (prior to Fed announcement)
Trades that meet BCI guidelines
On 3/2 and 3/4, the short put positions were closed using the BCI 20% guideline. This is based on share appreciation leading to decline in put value as puts have negative Deltas (as stock price rises, put value decreases). Also, on 3/16/16, Dan closed his put position prior to the Fed announcement which he treated like a risky event. This is not unlike our earnings report rule. Great work by Dan.
Trades that veer from BCI guidelines
On 3/3 the put was sold just prior to an earnings announcement. We got lucky as there was a positive surprise. We should avoid these risky situations. On 3/11 the short put was bought back when put value declined to 64% of its original value…a pricey maneuver. This was followed by a put sale of $0.56, leaving a credit of $0.20, less commissions.
Final results
put-selling

Dan’s multiple put trades

Using the maximum amount of cash that Dan had to set aside in this series of trades ($3144.00 per contract), the 1-month return calculates to 7.03%.
Discussion
This series of trades shared by Dan demonstrates the importance of mastering the skill of position management. By being pro-active, Dan took an initial return of 1.9% (2/23 trade) and nurtured it to a final 1-month return of 7.03%. Nice work Dan!
*********************************************************************************************************************************************************************************
This was the first month that Dan traded as a BCI Premium Member. We should all recognize that no one can achieve 7%, 1-month returns every month however, by using the BCI rules and guidelines we can always mitigate losses and maximize profits by mastering stock selection, option selection and position management as Dan did for the March contracts.
 ********************************************************************************************************************************************************************************
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For more information and to register:
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April 1, 2016

Quinnipiac G.A.M.E. Forum:

Global Asset Management Education

Friday April 1, 2016

9 AM – 10 AM

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Tuesday evening, April 19th
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Market tone

Global stocks were up this week as recession concerns eased and the US Federal Reserve signaled it expected to hike rates at a more gradual pace. The Chicago Board Options Exchange Volatility Index (VIX) fell to 14.01 from 17.1 last week. This week’s reports and global news:

  • The Fed cut its forecast for rate hikes in 2016 from four to two. At this point, federal funds futures are not fully pricing in the next rate hike until early 2017
  • This week’s passive outlook from the Fed sent the dollar lower and oil higher
  • The Japanese central bank left policy unchanged but downgraded its economic outlook at its meeting on Tuesday
  • The Norges Bank (Norway)cut its policy rate to 0.5% — an all-time low — from 0.75% and indicated it could trim rates further, going so far as to say that it has the ability to adopt negative interest rates, like several of its Nordic neighbors
  • European leaders meet in Brussels on Friday in an attempt to construct deal with Turkey that would relocate thousands of migrants from Greece to Turkey. In return, Turkish citizens would be granted the ability to travel within the European Union without visas. Under the terms of the proposal, the Turkish government would also receive financial aid and negotiations for Turkey to join the EU would be fast tracked

Coming up next week

  • The German Ifo and ZEW surveys are released on Tuesday, March 22nd
  • Flash global purchasing managers’ indices are released on Thursday, March 24th
  • UK retail sales and US durable goods orders are released on Thursday, March 24th
  • The US Q4 GDP final revision is released on Friday, March 25th
  • Markets in US and Europe are closed for Good Friday, March 25th 

For the week, the S&P 500 increased by 1.35% for a year-to-date return of +0.27% (finally in positive territory for the year).

Summary

IBD: Market in confirmed uptrend

GMI: 6/6- Buy signal since market close of March 2, 2016

BCI:  Moderately bullish, favoring out-of-the-money strikes 3-to-2

Wishing you the best in investing,

Alan ([email protected])

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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.

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21 Responses to “Creating Multiple Income Streams in the Same Month when Selling Puts”

  1. Jay March 19, 2016 5:38 pm #

    Dan

    That is exemplary trading. Thank you for sharing it with Alan and he with us!

