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
- Stock ticker
- Stock name
- Recent price
- 3-month and 1-year analysis
- Earnings report date
- Dividend yield
- Ex-dividend date
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.
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.
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.
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.
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
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
- 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%
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