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Dow 30 Stocks and Covered Call Writing: Implementing the Premium Blue Chip Report

The risk inherent in covered call writing and put-selling is related to price decline in the underlying security. Investors with low-risk tolerance may turn to blue chip stocks which have proven track records of being reliable, cash-rich securities that frequently also generate dividends. This article will highlight how to utilize the monthly BCI Premium Blue Chip Report of best-performing Dow 30 stocks in our option-selling portfolios.

 

Criteria for inclusion in the BCI Blue Chip Report

Each month, the BCI team does a 3-month and 1-year comparison price chart analysis of the Dow 30 stocks and the S&P 500. Dow 30 stocks that have out-performed the benchmark (S&P 500) in both time frames will be included in the report of eligible Dow 30 stocks. These reports are available on the premium member site in the resources/downloads section.

 

Information included in the Blue Chip Report

covered call writing with blue chip stocks

Blue Chip Report for May 2018 Contracts

 

  • Stock ticker
  • Stock name
  • Recent price
  • 3-month and 1-year analysis
  • Earnings report date
  • Dividend yield
  • Ex-dividend date
  • Sector/Industry

 

Which stocks to select

Since all stocks in the report are eligible, if portfolio cash available permits, we can use all the securities published in the report. If there are cash limitations, we select based on share price generating as much sector/industry diversification as possible.

 

How to manage stocks that are removed or added to subsequent reports

Since we are undertaking monthly (or weekly) obligations, we can alter our portfolio each month to include only the eligible candidates. This way, we are always utilizing only the best-performers at all times.

 

Earnings reports 

Our golden rule of never having an option in place when there is an earnings report prior to contract expiration still applies. Options can be written after the report passes or Weekly options can be used, by-passing the week of the earnings release.

 

Ex-dividend dates

This applies only to investors who absolutely do not want their shares sold as a result of option exercise. Since we are selling American-style options, exercise technically can occur at any time up to contract expiration. Early exercise is extremely rare but when it does occur, it is usually related to an ex-dividend date (more specifically the day prior to the ex-date). Given this hypothetical, we must wait until the ex-date or later to sell the option or use Weeklys to circumnavigate the ex-date as we suggested with earnings reports.

 

Advantages of using blue chip stocks

These stocks have a lower implied volatility than (let’s say) growth stocks and therefore we are less susceptible (but not immune) to substantial share price decline. We also have the opportunity to capture dividends especially if we avoid ex-dates.

 

Disadvantage of using blue chips

Lower implied volatility translates into lower option premiums so our potential returns are limited. Expect initial monthly time value returns to fall into the 1% – 2% range. Growth stocks are often twice that amount.

 

Discussion

Using blue chip stocks selected from the Dow 30 index is an outstanding way to implement our covered call writing strategy in a conservative manner. Risk and returns will be lower compared to traditional option-selling stocks but should be given serious consideration for those with a lower risk-tolerance. 

 

This week’s stock report

Our premium stock report will be posted a bit later than usual as we return from our seminar series in Las Vegas.

 

Upcoming events

November 2018:

The Blue Hour Webinar # 12: When to Roll our Covered Call Options

***Premium site…premium members only

 

February 7th – 10th, 2019

Orlando Money Show

Omni Orlando Resort @ Champions Gate

 

Market tone

This week’s economic news of importance:

  • Chicago Fed national activity index September 0.17 (0.27 last)
  • Markit manufacturing PMI October 55.9 (55.6 last)
  • Markit services PMI October 54.7 (53.5 last)
  • New home sales September 553,000 (629,000 last)
  • Weekly jobless claims 10/13 215,000 (210,000 expected)
  • Durable goods orders September 0.8% (-1.9% expected)
  • Pending home sales index September 0.5% (-1.9% last)
  • Gross domestic product Q3 3.5% (3.4% expected)
  • Consumer sentiment index October 98.6 (99.0 expected)

 

THE WEEK AHEAD

Mon October 29th

  • Personal income September
  • Consumer spending September
  • Core inflation September

Tue October30th

  • Case-Shiller home price index August
  • Consumer confidence index October
  • Home ownership Q3

Wed October 31st

  • ADP employment October
  • Employment cost index Q3
  • Chicago PMI October

Thu November 1st

  • Weekly jobless claims 10/27
  • Productivity Q3
  • Markit manufacturing PMI October 
  • ISM manufacturing index October
  • Construction spending September

Fri November 2nd

  • Nonfarm payrolls October
  • Unemployment rate October
  • Average hourly earnings October
  • Trade deficit September
  • Factory orders September

 

For the week, the S&P 500 moved down by 3.94%% for a year-to-date return of 0.56%

Summary

IBD: Market in correction

GMI: 0/6- Bearish signal since market close of October 8, 2018

BCI: Selling only in-the-money strikes until market begins recovery.

