beginners corner

ETF Index Tracker Proposed Strategy: A Risk-Free Investment?

Using covered call writing and exchange-traded funds (ETFs) is a viable approach to generating monthly cash flow. I personally use this strategy in my mother’s portfolio. Can this investment style be expanded to include inverse ETFs to move this expanded path to a near risk-free system?

In April 2017, Rushbabh, a member from Australia, was kind enough to share an idea he developed involving ETF and inverse ETF index trackers combined with covered call writing.


The hypothesis

  • Buy an index tracker ETF
  • Buy an inverse index tracker ETF
  • Sell covered calls on both securities
  • Collect premiums and liquidate both ETFs if options are exercised

The question Rushbabh posed to me asked if I thought this could be a risk-free investment.


The scope of risk: no free lunches!

If our goal is to exceed risk-free returns (Treasuries for example), we must incur some risk. As investors, we must locate and define our comfort level as to how much risk we are willing to expose ourselves to and determine the return goals we are seeking. If Treasuries are at one end of the spectrum and buying lottery tickets is at the other end, then covered call writing is somewhere in between the two and closer to Treasuries in my view. Of course, this assumes mastering the three required skills (stock selection, option selection and position management).


Evaluating proposed strategies by paper-trading

The best way to examine an investment concept is to set up trading guidelines and paper-trading over a meaningful time frame. To me, this is a more relevant and practical procedure than having a computer do the work for us. We can tweak the trading guidelines and find nuances to enhance positive steps and delete the negative ones. In this article, I created a spreadsheet for an initial non-scientific study which incorporated the following hypothetical parameters:

  • ETF index tracker is trading at $50.00
  • ETF inverse index tracker is trading at $50.00
  • $50.00 call option strike prices were $2.00 for both securities
  • Initial per share total premium collected totaled $4.00 for each “set” of ETF positions
  • ETFs will move in opposite directions by equal amounts


Spreadsheet reflecting returns for various price changes

covered call writing strategies

Covered Call Writing ETFs and Inverse ETFs

Note the following:

  • For each “combined position” we have a net options credit of $4.00 per share. 100 shares of ETF + 100 shares of inverse ETF will net $400.00 (less commissions)
  • The price of the securities will move in opposite directions by an equal amount based on the movement of the underlying benchmark
  • The upside is capped due to the option obligation
  • The downside is not capped but subject to position management opportunities
  • The cost-to-close for each security also moves in opposite directions
  • Our breakeven is $4.00 from the initial cost basis and strike, $54.00 or $46.00 in this hypothetical
  • Once either security moves more than $4.00 from the initial strike price, we start to lose money



The takeaway from this (admittedly) non-scientific study is a guideline we have applied to covered call writing for years…once underlying (combined in this case) share price moves below the breakeven, we start to incur loses. Until a longer-term analysis can be examined, it initially appears that this is a strategy that will have positive results when there is little price movement in the underlying securities. The term “risk-free” is not appropriate.



In our stock market environment, there are no risk-free trades. There is certainly nothing wrong with looking to develop new strategies that will minimize risk and I commend Rushabh for thinking outside the box. I admire members who seek to achieve even higher returns using their education and trading skills.


Next live events

  • All Stars of Options (just added)

October 4, 2017

10:00 AM – 10:45 AM

Hyatt Regency Dallas @ Reunion

  • Dallas Texas: October 5, 2017
  • Money Expo: An online webinar event: Monday October 9, 20173 PM ET: Online event hosted by The Money Show. Alan will be a featured speaker at MoneyExpo, which is the biggest online-only premier event for traders and investors across all traditional asset classes. Registration link and information to follow.

Palm Beach Gardens Florida: October 10, 2017: 


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.


