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Evaluating a Portfolio from a Numerical Perspective

When we formulate our covered call writing and put-selling portfolios, we are basing our decisions on non-emotional sound fundamental, technical and common sense principles. Similarly, we can analyze a portfolio and determine the investor’s stock and overall market assessments. On November 17, 2017, Carl sent me a list of his very first covered call writing portfolio positions. I felt it would be instructive to analyze this portfolio and interpret Carl’s thought process that led to these decisions.

 

Portfolio positions in 1-contract increments

covered call writing stock selection

Carl’s Initial Covered Call Writing Portfolio

 

Portfolio calculations using the multiple tab of the Ellman Calculator

covered call writing calculations

Portfolio Calculations Using the Ellman Calculator

 

Analyzing the portfolio rationale

  • The first item that stands out is that all selected strikes were out-of-the-money indicating a bullish market bias. It would also normally reflect that chart technicals were also bullish and confirming 
  • The average initial return on option (ROO) is 1.9%, a moderately conservative approach to covered call writing because ROO stats reflect the implied volatility of the underlying securities and therefore the inherent risk in our trades
  • The upside potential averages to 3.4% reflecting a bullish bias where we want to take advantage of market forces moving share price from current market value up to and beyond the current strike prices sold
  • The initial time value returns (ROOs) range from 0.4% to 3.2%. The 0.4% seems to be out-of-place and Carl may have considered not using such a deep out-of-the-money strike in this case. Setting a range for initial time value returns is a critical step in setting up our option-selling portfolios

 

Discussion

Our portfolio positions should reflect a previous analysis based on sound fundamental, technical and common sense principles. Carl did a phenomenal job of setting up his first ever covered call portfolio based on his bullish sentiment. Once our portfolios are set up, we move from the stock and option selection steps and move into position management mode to see if we can take advantage of potential exit strategy opportunities. .

 

New book and 3 new calculators now available in the BCI store/ Discount coupons expiring soon

Our new book, Covered Call Writing Alternative Strategies and the 3 new calculators associated with the 3 strategies highlighted in this book (Portfolio Overwriting, The Collar Strategy, The Poor Man’s Covered Call) are now available in the BCI store. We are offering early-order discount promo codes for the book and the 3-calculator package:

newbook5: $5.00 off the price of the new book ($27.00 – $5.00 = $22.00). The book will cost $35.00 when available on Amazon.com.

3calculators20: $20.00 of the price of the 3-calculator package ($79.00 – $20.00 = $59.00)

To receive both discounts, place 2 separate orders.

 

Link to BCI store: 

 

 

 

 

Upcoming event

Chicago Stock Trader’s Expo: All Stars of Options

Sunday July 22nd 12:30 PM – 1:15 PM

“How to Select the Best Options in Bull and Bear Markets”

Hyatt Regency Hotel @ McCormick Place

2233 South Dr. martin Luther King Jr. Drive

Chicago, IL 60616

Click here for details

See all events

 

Market tone

This week’s economic news of importance:

  • Markit manufacturing PMI June 55.4 (54.6 last)
  • ISM manufacturing index June 60.2% (58.3% expected)
  • Construction spending May 0.4% (0.0% expected)
  • Factory orders May 0.4% (0.0% expected)
  • Motor vehicle sales June 17.5 million (17.0 million expected)
  • ADP Employment June 177,000 (189,000 last)
  • Weekly jobless claims 6/30 231,000 (225,000 expected)
  • Markit services PMI June 56.5 (56.5 last)
  • ISM nonmanufacturing index June 59.1% (58.3% expected)
  • Nonfarm payrolls June 213,000 (200,000 expected)
  • Unemployment rate June 4.0% (3.8% expected)
  • Average hourly earnings June 0.2% (0.3% expected)

 

THE WEEK AHEAD

Mon July 9th

  • Consumer credit May

Tue July 10th

  • NFIB small-business index June
  • Job openings May

Wed July 11th

  • Producer price index June
  • Wholesale inventories May

Thu July 12th

  • Weekly jobless claims through 7/7Consumer price index June
  • Core CPI June
  • Federal budget June

Fri July 13th

  • Import price index June
  • Consumer sentiment index July

For the week, the S&P 500 moved down by 1.33% for a year-to-date return of 1.67%

Summary

IBD: Uptrend under pressure

GMI: 3/6- Defensive signal since market close of June 28, 2018

BCI: Using an equal number of in-the-money and out-of-the-money strikes. Tariffs still a concern.

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US

The 6-month charts point to a neutral tone. In the past six months, the S&P 500 was up 0% while the VIX (13.38) moved up by 40%.