    Life would indeed be a box of chocolates if we could make 7% every month :).

    If one had fallen asleep under a tree New Year’s Day awaking yesterday they would look at the S&P and say “Ho Hum, no change”.

    What a story they missed! That is what makes your results all the greater because this has been a year where I suspect many investors got knocked out by trailing stops only to see the market snap right back as they scratched their heads.

    Those damn computers never sleep! Their objective is to separate the most people from their money as possible :).

    If you are like me the first thing you do when you log on in the morning is delete 15 unsolicited e-mails from trading services because you listened to a webinar or two (infomercial) and got on “the list”.

    With BCI methods you can capture trends conservatively, never put yourself at great risk and have a 7% month every now and then…. well done! – Jay

  2. Barry B March 19, 2016 11:05 pm #

    Premium Members,

    This week’s Weekly Stock Screen And Watch List has been uploaded to The Blue Collar Investor Premium Member website and is available for download. Look for the report dated 03/18/16 in the “Reports” section.

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

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

    Best,

    Barry and The Blue Collar Investor Team

  3. Alex March 20, 2016 11:44 am #

    Alan,

    I’m trying to understand how much more profitable would be to just own a stock for a given time or write a call on it, like with the example of TSM, ( i bought 1000 stock at 24.88$ 2 days ago and sold to open TSM Mar 18 2016 25.00 Call , 10 contracts) received a premium of 138$ net of commissions, + difference = 258$ or 0.6$ as you pointed out.

    However if i just to kept the stock , now, being at 25.77$ i’d have made 3.58% or 890$ ; so i’m unsure what would be the best line of action in what cases… (?)

    Also do you recommend to write a call after sometime owning a given stock or it’s ok to write it right away ?

    Regards!
    Alex

    • Alan Ellman March 20, 2016 12:00 pm #

      Alex,

      Once we have decided on a strategy it is important to evaluate whether we are meeting our goals as opposed to evaluating whether we would have done even better had we used a different strategy. In sports, that’s known as being a Monday morning quarterback and I was guilty of this as well early in my option-selling career.

      If we set our initial target goal at 2-4% and then manage our positions to successful final results, we are then successful investors.Share price rising more than the option premium generated will occur from time to time but we are still successful nonetheless.

      Once we have selected the underlying securities, selling options on them should begin today or when the next cycle begins if we are close to expiration of the current contracts..

      Alan

  4. Alex March 20, 2016 5:25 pm #

    Alan,

    Is there a faster way of weeding out the low IV stocks in the premium report than going through the options chains and calculating ROO between 2-4%?

    Why do u keep low IV stocks in the report? How would one make use of them?

    Alex

    • Alan Ellman March 20, 2016 5:30 pm #

      Alex,

      You can get a rough idea of volatility by viewing the “beta” column of the Premium Stock Reports (6th column from right). Although historical volatility and implied volatility do not always line up, it will point you in the right direction.

      We include all stocks that pass our screens, even those with low implied volatility. The reason is that we are fortunate to have a large membership with varying goals and degrees of risk tolerance. As an example, I use low IV securities in my mother’s portfolio and higher IVs in mine.

      Alan

    • Jay March 21, 2016 1:09 pm #

      Alex,

      Sounds like you are bumping up against the same frustrations I, and I suspect others, have had selling calls against winners.

      For me the “greed instinct” used to kick in. I found myself second guessing my profitable strategy instead of feeling good about my gains! That sort of thinking had me on a fast track to nowhere. Or led me to take more risk than I should.

      I find a better place to be is set a target for the month, think through a strategy to get me there then be happy when I hit or exceed it.

      I wish I had said it first but the secret to happiness is lowering expectations about things you can not control.The market is certainly one of them :)! – Jay

  5. Adrian March 21, 2016 4:30 am #

    Alan, so from your recent answer I can assume that for any stock you hold throughout the contract where you then see that it has failed a screen(the fundamental/technical screener for instance), then it doesn’t make you more likely to have the option to Close-out this position, rather than do a “Rolldown” instead, at a time when your stocks price has already been falling,- if you could just confirm that again?