Market tone

Global stocks edged up this week despite some midweek volatility resulting from North Korea’s missile launch over northern Japan. West Texas Intermediate crude oil dropped 80 cents a barrel to $46.75. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), ended the week lower, at 10.13 from 11.9 a week ago. This week’s economic and international news of importance:

  • US nonfarm payrolls rose a less-than-expected 156,000, missing estimates for a 180,000 rise
  • The unemployment rate ticked up to 4.4% from July’s 4.3%
  • Payrolls for the prior two months were revised lower by a combined 41,000
  • The August Institute for Supply Management manufacturing index reached a six-year high of 58.8, up from 56.3 in July. Manufacturing data across the developed world were on the firm side, suggesting the synchronized global economic upturn remains intact
  • An estimated 23% of US refinery capacity is offline because of flooding in the wake of Hurricane Harvey
  • Nationally, gasoline prices have risen an average of 17 cents a gallon since Harvey made landfall and now average $2.45, according to AAA
  • North Korea conducted several missile tests this week in response to annual US-South Korea military exercises. The second launch crossed over Hokkaido, Japan’s northern island
  • The US economy grew at a 3% annual pace in the second quarter, an upward revision from the 2.6% pace reported in July
  • Spending was robust by both consumers and businesses in Q2, with capital expenditures expanding at an 8.8% rate — the fastest in nearly two years
  • Corporate profits rose 8.1% year over year
  • President Donald Trump travelled to Missouri this week to make the case for overhauling the US tax code. But, the president offered few specific policy
  • The third and latest round of Brexit negotiations ended with no agreement on key issues such as the Northern Ireland border, citizen’s rights and the size of the Brexit divorce payment


Mon, Sep 4th

  • US markets closed for Labor day

Tue, Sep 5th

  • Australia reserve bank interest rate decision
  • Global purchasing manager’s indices
  • Eurozone Q2 GDP and retail sales
  • Eurozone sentiment index

Wed, Sep 6th

  • Non-manufacturing PMI
  • Fed Beige Book

Thu, Sep 7th

  • Eurozone interest rate decision

Fri, Sept 8th

  • Japan Q2 GDP
  • China trade balance
  • UK industrial production
  • Canada unemployment rate

For the week, the S&P 500 moved up by 1.40% for a year-to-date return of 10.13%


IBD: Market in confirmed uptrend

GMI: 6/6- Buy signal since market close of August 31, 2017

BCI: I am currently favoring in-the-money strikes 2-to-1.



The 6-month charts point to a cautiously bullish outlook. In the past six months, the S&P 500 was up 3% while the VIX (10.13) moved down by 20%.

Our thoughts and prayers are with all our friends who have been impacted by Hurricane Harvey.

Much success to all,

Alan and the BCI team


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.

43 Responses to “ETF Index Tracker Proposed Strategy: A Risk-Free Investment?”

  1. John September 2, 2017 1:47 pm


    I use Schwab for my trading. They made a commission change a couple of weeks ago.

    For all options with ask price of .05 or lower, there is no commission. You still pay the per option charge of around $.50/ contract.

    Looks like this may help near expiration day, roll out or even close a position at a small fee, rather than wait over the weekend for expiration.



  2. Dan September 2, 2017 2:46 pm


    Is this correct: Intrinsic value is the amount above the struck price as a gain if you had never put a covered call option in place?
    Do you look at this value when and if you buy back the option. How is intrinsic value used?


    • Alan Ellman September 3, 2017 7:36 am


      When we enter a covered call trade with an in-the-money strike (below current market value of the stock), the intrinsic value represents protection of the time value initial profit. For example, if we sold the $30 call on a stock trading at $32 for $3, $2 is intrinsic value and $1 is time value. We are obligated to sell the stock at $30. Our initial time value profit of 3.3% is guaranteed as long as share value does not decline by more than 6.25% ($2/$32).

      If an out-of-the-money strike moves in-the-money due to share value appreciation, the intrinsic value cost-to-close is compensated by share appreciation. In the above example, if share price moved to $33 and the cost-to-close is $3.20, the intrinsic value of $3 is compensated by share value moving from $30 (our original obligation to sell) to $33 (current market value). In this scenario, the time value cost-to-close would be $0.20. Use the “What Now” tab of the Ellman Calculator to calculate these type of results.


  3. Roni September 2, 2017 5:42 pm


    On paper trading.

    The problem with paper trading is the removal of emotional involvement.

    Emotion is the most potent ingredient in making a trading decision.

    So, if one wishes to test a different strategy or tactic, I believe it is better to start with small, controlled cash outlays, to feel the “real thing”, and increase the ammounts gradually if successful, and as confidence in the method grows.