 

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US

The 6-month charts point to a bearish tone. In the past six months, the S&P 500 was up 0% while the VIX (24.16) moved up by 57%.

Wishing you much success,

Alan and the BCI team

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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.

32 Responses to “Dow 30 Stocks and Covered Call Writing: Implementing the Premium Blue Chip Report”

  1. Sunny October 27, 2018 10:06 am #

    Alan,

    You wrote ‘Our golden rule of never having an option in place when there is an earnings report prior to contract expiration still applies.’

    But how about owning the stock during earnings report? I own MDLZ and sold few CC that expired worthless. MDLZ reports earnings on 10/29. I’m having small paper loss with it, don’t know what is better, sell a stock and take a loss or keep it through earnings report. What does BCI methodology prefer? I’m neutral on stock and since it’s consumer staples it’s more a defensive position.

    Thanks,
    Sunny

    • Alan Ellman October 28, 2018 12:07 am #

      Sunny,

      In the BCI methodology our 2 choices are to either sell the stock or own it through the earnings report and then write the call after the report passes. In the case of the latter approach, we would lean this way when the stock historically has had favorable reports. Otherwise, avoiding the report eliminates the risk of a disappointing report. The original price of the stock plays no role whatsoever in this decision.

      Alan

      • Sunny October 28, 2018 5:19 pm #

        Thanks Alan. This was very helpful.

        I just have another question regarding earnings. I understand selling stock prior earnings report to avoid unpredicted stock movements. Also I understand why we don’t need to sell calls when we do portfolio overwriting (our shares can be assigned if there is positive earnings surprise). But why not sell CC if we decide to keep stock through earnings? I have noticed that premiums are higher during the earnings month, so if report is positive and the stock moves up and we get assigned, we win anyway, if the stock moves down we can implement exit strategies and reduce our loss by keeping premium. Is this because when we choose to keep stock through earnings we are overall bulish on it and expect positive earnings surprise, hence we expect to sell CC at higher strike after earnings or just sell the stock capturing upside?

        Thanks,
        Sunny

        • Alan Ellman October 29, 2018 4:12 pm #

          Sunny,

          Earnings reports represent times of increased volatility where shares can dramatically increase or decrease in value if the report positively surprises or disappoints. By selling a call that expires after the report, we are capping the upside while only protecting the downside the amount of the call premium.

          In the recent years, reports tend to be favorable due to company’s muted guidance. By waiting for the report to pass, we are able to take advantage of those positive surprises. There will be times when writing the call would have been the better choice but overall we will benefit by waiting for the report to pass. This, of course, assumes we want to retain the shares through the risk of the earnings report.

          I believe that this is one of the most important rules in the BCI methodology.

          Alan

          • David November 1, 2018 1:43 pm
            #

            Additionally, do you have a preference of writing covered calls or puts?

      • David November 1, 2018 1:29 pm #

        Does the golden rule re: earnings releases also apply to cash covered PUTS?

        • Alan Ellman November 1, 2018 3:46 pm #

          David,

          I personally prefer covered call writing in most market environments but favor selling c-s puts in bear markets prior to entering covered call trades (PCP strategy). Both strategies allow us to beat the market consistently so there is no right or wrong here.

          Yes, earnings reports should be avoided for both strategies.

          Alan

          • David November 1, 2018 4:08 pm
            #

            Thank you. Your the best

    • Roni October 31, 2018 11:54 am #

      Hi Sunny,

      it seems like you got lucky this time with MDLZ, but, the odds were against you taking it through ernings.
      During a stiff correction like we have been through, 3 out of four stocks will get hit badly, and your small loss would become catastrophic.

      Roni

  2. Matthew October 27, 2018 4:56 pm #

    Hi Alan – re: Sunny’s question, would it make sense to write a covered call that’s deep in-the-money that accounts for the possibility of a large drop in MDLZ stock price after earnings are reported? Curious to hear your answer to the original question. Thanks.

    • Alan Ellman October 29, 2018 4:27 pm #

      Matthew,

      An astute observation that deep ITM calls will give additional protection to the downside but it may also make us quite unhappy if the report is favorable (most are). My response to Sunny applies to all strikes, ITM, ATM and OTM.

      PLEASE: No covered calls prior to earnings…please. Send me a direct email if you’re unsure where I stand on this issue.

