When we sell a covered call and share price rises dramatically, there is a tendency to roll up in order to capture additional future share appreciation. The most common reason for a gap-up in price is a favorable earnings report. In mid-May 2017 Tim wrote me about a series of trades he executed that involved a combination of these events. Let’s evaluate these trades and explore how certain headaches could have been avoided and how results could have been elevated to even higher levels.
Tim’s trades
NVDA: Chart Showing Tim’s Trades
- January 2017: Buy NVDA at $110.00 (#1)
- 5/1/2017: Sell 5/$110.00 call (#2)
- 5/10/2017: Earnings report gap-up to $120.00 (#3)
- 5/10/2017: Roll up option to 6/$115.00 call (#3)
- 5/19/2017: NVDA trading at $136.00 (yellow field)
Post-earnings report price movement
NVDA: Post Earnings report Price Activity
- Gap-up in price after a favorable earnings report (red arrows on left)
- Price acceleration continues for 2 weeks after the report (green arrows)
- 1-day price decline as market declines by 370 points after special prosecutor named to investigate Russian connection to 2016 election (red arrows on top right)
Earnings report rule in our BCI methodology
Most of our strategy is based on guidelines that give us some flexibility. This is not the case here. We never write a call or put option when there is an earnings report due out prior to expiration.
If we have a lot of confidence in a stock that has had a favorable history of positive reports and want to hold it through the report and then write the call, that is permitted in limited circumstances. In these cases, we let the report pass and then the price settle before writing the call option.
Possible entry points after NVDA earnings reports
Looking back on recent earnings reports for this security the chart below shows potential entry points to sell call options post-report:
NVDA: Selling Covered Calls after Earnings reports Pass
After the price reaction to the report has subsided and the stock appears in a period of consolidation, we can consider selling the call options. The green arrows show the earnings report releases and the red arrows reflect possible entry points to then sell call options.
What should Tim consider having sold the option pre-report?
The mid-contract unwind exit strategy is our most valuable tool in these circumstances. Look for the time value component of the option premium to approach zero, making the cost-to-close negligible. In this case, the time value cost-to-close is $0.95 or 0.8%:
NVDA Options Chain for 6/2017 Expiration
For more detailed information on the mid-contract unwind exit strategy:
The Complete Encyclopedia for Covered Call Writing- Classic edition:Â pages 264 – 271
The Complete Encyclopedia for Covered Call Writing- Volume 2: pages 243 – 252
(both editions are available in hardcover format)
Discussion
Next live events
October 4, 2017
All Stars of Options (just added)
How to Select the Best Options for Covered Call Writing in Bull and Bear Markets
10:30 AM to 11:15 AM
Hyatt Regency Dallas @ Reunion
October 5, 2017
Â
October 10, 2017:Â Â Palm Beach Gardens Florida:
7 Pm to 9 PM
Using options to Generate Monthly Cash and to Buy a Stock at a Discount.
LOCATION: Publix Greenwise Market (2nd floor)
11231 Legacy Avenue (Legacy Place)
Palm Beach Gardens, FL 33410
The club charges $10 at door to cover expenses.
High Dividend Yield Stocks with LEAPS report
Premium members: The 4th quarter 2017 edition of this report has been uploaded to your member site. Scroll down on the left side of the premium site.
Market tone
Global stocks were little changed for the week. The Chicago Board Options Exchange Volatility Index (VIX) was flat at 9.59, and the price of West Texas Intermediate crude oil ended the week at around $50.56 a barrel. This week’s economic and international news of importance:
- On Wednesday, the US Federal Reserve announced that it would leave its benchmark interest rates unchanged but suggested that a hike is likely by the end of the year
- The Fed also announced plans to start reducing its $4.5 trillion balance sheet of Treasuries and mortgage-backed securities in October
- On Thursday, Donald Trump signed an executive order that will allow him to take action against anyone who finances and facilitates trade with the North Korea
- On Thursday, Standard and Poor’s downgraded China’s long-term sovereign credit rating from AA- to A+, following a similar downgrade by Moody’s in May
- US home resales fell 1.7% to a seasonally adjusted annual rate of 5.35 million units in August, the lowest since August 2016. A sharp decline of 25% year on year in home sales in Houston, related to Hurricane Harvey, accounted for most of the overall decline
- Central Mexico was hit with a 7.1 magnitude earthquake earlier this week, causing hundreds of buildings to collapse in Mexico City. Trading on the Mexican stock exchange was suspended following the quake.