    You can’t learn to swim without getting wet.


    • Alan Ellman September 3, 2017 7:43 am


      You are definitely correct that human nature is such that a more realistic return is garnered by investing real money. However, I do feel that, for beginners, starting with paper-trading does have value and then can move to investing with small amounts of money in actual cash accounts before becoming fully invested.

      My concern is for beginners losing money before becoming completely familiar with all the nuances of the strategy.


      • Roni September 3, 2017 2:22 pm

        I agree, you have convinced me.

        Thanks – Roni

    • spindr0 September 3, 2017 11:46 am


      I would offer that the progression with a new strategy would be to back test it first, then paper trade it and then, as you suggested, start with a small, controlled cash outlay to feel the “real thing” and increase the amount gradually if successful, and as confidence in the method grows.

      Paper trading offers several benefits if done on a legitimate platform that replicates actual market conditions (buying at the ask, selling at the bid, with trade execution only if actual trades occur IRL at those prices).

      1) It familiarizes you with your trading platform works – order creation and placement, using analytical tools

      2) It helps you to learn how to avoid basic mistakes

      3) It helps you to see the changing relationships between option premiums and the underlying as price, time and volatility change

      4) It helps with testing a strategy and seeing how real time performance is different than looking at close to close results

      5) It helps you develop and implement a set of trading rules

      HOWEVER, since the money isn’t real, it lacks emotion. It enables you to stick with losing positions that you would never ride that far down IRL. When live, as you see real money tick away before your very eyes, there’s stress. Being able to think clearly and quickly when under such stress and react appropriately is something that you will never develop from paper trading. Good judgement comes from experience and experience comes from bad judgement :->)


      • Roni September 3, 2017 2:29 pm


        that is really a complete an detailed explanation for my somewhat hasty words, and gut feeling, on paper trading.

        I am sure it will help many people who read us here, including myself.

        Thank you so much – Roni

  4. Barry B September 3, 2017 12:17 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 09/01/17.

    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:


    Barry and The Blue Collar Investor Team

  5. Allan September 3, 2017 9:48 am

    Just totaled up my returns for August. My portfolio gained 1.5% after fees. I held 40% cash, which brought down my returns, but in this market I just can’t bring myself to be fully invested.

    • MarioG September 4, 2017 11:00 am


      That 1.5% is great while holding 40% in cash. It implies you did more than 3% average per trade.

      The important thing, I also have found, is the YTD Percent and Annualized figures. Despite the market performance last month where i gained only 0.5%, my YTD annualized is 21.8% so far (see attached image or performance table).

      Interesting, that since you mentioned you kept 40% in cash and that is your normal cash position that one can calculate 2 YTD figures, one an Invested YTD and the other an Overall YTD (including the cash).

      I find myself now being happier placing ITM trades with a few OTM trades so I am more likely to get a positive outcome at the end of the year. I look for less volatile chart patterns and support levels near or greater than my Breakeven points instead of looking for large downside protection. If the stock price is near the ITM strike, better for me, since the Time Value is larger. Have to increase my chances.

      I updated the attached performance table to automatically calculate the cycle period, months to date, and annualized Performance from the manually entered YTD Gain, which I calculate elsewhere for the portfolio.


      • Justin P. September 5, 2017 12:35 am


        “That 1.5% is great while holding 40% in cash. It implies you did more than 3% average per trade.” – I assumed he was saying he made 1.5% on the stocks he was holding, though obviously Allan could clear that up. A 3% average would be truly remarkable given the RUT lost about 6.2% last month, depending on how much was invested (I’m finding it more difficult to diversify enough each month as I add more capital).

        22% is an excellent annual return Mario, even better if you can compound it. How many stocks are you looking at before opening your positions each month?


        • Allan September 5, 2017 10:50 am

          It was 1.5% on my total CC portfolio (cash and securities). I received dividends in August and hit a ‘double’ which contributed to the final tally.

          • MarioG September 5, 2017 1:55 pm

            That’s even better news.. hitting a double. What was the Symbol?