    Some questions below of the MCU which is still an exit strategy I am better need of understanding:-
    2. As you had told me that we should on the next option we sell mid-contract (from a DMCP, or MCU) to be selling it ITM, then should I sell even further ITM if the market is also volatile/bearish, instead of normal/bullish conditions?

    3. Is it really still a good idea to do MCU’s on stocks if we are in a bearish market?
    If the 2nd call option is sold ITM, this stock still may likely end as a loser, and so whereby it may then have been better to stick with the 1st stock as a higher overall return likely?

    4. To do a MCU for a stock, then are the stocks that I monitor on the watchlist for the 2nd replacement stock, those stocks that I may have first used(as the ‘first stock’) but didn’t because technicals/returns weren’t good enough?(and also including more and more stocks off each weeks ETF/stock reports that go by?)

    5. And last one on this topic, how do I set-up an email alert on the price of any stock I could then do a MCU strategy for?(could I set it up say 10% above buy price or for a lesser percentage?)

    I’m going to have to go over stock-technicals again next.
    I did make a note of what you said about my previous ‘COTY’ trade, – a definite point to remember even though the price hadn’t crashed all at once yet I guess it could have anytime!
    Thanks for your help.

    • Alan Ellman March 23, 2016 12:18 pm #

      Adrian,

      1- Yes, confirmed…once a position is entered, it is managed with our exit strategy arsenal as described in my books and DVDs, NOT on its removal or re-insertion into our Premium Stock Lists.

      2- Yes, when entering a new position mid-contract, the “moneyness” of the strike is determined by overall market assessment, chart technical and personal risk tolerance. Deeper ITM is a good idea in this scenario as long as the time value return meets our goals (perhaps 1-2% mid-contract).

      3- It’s always a good idea to close a position where we have maxed out our profit if the time value cost to close is near $0. The freed up cash can be used to sell an ITM call strike or to secure an OTM put. I very rarely will give my investment cash a “vacation” but crafting the trade execution in a bear market is critical.

      I’ll come back to #4 and #5.

      Alan

      • Alan Ellman March 25, 2016 9:24 am #

        Adrian continued,

        3- Yes, the MCU strategy is appropriate in bearish environments as well. We have maxed out our initial trade and now can use the “freed-up cash” to generate a 2nd income stream in the same contract month. Stock and strike selection on position 2 is determined by the current market environment.

        4- Replacement stocks are taken from the most recent premium stock or ETF reports. This is why our team updates these reports weekly.

        5- Have a look at the current options chain and see how far in-the-money a strike must be to trade near parity (all intrinsic value). Then use that stat to establish your email alert request.

        Alan

  6. Jabar March 22, 2016 11:45 am #

    Alan,

    I trust that you have had a great for 1st Quarter of 2016 and I hope all else is well.

    In the 20%-10% exit strategy guidelines, which should I be focusing on when it comes to the call options in preparation for an exit strategy.

    1 Call option change/percentage change?

    Facebook, Inc. (FB)
    111.85 +0.40(0.36%)

    2 Call option percentage change?

    111.00
    5.05 5.05 5.25 0.02 0.40% 72 1099 33.13%

    3 stock price/percentage change?

    111.00
    5.05 5.05 5.25 0.02 0.40% 72 1099 33.13%

    Info is used for an example from Yahoo options chain for ITM FB (april 29th)

    Thank You very much for all your help Alan!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

    • Alan Ellman March 23, 2016 12:18 pm #

      Jabar,

      If we generate $5.05 on the initial option sale, we would buy it back at 20% or less ($1.01 or less) in the first half of the contract or 10% ($0.50 or less) in the latter part of the contract).