- Top Republicans on a US Senate panel proposed a budget deal that would allow for up to $1.5 trillion in tax cuts over the next 10 years. The tax cuts would add to the current $20 trillion federal debt, which is projected to increase to about $30 trillion over the next decade
- On Thursday, the Bank of Japan announced that it will hold interest rates steady at 0.1%
THE WEEK AHEAD
Mon, Sep 25th
- None
Tue, Sep 26th
- US: new home sales
Wed, Sep 27th
- UK: House prices
- US: Durable goods orders
Thu, Sep 28th
- US: Average weekly earnings
- Japan: Consumer price index, unemployment rate
Fri, Sept 29th
- Canada: GDP
- Eurozone: CPI
- Japan: Housing starts
For the week, the S&P 500 rose by 0.08% for a year-to-date return of 11.76%
SummaryÂ
IBD: Market in confirmed uptrend
GMI: 6/6-Â Buy signal since market close of August 31, 2017
BCI: I am currently favoring in-the-money strikes 2-to-1.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a neutral to slightly bullish outlook. In the past six months, the S&P 500 was up 6% while the VIX (10.17) moved down by 25%.
Much success to all,
Alan and the BCI team
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 09/22/17.
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
For all of The Blue Collar Investor community that are impacted by hurricanes Harvey, Irma, and Maria, our thoughts and prayers are with you. Stay safe…come back even stronger…
Best,
Barry and The Blue Collar Investor Team
Edit
Alan,
If you haven’t seen it, the September issue of the AAII journal highlights 2 of the ETFs that have been on our watch list most of this year. They are SOXX and SMH, 2 semiconductor ETFs. They hold stocks like NVDA, BRCM and INTC. What I like most about ETFs is that we don’t have to worry about earnings reports. Thanks for all the information you provide to us retail investors.
Frank
Hi Frank,
I hold XSD so am invested in the semiconductor theme also. I too like ETF’s for their simplicity and lack of earnings report worries other than if the whole sector takes a hit.
I like tech as a big picture theme and own QQQ as a core investment holding. What I have started doing with QQQ, should anyone find this of interest, is structure what I call “Simple Man’s Condors”. Alan did a Blue Hour about “Poor Man’s Covered Calls”. Well, this is another way to get extra yield from the same underlying.
One has to have some ready cash and a desire to add to a current holding for this to be of interest. I own 200 shares of QQQ in my IRA (I never sell options outside my IRA for tax reasons) and they are covered for Oct. at 147. I did not get much premium on that a couple weeks ago and I have enough cash to buy 200 more shares at a lower price so I sold the Oct. 140 CSP’s for about 1% doubling my income on a reasonably stable high liquidity ETF I consider a core holding.
Should QQQ, trading at 143.47, as I write this stay between 140 and 147 this month I’ll keep my current shares and my two premiums. If it breaks out I’ll sell at a profit, keep the low side premium and start again. If it dips I’ll have 400 shares at a lower total cost basis which is my goal. If it gets really hammered in some North Korea scenario there are always exit strategies in the mean time.
So if you have a solid ETF or stock as an investment, would like to own more of it and you have some ready cash the “Simple Man’s Condor” is a way to get two income streams on it at the same time and not have cash laying idle. – Jay
Hi Jay,
lots of red ink this morning.
I placed my last 3 trades today for the Oct 20 contract cycle, and am now fully invested (and feeling some pain).
As Tom Hank says in “Cast Away” let’s see what the tide brings us.
Roni
Good morning Roni,
It is in seasons like this when the tide usually ebbs we have to remind ourselves it always comes back in 🙂 – Jay
Thanks Jay
Good luck with those Roni – just sold the NVDA 172.50’s myself for a 3.5% ROO if you’re looking for any more promising candidates.
Justin
The chart of NVDA makes me reticent to invest.
Ethan – the last few months NVDA has been in an overall gentle uptrend, and long term it’s also an uptrend. What don’t you like about that?
@Justin- the price fell below the 20 day EMA, the MACD has turned down as has the slow stochastics.
Thanks Justin,
I did buy/write NVDA @ 199.95 on 09/22, and sold the 10/20/2017
180.00call for 3.5% ROO.