  6. spindr0 September 3, 2017 12:00 pm

    Understanding of synthetic equivalents makes it easier to visualize Rushbabh’s idea. If the standard ETF is UP and its inverse is DOWN, selling an ATM covered call on each one is equivalent to selling an ATM short put on each:

    Buy UP for $50 and sell one ATM $50 UP callf or $2 = short one $50 UP put
    Buy DOWN for $50 and sell one ATM $50 DOWN call for $2 = short one $50 DOWN put

    Premium received is $4

    The position is equivalent to short one $50 UP put and short one $50 DOWN put

    Since these are correlated inverse trackers and since DOWN hypothetically moves identically in the opposite direction to UP, a short $50 DOWN put behaves like a short $50 UP call and the position is equivalent to:

    Short one $50 UP put and short one $50 UP call …which is equal to selling a $50 ATM straddle on UP (also equal to a short straddle on DOWN)

    The profit potential for a short $50 straddle is the premium received ($4) and the break evens are $46 and $54. Outside of those prices, losses occur.

    The good news is that Rushabh was thinking outside the box and trying to analyze a complex position. ” What If ” is an essential part of understanding options and applying them correctly. The bad news is there are no free lunches. Market makers and floor traders do risk free trades like conversions, reversals, etc. but frictional trading costs as well as lack of of size almost eliminates them for retail traders. Rushabh’s position isn’t one of them.

  7. Terry September 3, 2017 2:55 pm

    There is a large number of bold entries that passed all screens in this weeks report. Is it unusual to have this number of stocks as candidates?

    • Alan Ellman September 4, 2017 6:45 am


      Over the years we have found that the number of stocks on our weekly watch list is a good indicator as to the health of the overall market. Chart technicals play a major role in the number of “bold” stocks. In the past week, the market was up 1.4%, a robust amount. When this occurs, it is not unusual to have a large number of eligible candidates.


  8. Jay September 5, 2017 12:36 pm

    Good morning friends.

    Welcome to the wild ride we call September :)! So many dominoes stacked against the market between N. Korea, debt ceiling, budget deadline, Harvey aid and the statistical history of the month itself all good contrarians know it can only go up :)!

    I’ll confess I had YTD gains to protect so I took IRA profits Friday and built a lot of cash leery of September. Core holdings are all over written. I plan to now sell cash secured puts further below market on down days to force the discipline of buying back below where I sold.

    But for those 100% long with overhead calls written have no fear: I am a fantastic contrary indicator! When I am antsy it is usually a good time to buy or just be long.

    I manage my significant other’s account. When I told her the history of September and all the hurdles the market faces she would not hear of being anything other than fully invested, damn the torpedoes! In the end she will probably be right…. – Jay

    • JayM September 5, 2017 12:54 pm

      It’s times like this where ‘option management’ becomes so important. Who knows, maybe even smack a double or two!

    • Roni September 7, 2017 11:05 am

      Hi Jay,

      that’s a win win situation you have with your “other’s” account.

      If you are right you win, and if she is right you will both be happy that she wins.

      Way to go my friend, keep it up.


  9. MarioG September 5, 2017 3:17 pm

    Covered Call Purchase / FINVIZ Web Site comments

    Opportunity knocked!

    While the market was down over 200 points today, I was able to use Watch Lists I created of the BCI Premium Run List to quickly identify several stocks that I could buy Covered Calls with $18K of cash I had still in cash.

    I finally selected NCLH, which was about 4% down and had a nice low risk chart and Gain numbers.

    Attached is an partial image of the Finviz watch list for the 9/1/17 Premium Report Run List with columns identified and Menu Options for other Finviz features

    **** Covered Call Purchased ****
    ** 100 shares NCLH at 55.5295 Strike 57.5 Call 9/15 at 0.3730
    Static Return: 0.67%, Upside Potential 3.54% Return if Excercised Total 4.21%

    ** 200 shares NCLH at 55.5148 Strike 57.5 Call 9/15 at 0..35
    Roo% Static Return 0.63% Upside Potential 3.58% Return if Exercised total: 4.21%

    In addition to the DJ being down, I guess Hurricane Irma had an impact. Already that stock has recovered to 56.47 at 3pm

    **** FINVIZ Web Site Watch List Comments ****

    Found the time to become more familiar with web site.general features and particularly the Watch Lists.