      Alan

  3. Barry B October 28, 2018 1:14 am #

    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 10/26/18.

    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

    Since we are in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:

    https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

    Best,

    Barry and The BCI Team

    barry@thebluecollarinvestor.com

  4. JD October 28, 2018 5:01 pm #

    Thanks for your book, alternatives. I like the idea ‘cause I get tired of trades that drop off on me. Have even done a few and minimized my loss on declines. What do you think of buying a further out put, OTM? Would initially be a debit but maintain protection if rolling the call and can sell back if assigned on the call?

    Thanks,
    JD

    • Alan Ellman October 29, 2018 5:09 pm #

      JD,

      Buying a longer-term put will work if our intention is to hold the stock for the longer-term because the protection will be cheaper on an annualized basis. If adhering to the BCI methodology, we avoid earnings reports so rarely will we keep a stock more than 2 months. A protective put will avoid catastrophic losses from a disappointing report, but will be more expensive because of the higher implied volatility prior to a report.

      Alan

  5. Alan Ellman October 29, 2018 5:28 pm #

    AAII Investor Conference in Las Vegas at the Paris Hotel:

    Still trying to figure out the time of the day.

    So great meeting so many BCI members.

    CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

    Alan & Barry

  6. Jay October 30, 2018 6:44 pm #

    Hey Friends,

    Like navels everyone has opinions and I have mine :)!

    I have long thought covered calls were best on core positions you intend to hold so do it according to Alan and Barry’s portfolio over writing guidelines on the Blue Chips.

    The October sell off makes us all look like flat footed numb skulls. Who saw this coming in a “booming” economy?

    Yet every bear armed with hind sight can sound smart about it.

    I am up beat from here. I don’t mind sticking my chin out: I am not a political animal but I think the Repubs will keep the gavel and the market will like that. If not we will have some hefty down days for a while but that too will pass.

    Trade for today and invest for tomorrow. -Jay

    • Hoyt T October 30, 2018 9:37 pm #

      Hi jay,

      Great post.

      I write while standing as I am still unable to sit. The part of my body that I used to use to sit is over on a platter.:)

      I certainly didn’t see this coming. While the result is the same as occurred from January 26- February the lead up to this was different. In January we had the greatest panic buying since the 1920s. This time we clawed our way up with plenty of down days.

      So what happened? In my opinion, three rate hikes with the promise of one more this year and three more next year, continued reduction of Federal Reserve balance sheet, applied tariffs and the treat of more.That basically is it. Throw in midterms for icing.

      Should we have seen it coming? Of Course! Why didn’t we? Well I think most of us “knew” it would happen but we thought it would be next year and, in my case, greed made me want to squeeze out the last drop of profit. The siren call of the market for a typical November and December is too much if you are not “tied to the mast” as Ulysses was.

      I am going to hang on my wall the following quote:

      “Trade for today and Invest for tomorrow”
      ….Jay

      Take care and good luck,

      Hoyt T

      • Jay October 31, 2018 4:46 pm #

        Thanks Hoyt and Roni,

        I appreciate your always kind words.

        It’s a tough time in the market. Seems like every day is a roller coaster. I closed three successful put day trades today against a green tape on SPX! I was using resistance but could have done as well or better using calls at support!

        I hear the sirens of November and December also and have not sold any holdings since I lightened up that side of the ledger Oct first. On we go….- Jay

    • Roni October 31, 2018 12:04 pm #

      Hi Jay,

      like Hoyt, I am not able to sit either. Probably not until the end of this year.

      I hope this is the last hard and paynful lesson learned for my upcomming remaining trading years.

      Roni

      • Roni October 31, 2018 12:05 pm #

        I mean painful

  7. David Skonieczki October 30, 2018 7:15 pm #

    I looked at this blog for the first time today & liked the post on covered calls versus DOW 30 stocks. I even added BCI to my blog’s reading list. Thank you. In my IRA, I sell the monthly cash secured puts against broad based ETFs to help me buy, & then, after assignment to buy the ETF, I sell the monthly covered calls to help me to sell it. I’ve considered using individual stocks, & even reviewed your post’s idea at today’s market close. I did the arithmetic with DIA ($248.70), the ETF that invests in the DJIA’s 30 stocks, & with WMT ($102.42) – Walmart – one of the DJIA’s stocks. To maintain apples to apples, both equities have a current dividend yield of about 2.1%; & I selected the 11/16/18 puts & calls that were about 2.5% out of the money. I calculated what I call the premium yield – for puts, I divide the premium’s BID by the strike price (the amount of cash reserved); for calls, I divide the premium’s BID by the equity’s market value. Using the time until expiration – 17 days – I annualized the premium yield. For selling puts, DIA’s annualized premium yield was 25%, WMT’s was 39%. For selling calls, DIA’s was 18%, WMT’s was 36%. I’m sure I’ll re-visit the individual stock idea for my IRA, but how do you feel about covered calls (cash secured puts) versus ETFs?