NVDA has been very good to me in the past 2 years, avaraging 2.5% almost every month.
Roni
Ethan,
FWIW, be aware that a turn down of the MACD above zero may or may not a valid signal and the same holds true for an upward reversal when the MACD is below the zero line. This is due to the nature of the construction of the indicator.
The invalid signal is caused when the ROC slows causing the two exp. moving averages to converge. The underlying’s price will verify if the signal is valid or not.
Interesting you should reject NVDA because of it’s technicals Ethan – Barry and his team at BCI looked at the same wiggly lines I gather and included NVDA in the last two weekly screens. Further evidence I guess that TA is more of an art than a science.
Personally I used to use MA’s and other indicators (I started out in ’85 pencilling in charts on chart paper from newspapers) but eventually concluded I got much better results from following the trend, respecting support and resistance, and ‘eyeballing’ the chart generally (32 years of analyzing charts can’t help but give you a pretty good feel for what’s likely to happen or not, but then it’s all about probabilities.)
Justin
correction : I boght NVDA at 189.95 and NOT 199.95.
Sorry – Roni
Roni,
Personally I don’t buy after a spike, but wait for a pullback near to the breakout point – technically much safer. Agree NVDA a great stock though. Just bought into OLED 125’s and CTRL 30’s – 4:45 a.m here, so back to bed!
Justin
Justin,
Correction of my correction.
The correct number I bought NVDA is 179.95
I must check my brain, my it’s an early sign of Alzheimer.
As for OLED and CTRL, Ibelieve you did well. I was cosidering both this week, but ran out of cash, and I hate to use my margin.
4:45 is when I wake up for a leak, and back to bed.
It must be difficult for you to trade at such a time lag.
Sleep well – Roni
Roni – that’s a much better price! If you’re not kidding and you want to check for dementia I gather you should try to draw a clock face (read it on the net recently.) And for prevention, take up chess and learn a musical instrument. (Personally I play close to master level chess and play the piano and guitar, so I figure I should be safe :))
Re the early trading, I like it as it frees up my day for hiking and going out generally – I don’t generally have any trouble getting back to sleep fortunately.
Justin
“Citi raises its Nvidia (NASDAQ:NVDA) price target from $185 to $210 and maintains a Buy rating.
Analyst Atif Malik cites AI market potential and says Nvidia is “widely perceived as an underdog in inferencing given architecture optionality around the use of CPU, FPGA, and TPU.”
Nvidia shares are up 1.71% premarket to $178.68. “
Thanks Justin,
I am kidding, but will take your advice seriously.
Your multiple capabilities are really impressive, wow…
Chess is a terrific idea, I play it, but very basic.
I do play the Guitar, but I had no time for it lately, because of the Brazilian recession, I must dedicate to keeping my little company afloat.
Cheers – Roni
Yes you should always be learning new things – too many people finish school and think they’ve done with studying. That’s why so many end up dribbling into their bibs in dementia wards – the brain is a muscle, use it or lose it I say (not that may listen, but hey…) 🙂
Justin,
see you next week.
Roni 🙂
I have successfully invested in CC for the last year, but have never managed my portfolio during a significant market downturn. I count on the monthly premiums to supplement my income. I have been writing ITM calls, but the premiums have not been that good.
Ethan,
Consider doing some simulations to get an idea of what it’s like during a significant downturn. Pick a stock, pretend that it has dropped 5 or 10 points and then look at the current option chain to see what possibilities exist for another write.
As an example, suppose you bought IBM last month at $150.50 and sold the ATM Sept $150 call for $3.50 (made up prices). Your net cost would be $147. With IBM at $145.50 today, you be looking at writing an OTM strike of $147 or higher.
Suppose instead that you bought IBM last month at $155.50 and sold the Sept $155 call for $3.50 (made up prices). Your net cost would be $152. What would you do today with IBM at $145.50 ? You’d have to write a deep OTM call if you wanted to avoid locking in a loss. The Oct $152.50 call would get you about 65 cents which isn’t very rewarding nor does it offer much downside protection. To get more, you’d have to go out to a further month or or just do nothing –> Buy & Hope.
That’s what happens in a severe downturn. In 2008, IBM dropped about 45 pts from $125+ to $80+. I’d suggest that you consider formulating a plan for such an event, should it occur again.