    I like the Watch List you can create. Simple yet powerful and easy to create. I take the Premium Report Run list and enter it into a Finviz Watch List.

    * Maximum symbols per Watch List:100 (I had to created 2 watch lists for the 9/1/17 Premium Report – No problem)

    * I created the watch list before the 9 am Monday opening. This allows me to automatically enter the Fridays Closing Price which is also in the Run List. For each symbol you enter, Finviz has a button to GET TODAYS PRICE, which over the weekend is the closing price. This saves a lot of data entry time.

    * Now that I have the watch list completed, I can sort by any column in the Watch list to pick stocks I may want to trade.

    * One useful feature is that you can hover your mouse over a stock symbol and see the latest chart movements to identify potential picks.

    * You can also Right-Click, Select New Tab on any symbol and get a detailed report on the stock, while keeping your portfolio in another Browser Tab. There is a link to the company’s web site in the Symbol page. Quite useful. .

    * I do know what the watch list limit is per guest customer. But I found out today there is a 100 line item limit per watch list.

    * You can register for free to be able to create watch lists and get a lot of information.

    * When you open a watch list, news for all the stock in your watch list appears below the list.

    * The only other feature in Finviz that I have slightly used is the Screener Menu option. I found it has a lot of features and power.

    Hope the above has been helpful.


    • Barry B September 6, 2017 4:27 pm


      Nice discussion. I use FinViz ALL the time…it is my go-to news site. You also might want to take a look at the CNBC site. They also have a nice portfolio management tool that gives you prices in real time. they also give you pre-market pricing on the major indices…i check those every night.

      Checking finviz in the AM is part of my morning “ritual” I check for any key geo-political developments as well as the news on the stocks that I hold in my portfolio.



      • MarioG September 7, 2017 9:21 am


        Thanks for the comments on Finviz and CNBC. I already checked out CNBC. Like it. subscribed to some of the newletters. Setup a watch list. Lots of features and information presented in a concise format.


  10. Jay September 5, 2017 3:39 pm

    Thanks Mario!

    As always I appreciate your tireless devotion to our community sharing your trades so we all may learn.

    I will sound like a broken record. Buying NCLH on a 4% dip was wise. But why cover it now? Wouldn’t it be better to let it bounce back and cover it on an up day? – Jay

    • MarioG September 5, 2017 4:15 pm

      You are right, Jay. Just did not do that. Since we are entering Week 3 probably in my mind wanted to keep it simple and minimize my future workload and get the 18K invested. I do have a Hurricane Irma and other chores to do.

      The STO did add 0.6% or $107 total to the income. Would have been less if I waited because of time decay. Otherwise the rest is all upside potential. Let’s re-visit this after Expiration Friday and then I can compare the Before and After.

      If the market stays up at Expiration Friday I will have many roll outs to do. The last two Exp. Fridays were relatively easy since Market dips on those Friday made many options worthless.


      • Jay September 5, 2017 6:57 pm

        Thanks again, Mario

        I am in New Orleans and have a wary eye, as you do, on Irma. We both know all about hurricanes.

        You manage more positions than me. It makes perfect sense to keep them on a common date.

        I still think buying stocks on down days and covering them on up days since the market is not linear is worth considering. But that is just me :)! – Jay

        • MarioG September 6, 2017 12:09 am

          I see your point, If a stock has Weeklies, you can then sell an option for 4 weeks any time, benefiting from a full cycle.

          To keep things simpler for me, I can use buy/wait selectively for the first 2 weeks of a 4 week cycle and still maintain my common Expiration Friday date. That will probably work best for me and is a good compromise. To maintain multiple Expiration Fridays will be too much both in time and documentation.


          • Jay September 6, 2017 12:11 pm

            Through hard work you enjoy the good fortune of managing a large portfolio. I very much get the efficiency of a common date. I trade/invest only in ETF’s and larger cap stocks that all have weeklies so I can craft “months” of my choosing.

            Buy/wait works for me (Alan will have to give me credit for that term if he discusses it in upcoming books!) and I do not find it cumbersome to have a variety of expiration dates since I rarely have more than a dozen positions and this is my main hobby.

