In the BCI methodology for covered call writing we use predominantly 1-month options. There are times, however, where we find cash in our accounts (mid-contract) that is inactive. This may be due to closing a position early either because the share price declined significantly or accelerated exponentially. Perhaps Grandma gave you a generous birthday present. Whatever the reason, the question arises should we enter a new covered call position mid-contract? Some may elect to wait until expiration Friday and enter new positions all at the same time for the following contract cycle. My personal preference is to keep my money working full time except in extreme market declines (2008). This article will discuss one way to approach mid-contract covered call positions. The stocks mentioned are NOT necessarily recommendations but rather displayed for educational purposes.
When selecting appropriate underlying candidates mid-contract we use the same system criteria as we do for full month trades: Elite performers fundamentally and technically while also screening for the “common sense” BCI requirements (no earnings report etc.). Therefore, we initially turn to our watch lists (premium or the one you developed). There are two major differences I employ when entering these mid-contract positions:
1- My goal changes from 2-4% to 1-2% for the remianing two weeks
2- I will favor in-the-money strikes in MOST market conditions because exit strategy execution becomes more challenging the closer we get to expiration Friday so I like the addition protection of ITM strikes. In strong bull markets I would have no issues going with the more aggressive OTM strikes.
This past week I received a few inquiries about this topic so it led me to this week’s blog article. On Thursday evening, May 3rd I accessed our recent premium report and went straight to the “running list”. I then went to an options chain to see which candidates would meet the following goals:
1: 1-2%, 2-week return
2: Decent downside protection of that profit
Here is a partial view of that running list with a few stocks that I would consider:
The yellow-highlighted cells are candidates worthy of entering into the Ellman Calculator based on option chain information. I then entered the potentially eligible stocks into a spreadsheet, including option chain information and industry information (remember that we must be properly diversified). Here’s what that looked like:
Next the information is fed into The Ellman Calculator where will look for our goal of 1-2%, 2-week return WITH protection. Below is a screenshot of the results:
In the green-highlighted cells I have selected 5 stocks in 5 different industries that best meet these goals. If I were looking for only one or two equities, the two circled in red would be given strong consideration.
Entering a covered call position mid-contract does make exit strategy execution more challenging but not insurmountable. It has the advantages of putting your money to work more frequently but requires a change in return goals and an adjustment of your strike selections. A well-formed watch list should provide a suitable number of choices to select from.
Live events update:
May 8th: I will be the keynote speaker for the Long Island Stock Traders Meetup Group. I will present a basic review of covered call writing and then proceed with an audience participation section where your favorite stocks are analyzed for potential covered call trades:
Place: Plainview-Old Bethpage Library (Auditorium)
Time: 7 PM – 9PM
Admission is FREE and non-members are welcome.
June 12th: I will be the keynote speaker for the New York City Private Investors Group at the ING Direct Cafe:
Time: 6PM to 7:30 PM
Admission is FREE and non-members are welcome.
We invite you to take our FREE video beginner’s tutorial with FREE powerpoint downloads:
This week’s mixed bag of economic reports came out over the backdrop of concerns that the euro zone’s recession may be deeper and longer than anticipated. This concern intensified after reports that their service sector index fell to 46.9 in April compared to 49.2 in March:
- A disappointing jobs report caused the market to plummet on Friday as 115,000 new jobs were created lower than the 165,000 expected
- Temporary hiring increased, however, after falling in March
- The unemployment rate declined to 8.1% from 8.2%
- Nonfarm business activity (measure of economic efficiency) declined at an annualized rate of 0.5%, in line with expectations
- The ISM’s nonmanufacturing index fell to 53.5 from 56.0 worse than the 55.0 expected. A reading above 50 signals expansion so economic activity continues to grow but slower than desired
- The ISM’s manufacturing index rose more than anticipated in April to 54.8 (53 was the expected stat)
- Construction spending rose by 0.1% in March, less than the 0.5% expected. This was due to a decline in government spending. Private sector spending actually increased by 0.7% mainly due to new single family homes
- Consumer spending increased by 0.3%, lower than the 0.4% anticipated
- With about 80% of S&P 500 c0mpanies having reported earnings recently, 67% have been positive surprises while 24% have been negative surprises. This is a critical component to the bullish stance taken by this site over the past 9 months
For the week, the S&P 500 declined by 2.4% for a year-to-date return of 9.6%, including dividends.
This site has been generally bullish on the economy and our overall covered call positions since last September but more recently has taken a defensive stance. As previously explained this is due to the volatility the markets have been experiencing:
Please note the following:
- The S&P 500 (blue line) is up about 2.5% in the past 3 months, a stat we can live with
- The VIX (black line) looks like it just took a ride on the Space Mountain roller coaster ride @ Disneyland
- In the past 3 months the VIX has been up by 20% and down by 20%
IBD: Market in correction
BCI: Cautiously bullish using predominantly in-the-money strikes
My best to all,
Alan ([email protected])