      This can be set up automatically immediately after the option sale by instructing our broker to buy-to-close at $1.01 as a limit order and change to $0.50 later in the contract.

      Alan

  7. Ron March 22, 2016 11:51 am #

    Alan,

    What process do you use to narrow down the stocks on the running list to get to the 5 or 6 you use?

    Thanks, Ron

    • Alan Ellman March 23, 2016 12:22 pm #

      Ron,

      There are many ways of using the “running list” One popular method used by many of our members is to favor stocks in “bold” (strongest technicals) along with those with Industry Rankings of “A” or “B” Factoring in proper industry diversification will dramatically decrease the list. Other members favor stocks that also generate dividends or those with higher “risk/reward” stats. The reason we include so many parameters is because of member request over the years so we try to meet as many trading styles as possible.

      Alan

  8. Anthony March 23, 2016 9:25 am #

    I had expected tree to announce around the 28th of April, I bought it wrote on Tues, a profitable call, then it shot up later I found out they pre announced?

    Thank God it was good news but it also could have been bad news, scary?

    Anthony

    • Alan Ellman March 23, 2016 12:23 pm #

      Anthony,

      Pre-announcements (and other unexpected news) are rare but do happen. We are getting paid to undertake risk and do everything possible to minimize the risk and maximize returns but risk cannot be totally eliminated. Glad it went your way…Alan

  9. Alex March 23, 2016 9:45 am #

    Alan,

    I’m checking out the article” Creating Multiple Income Streams in the Same Month when Selling Puts” ; I understand what he did, ” 2/23/16: Sold 1 contract of $30.00 NVDA MAR 16 PUT at $0.70

    3/2/16: Bought back 1 contract of $30.00 NVDA MAR 16 PUT at $0.14 (20% rule) ” but I don’t undertand how this has created profit. I imagine the benefit of this strategy the fact that you buy the same put at 20% cheaper, but I don’t see how?

    Also, several fundamentals and technical indicators are pointing at an upcoming correction / bear market. How does it go with the bluecollar strategy during bear markets?

    Regards!
    Alex

    • Alan Ellman March 23, 2016 12:28 pm #

      Alex,

      Put value declined because share value increased…puts have negative Deltas and are inversely related to share price. By closing a position retaining 80-90% of the original put profit, we can use the freed-up cash to secure another put that will return more profit than the cost to close.

      If you feel the market is about to enter a bearish phase, check out the articles I have written on this topic, all of which are in my books and DVDs. here’s a link to one:

      https://www.thebluecollarinvestor.com/comparing-covered-call-writing-and-put-selling-in-bear-markets/

      Alan

  10. Alan Ellman March 23, 2016 6:29 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

    For your convenience, here is the link to login to the premium site:

    https://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

    https://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

  11. Omar March 25, 2016 9:03 am #

    Alan,

    I’m planning to sell covered calls on stocks that I have in my Dividend stock portfolio. The plan is to sell 6 or 7 month away out of the money contracts. Question. If Im called away, is it a good practice to then sell an out of the money put on the same stock? since my focus is to generate dividend income and enhance my earning with covered calls, I don’t mind to then collect premium on the put , If I’m assigned the stock again at my price its all good! can you give me your thoughts in this?. I hope this makes sense to you. Will you ever come to Florida for one of your seminars? Thanks

    • Alan Ellman March 25, 2016 9:30 am #

      Omar,

      We can generate a higher annualized return by selling 1-month options (or Weeklys). It is critical to master how to roll options and navigate ex-dividend dates. Selling cash-secured puts is an excellent way to enter positions but you appear to already hold these positions.

      I urge you to read the following:

      Pages 343 – 346 (Encyclopedia-Classic)

      Pages 341 – 350 (Encyclopedia-Volume2)

      These are under the topic titled Portfolio Overwriting”

      Florida: I’ve had several presentations in Florida the past few years but none currently on the books…let’s see what we can do about that…

      Alan

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