            I evacuated New Orleans for Katrina and two other hurricanes since. I gather from context you, and now Alan, are in South Florida. You don’t need me to tell you to favor caution over bravado. Leave if there is the slightest question in your mind before it becomes impossible to do so.

            All the best, – Jay

          • MarioG September 7, 2017 3:51 am


            Have you ever missed an Expiration Friday strategy because of an oversight or maybe error in noting down your Expiration Friday date? What system do you use to prevent that?

            When I consolidate my 4 accounts into one in a Fidelity watch list, I sometimes add an option symbol for a weekly accidentally instead of the third Friday. I catch the error later when I notice the time value of the option trade is out of kelter from other trades.

            In making my CC buy and sells, I have to double check my orders so I do not make an error.

            With Fidelity, to set up a CC, you right click strike, select Buy Strategy and you initial order screen is set up for 1 contract..
            If you increment the contracts, it automatically increments the Share bought or sold in 100’s. If you increment the Shares bought, it increments in 100’s and also increments the contracts as well. No chance for Error.

            With Optionshouse/Etrade platform, to set up a covered call, you first go to the option chain. Click on bid price, then in upper right screen select Covered Call Strategy and your Covered Call order screen comes up. If you increment the Contract, nothing happens with the share bought. If you increment the Share bought, it only increments in units so you have to type in the correct shares you want and then manually increment the contracts. (I will give them some feedback to see if they can improve on this.)


          • Jay September 7, 2017 9:14 am


            If there is an order entry mistake to be made I have made it :). I have done every dumb thing that is possible to do and scrambled after the fact to undo it since I am a computer klutz!

            I am also an Options House customer and I am not happy with the buy out by eTrade. They grandfathered my low commissions but the platform is not as good and I find it frustrating.

            I have not had a problem with missing expiry’s or confusing them since I don’t have a big number of positions and I look at them each day.

            Since I leg into trades buying the stock first and covering later they are independent transactions each simple to do in it’s own regard. When I buy or sell spreads for speculation I have to be very careful so I don’t screw it up with an order entry typo. I make sure to always hit preview to check it again before hitting send. Often I will just save the trade and come back to it in a few hours or the next day to see if I still like it. It’s funny how often I get better pricing doing that :)! – Jay

          • MarioG September 7, 2017 9:27 am

            Thanks for being so forthright….It’s embarrasing to myself when you repeat it again a second time. That is what I am trying to avoid.

            You are right. Not a time to do things with haste. I look at the trade a few times to make sure something obvious is not right for the trade. Like having 3 contracts and 200 shares (Probably will be rejected) or having 300 shares and 2 contracts!


  11. Alan Ellman September 6, 2017 5:42 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.

    For your convenience, here is the link to login to the premium site:

    NOT A PREMIUM MEMBER? Check out this link:

    Alan and the BCI team

  12. Brian September 7, 2017 12:51 am


    I have a question about option liquidity. I use Tastyworks which rates the liquidity of the option on a scale of 1 to 4 (best). Many of the stocks highlighted in the weekly report are rated 1 or 2 which I have been passing on. Do you have any concerns with the liquidity of the stocks that are on the weekly list or am I just missing out on some really good trades?


    • Alan Ellman September 7, 2017 7:13 am


      In the BCI methodology, both stock and option liquidity are important. We require a minimum average trading volume of 250,00 shares-per-day or more on the stock trades and an open interest of 100 contracts or more and/ or a bid-ask spread of $0.30 or less for option trades.

      In our premium reports check the column titled “NTM OI > 100 contr” If you see a “Y” this means that a near-the-money strike does meet this criteria.

      These guidelines are geared specifically to our 1-month option obligations.

      We should also be prepared to leverage the “Show or Fill Rule” and negotiate the best possible option prices whether selling or buying back.


  13. MarioG September 7, 2017 1:09 am


    Question – Why are special dividends like the recent EDU
    dividend of $0.45 handled differently than regular
    quarterly dividends.

    The EDU special dividend adjusted the STRIKE Option symbol
    and price. Strike 80 changed to Strike 79.57. 80 – 79.57- $0.43.
    Do you know why it is not $0.45.