    • Alan Ellman October 31, 2018 10:51 am #

      David,

      When selling options, ETFs offer the advantage of instant diversification and generally, lower volatility. Less cash is required to establish a well-diversified portfolio. There is also the advantage of not dealing with earnings reports. I use these in my mother’s portfolio for covered call writing.

      Individual stocks generally have higher implied volatility and therefore offer higher potential returns. This is the universe where my option portfolios reside.

      There is no right or wrong here. Each investor must make a choice based on cash available and personal risk-tolerance.

      Alan

      • David Skonieczki November 1, 2018 3:14 pm #

        Thank you for the reply Alan. I’ve submitted blog comments & letters to editors but you’re my first reply. I see that you have a lot of investors commenting, & I see that you provide a lot of replies. I’m sure your replies stimulate comments. Good going. I’ll continue to review your blog. As I mentioned, I’ll revisit option selling using individual stocks & today I considered selling GE’s $9.50 put expiring on November 16, 2018. But I took a pass on the idea.

  8. Americo October 31, 2018 3:52 pm #

    Alan hello. I’m trying to understand the relationship of the ask price of a stock as a function of the strike price. In other words when will the ask price start to decrease ? This is in relation to the 20%/10% guideline to buy back the option.

    Thanks Americo

    • Alan Ellman November 1, 2018 5:01 am #

      Americo,

      The “ask” price of an option decreases when the value of the underlying security decreases (Delta) in price and with the passing of each calendar day (Theta). A decrease in the volatility (Vega) of the stock is a lesser factor during the contract month.

      The 20%/10% guidelines apply to a stock decreasing in value and allows us to mitigate potential losses or turn losses into gains. Please reference the exit strategy sections of my books & DVDs before entering any option-selling trades.

      Alan

  9. Ed October 31, 2018 3:53 pm #

    Alan

    I would like to know on what day of the week the reports on eligible stocks for option trading are sent. Do I receive them by email or do I have to go to the website to get them? Please let me know about this.

    Best regards,

    Ed

    • Alan Ellman November 1, 2018 5:08 am #

      Ed,

      The ETF Reports are uploaded to the member site mid-week, usually Wednesday evening. There was a new ETF Report added last night.

      Stock reports are added over the weekend, usually very late Saturday evening or early Sunday morning. We promise prior to market open on Monday. We start crafting these stock reports after market close on Friday.

      We also publish a Blue Chip (Dow 30) Report which is published the week prior to the beginning of new Monthly contracts (the week of expiration Friday for the current contract months).

      Login to the member site using the user name and password you set up when you subscribed. We also send out email notification when the new reports are available.

      Alan

  10. Alan Ellman October 31, 2018 5:51 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.

    New members check out the video user guide located above the recent reports.

    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. MarioG November 1, 2018 1:59 pm #

    Comment on latest ETF Report of 10/31/18

    Page 2 – Top Performing ETFs:

    IYZ is labeled incorrectly as “Ishares US Energy Index” . Should be labelled as “IShares U.S. Telecommunications”

    Mario

    • Alan Ellman November 1, 2018 3:20 pm #

      Thank you, Mario…good catch…Alan

  12. William November 1, 2018 3:22 pm #

    Hi Alan,

    I’m a newbie to covered calls. I’ve been watching your UTube video to familiarize myself with what to expect when I start, and just started to paper trade.

    I’ve looked at 6 or 7 stocks that are candidates for this trade. But none have offered the roughly 3% return on investment that I was expecting, unless I use ATM strikes.

    With the VIX still over 20, I thought I was going to see elevated option prices.

    So my question is: is this just the normal environment? Should I adjust my long term return expectations for OTM call strikes to less than the 2% I’m seeing?

    Your service to the trading community is beyond exemplary, thank you for all you do.

    Regards
    William
    South Pasadena CA

    • Alan Ellman November 1, 2018 3:49 pm #

      William,

      If you’re looking at the November contract expirations, we are already half way through the contracts and so the time value component of the premiums have eroded. For the full contract month, many of the eligible securities will have initial time value profit of 2% – 4%, both ITM and OTM.

      Thank you for your kind words.

      Alan

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