Covered call writing and selling cash-secured puts are strategies that can be crafted to meet the personal risk tolerance of all investors. I use stocks selected from our premium watch lists in my accounts and from the ETF Reports in my mother’s account. Recently, several members have asked about using only blue chip companies. These are defined as nationally-known, well-established and financially secure corporations. As a result of these inquiries the BCI team is providing quarterly reports of the best-performing Dow 30 stocks from 3-month and 1-year perspectives. In this article, we will use the 10 best out-performers to create a portfolio for covered call writing using out-of-the-money strikes taken from the 8/20/2016 report…premium members should use the most recent monthly report.
Blue Chip Report of 8/20/2016 (top section)
Selection process- basic approach
Add up the prices-per-share of all 10 candidates and multiply by 100. That will be the cost to buy 100 shares of each and sell 1 option contract per security. Now take that amount and divide into the cash available. In this example, if we had $300,00.00 cash available we could purchase 300 shares of each stock costing $264,273.00 plus commissions.
Selection process- advanced approach
In this procedure, we calculate the average cash per position. For a portfolio of $300,000.00 and 10 stocks, we would dedicate approximately $30,00.00 per position. Next, we divide the price-per-share into $30,000.00 and round of to the nearest 100. For example, we would buy 1000 shares of CSCO ($30.52) and 200 shares of MMM ($179.61). Adjustments may need to be made to assure an adequate amount of cash available for potential exit strategy opportunities.
Calculations if we purchased 300 shares of each stock: The Ellman Calculator
Results show initial 5-week premium returns of 1.52% with upside potential returns of an additional 1.99% This creates a scenario with a possible 5-week maximum return of 3.51% which annualizes to 36.5%
Option-selling can be tailored to one’s personal risk tolerance. Using blue chip stocks only as the underlying securities is a conservative approach to covered call writing. Generally, returns will be lower than those from our main premium watch list but still formidable. A secondary benefit is that these securities also offer dividend distributions which can enhance returns even higher.
Upcoming live events
1- March 21st and 22nd, 2017
Two live Florida events (Fort Lauderdale -22nd and Delray Beach- 21st)
2- April 12, 2017
Income Generation Webinar for The Options Industry Council
March 2, 2017 (next year): POINT Options Group Phoenix Arizona
March 3, 2018 (next year): American Association of Individual Investors : Phoenix Chapter
Global stocks continued to rise this week, and strong global manufacturing data continued to improve. Despite growing economic optimism, oil prices fell this week on increased US inventories. Volatility remains subdued, with the Chicago Board Options Exchange Volatility Index at 10.96. This week’s reports and international news of importance:
- The week began with markets pricing in about a 50% chance of a hike in the federal funds rate at the Federal Open Market Committee meeting this month but ended with markets almost fully pricing in a quarter-percent hike. Comments from Fed chair Janet Yellen helped seal expectations of a March hike
- A rise in the ISM manufacturing purchasing managers’ index and a jump to a 15-year high in the Conference Board’s consumer confidence measure were two standout data points in the United States this week
- China’s PMI showed strength as well, though the eurozone’s and United Kingdom’s PMIs were less robust
- Economic sentiment in the eurozone reached a six-year high
- The Eurozone data reflected an energy-driven rise in inflation to near the European Central Bank’s 2% target. This is the first time consumer price inflation has reached the target in four years
- The Dow Jones Industrial Average closed above 21,000 for the first time on Wednesday, while the S&P 500 Index reached 2,400London’s FTSE 100 also closed at a record high on Wednesday, supported in part by a weak pound.
- Despite suffering a defeat in the House of Lords over the Brexit bill, UK prime minister Theresa May insists her timetable for triggering Article 50 will not be delayed
- With 98% of companies reporting for the fourth quarter of 2016, the earnings growth rate for the S&P 500 is 4.9%. The 4th quarter will mark the first time the index has seen year-over-year growth in earnings for two consecutive quarters since Q4 2014 and Q1 2015
THE WEEK AHEAD
MONDAY, March 6th
- Factory orders Jan.
TUESDAY, March 7th
- Foreign trade deficit Jan.
- Consumer credit Jan.
WEDNESDAY, March 8th
- ADP employment Feb.
- Productivity Q4
- Wholesale inventories Jan.
THURSDAY, March 9th
FRIDAY, March 10th
- Unemployment rate (U3) Feb.
- Federal budget Feb.
For the week, the S&P 500 was up by 0.67% for a year-to-date return of 6.44%.
IBD: Market in confirmed uptrend
GMI: 5/6- Buy signal since market close of November 10, 2016
BCI: I am currently fully invested and have an equal number of in-the-money and out-of-the-money strikes. Cautious, concerned and hopeful…waiting for the math to add up relating to new administration promises and how they will be paid for. I need both sides of the equation to balance out in order to become more aggressive.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a slightly bullish outlook. In the past six months, the S&P 500 was up 9% while the VIX (10.96) declined by 9%.
Wishing you the best in investing,
Alan ([email protected]om) and the BCI team