    Announcement: 7/25/17 (Earnings report on EDU Web site)
    Amount: $0.45 per share
    Ex Div Date: 9/1
    Call Strike: Strike 80 changed to 79.57.(80-79.57 = $0.43)
    Pay Date: Oct. 6



    • Alan Ellman September 7, 2017 9:37 am


      Great question that me scratching my head as well regarding the discrepancy in dividend and strike. Then I realized that EDU was an American Depository Receipt (ADR), a foreign company trading on US exchanges. The stock certificates are held by a bank that charges a deposit fee in cases of special dividend distributions. In this case, it appears that fee is $0.02 per share making the net of the dividend distribution $0.43, not $0.45.

      Plain vanilla, anticipated, recurring dividends don’t change strikes because market-makers know they’re coming and the option pricing factors the ex-date into the value of the options…calls decrease in value and puts increase in value because stock price will go down on the day of the ex-date by the amount of the impending dividend.


  14. Alan Ellman September 7, 2017 6:57 am


    Our Florida office will close as of Saturday and will re-open as soon as it is safe to do so. All reports and blog articles will be published at its normal time and will not be impacted. All book and DVD orders will be shipped from our New Jersey office within 1-day of the order. Email and blog responses may be delayed.

    Stay safe.


    • Justin September 7, 2017 7:24 am

      What is it about Florida? All we get around here is the occasional willy-wllly…

  15. Harini September 7, 2017 7:00 am

    Hi Alan,

    I am a novice in covered call trading.Just started going through your videos and ordering your book.

    I have a question regarding when to place a covered call ,in the monthly covered call selection I could see October 20th calls,today is September 6 th ,what is the best time to sell a covered call.

    I have 101 South west airlines stocks purchased at 61$ ,and now trading at approx 51$.Do you think I should consider ITM covered call or should I sell put ?

    Thanks for your help.

    • Alan Ellman September 7, 2017 4:29 pm


      Here are some general guidelines that have application to covered call writing and put-selling:

      1- My personal preference is to use Monthly options that expire on the 3rd Friday of the month. Some of our members prefer Weeklys that expire every Friday.

      2- The best time to enter these positions is within the first few days of a contract (the Monday or Tuesday after expiration).

      3- Southwest: First we must determine if this is a stock we want to keep in our portfolio or are we willing to sell. If keep, stay with out-of-the-money strikes. If not, in-the-money strikes will work (101 shares will allow the sale of 1 contract).

      4- In general, airline stocks are not the best securities for option-selling because they provide monthly capacity reports that act like earnings reports and create risk. If you plan to hold LUV for the long haul, writing calls is okay.

      5- Selling puts is generally reserved when we don’t yet own the shares. They give the right to the option buyer to sell their shares to us. If we sell a put our position in that stock can increase and will have no impact on the shares we already own. Buying a put, on the other hand, will offer downside protection on this declining stock.

      6- At this time, 2 points are most important:

      A. It doesn’t matter what we paid for a stock in the past. Our current decisions are based on current price.

      B. Take your time…we shouldn’t start selling options until we have mastered the 3 required skills (stock selection, option selection and position management). Once we have achieved this level of education we now will have years and decades to benefit.


  16. Nagesh September 7, 2017 4:03 pm

    Hi Alan,

    I have a question about ITM covered calls,are ITM options exercised all the time?

    If yes,when will these options will be exercised ?

    Is it before the expiration cycle or at the the time of expiration?


    • Alan Ellman September 8, 2017 8:21 am


      Technically, our ITM options are “American Style Options” which can be exercised by the option holders AT ANY TIME until 4 PM ET on expiration Friday. Practically, however, options are rarely exercised early because the option buyers are better off selling the option rather than exercising it and selling the stock. When options are exercised early, it is usually related to an ex-dividend date.

      Selling the option results in capture of intrinsic value + time value Exercise and selling the stock results in capture of intrinsic value only.

      Expect all options that are in-the-money by $0.01 or more to be exercised the Saturday after expiration Friday. Keep in mind that we can avoid exercise by buying back the ITM option prior to 4 PM ET on expiration Friday.


    • spindr0 September 8, 2017 7:15 pm


      ITM calls are more likely to be exercised early if they have very little time premium left in them.