Spin
Hey Spin,
Thanks for your always insightful post!
I’ll tell you what: I have not been this clueless about the market in a long time.
If I had to guess where the S&P and most stocks will be a month from now I would say lower. Watch that spark a rally :)! – Jay
Hey Jay,
Thanks for the kind words. I won’t bore you with the details but I’ll just mention that the crash of 1987 taught me a lesson about the perils of selling covered calls and short puts in a bear market. Expiration Friday was the day before the crash and I effectively owned (at a loss) the underlying for every OTM short put position by Monday afternoon. As for the current market, it stopped making sense a long time ago. It defies gravity.
Spin
Thanks Spin, I am glad you are here. Please do not go anywhere!
Most friends here are retail investors trying to figure out how to get extra yield from the stuff they own in this zero interest rate environment. Selling calls and puts scratches that itch 🙂 – Jay
My plan is to keep half of my cash (for CCW) on the sidelines, and write ITM calls with the other half. Not great premiums, but less risky.
Ethan,
In all market conditions, we enter and manage our trades based on overall market assessment, chart technicals and personal risk tolerance. We always must have a plan when our positions turn against us or when they end up much more favorable than anticipated. Our approach is always centered on non-emotional trading based on sound fundamental, technical and common sense principles NEVER PANIC. That weakens our adherence to a structured plan.
In bear markets, we favor ITM call strikes as you have been doing…nice work! We can also sell deeper out-of-the-money cash-secured puts before entering covered call trades. Either way, we always have our position management skills ready to mitigate losses and enhance gains.
Ultimately, we all will have experienced bear, bull and mostly normal market conditions but our adherence to a structured plan, rather than emotion, should never waiver.
Alan
Premium members:
The October 2017 edition of our Blue Chip Report based on the Dow 30 stocks has been uploaded to your premium site. Look in the “resources/downloads” section of the member site (right side) and scroll down to “B”
Alan
New seminar just added:
Saturday June 9, 2018
Charlotte North Carolina
Details to follow
Dr Ellman: Do you ever come up to Canada for a seminar?
Ethan,
All my seminars are the result of invitations. If invited to speak at a large group in Canada I would certainly give it serious consideration.
Alan
Hey Ethan.
Welcome to our group! I share your reticence about putting new money in the market at the moment. I am using cash to secure OTM puts. It still beats CD rates 🙂
Canada is an obviously huge country and I do not know where you live. But once on a business trip I got to see Calgary and Banff. They are among the prettiest places I have ever seen! – Jay
Alan;
I’ve enjoyed learning your strategies and using them to learn covered calls in my IRA account.
As I’m not pulling cash from this account yet, it is allowing me to keep writing CC’s.
Can you tell me if trade commissions we rack up all year may be tax deductible? I know things can be different in a tax deferred IRA.
Thank you and I appreciate the education you’ve allowed me to get here.
Jim
Jim,
Since I am not a tax expert, I would ask you to check my response with your tax advisor. This is my understanding:
The IRS does not allow us to write off transactions fees when we buy or sell stocks/options. Instead, we can add the amount of those fees to the purchase price of your stock. The purchase price plus the cost to acquire our stock equals our cost basis. For example, if we bought 100 shares of XYZ stock at $10 per share, our purchase price would be $1,000. Add in transaction fees of $10.00 to get our cost basis of $1,010 or $10.10 per share. We can also reduce the amount received from selling our stock by the amount of our transaction fees. Even though we can’t deduct our transaction fees, we can reduce our taxable gain, or increase our taxable loss, by properly calculating our cost basis.
Alan
Jim,
I am not a tax guy either. I suggest you sell options in an IRA account. Level One clearance will get you covered calls, cash secured puts and the ability to buy calls and puts. My experience – which is only that – is selling options in a taxable account creates headaches. – Jay
Jim,
The IRS does not permit you to directly write off commissions paid for buying or selling securities. Commissions are included in your cost basis (added to the purchase price and subtracted from sale price). The deduction is realized when the position is closed, thereby reducing the capital gain or increasing the loss.
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.
Next week’s report will be published on Tuesday as we are traveling to Dallas for seminars on Wednesday (“All Stars of Options” event) and Thursday (seminar covering both covered call writing and put-selling).
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Alan and the BCI team