Wishing you much success,

Alan and the BCI team

 

 

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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.

22 Responses to “Evaluating a Portfolio from a Numerical Perspective”

  1. Joanna July 7, 2018 5:23 am #

    Alan,

    Yesterday, I hit a double on Atlassian Corp. (TEAM). Here are the details:

    6/19 – Did a buy/write of 2 July 20th covered calls at the strike of 70, returning a premium of .90 each. I paid $64.11 for the underlying.

    7/5 – Bought the 2 calls back at the 20% depreciated value of .17 each. This translated to a $146 premium [(0.90 – 0.17) x 2] on the first “hit”

    7/6 – I sold 2 July 20th calls at the strike price of 65. I did this for 2 reasons. First, the premium is higher. Second, it’s to my advantage for the shares to be assigned since July 26th is their earnings report. I have confidence in the shares since it has passed all fundamental and technical requirements, and it’s just a darn good company. At any rate, the premium on each call is 1.40.

    So, my double returned a grand total of $146 + $280 = $426. Some people may not be impressed with this amount of money, but I’m just giddy that it’s this easy to make moolah! Cheers!

    Joanna

    • Alan Ellman July 7, 2018 6:52 am #

      Joanna,

      What a great way to start my weekend. Thanks for sharing this trade with us.

      I, for one, am extremely impressed. I know you started learning the BCI methodology not that long ago and you are already moving to the Dean’s List! Keep up the good work and I encourage you to continue to share future trades.

      Alan

    • MarioG July 8, 2018 4:47 am #

      Joanna:

      Good Trade and congratulations.

      I thought I would analyze your trade and calculate your returns.

      You will actually earn about $604.00 if it ends up In The Money on 7/20, otherwise, it will be Worthless at Expiration and your ultimate return depends on the stock price when you sell it before Earnings Reports.

      You actually can end up with greater profit if it ends up worthless and the price then rises higher before Earnings Report.

      *****
      Buy Covered Call
      TEAM:
      * Buy 200 @ 64.11
      * STO 2CN 7/20 @ .90 (OTM)
      * RCB (Return Cost Basis): 64.11 BEP (Breakeven) 63.21
      * ROO% (64.11): 1.4% ($180) Upside Potential (70): 9.2%

      *****
      20% Rule Exit
      * BTC 2CN 7/20 70CA @ 0.17
      * RCB 64.11 BEP (new): 63.38 = (63.21 + 0.17) (raises breakeven)
      * Assuming the stock was 5% down at 60.90, your ROO% return is: ROO% = (60.90 – 63.38)/64.11 = = -3.9% (loss) = $496.00 Loss

      ****
      Hit Double Selling call Strike 65:
      * STO 2CN 7/20 65CA @ 1.40
      * RCB= 64.11 BEP (new) = 61.98 = (63.38 – 1.40)

      * If the Stock expires Worhless at 64.11 and you can sell it at 64.11 the following week, your ROO% = 3.3% ($426) – (Agrees with your total)

      * If the Stock is ITM at Expiration, your ROO$ (Strike 65): 4.7% = ((65 – 61.98))/64.11), $604.00

      *****
      Great Covered call Return for 1 cycle. Watch out for the unexpected. More than 1 time I have had calls sink the day before Expiration. Just happens. Good luck.

      Mario

  2. Dennis July 7, 2018 3:41 pm #

    Alan,

    I noticed that 2 of the stocks in Carl’s portfolio (CMSCA and PPC) had 2 different options used. All were out of the money. Can you explain the reason for this and if it something we should routinely consider?

    Thanks a lot.

    Dennis

    • Alan Ellman July 8, 2018 5:06 pm #

      Dennis,

      When we use multiple strikes for the same underlying stock, I refer to this as “laddering strikes” Usually this involves using both in-the-money and out-of-the-money strikes but in this case Carl used multiple out-of-the-money strikes reflecting his bullish assessment of the market and the stocks. The more bullish we are, the deeper out-of-the-money we should go while still generating our initial target return goals.

      Let’s say we are targeting 2-4% for our initial return goals when structuring our trades. We should then consider strikes that are closer to 2% when extremely bullish and closer to 4% when mildly bullish.

      Alan

    • MarioG July 9, 2018 10:29 am #

      Laddering of strikes:
      Classic Encyclopedia: Pages 112-113, 118, 124, 177 (index only lists 112-113)

      As Alan mentioned in his Blog response, CMSCA at Strike at 0.4% ROO% initial return does not meet target goals and is not recommended.

      At 0.4%, which represents $14.74 per contract, the possible share appreciation overwhelms the trade that you might as well be long on the stock instead of having the obligation to carry it to Expiration for so small an initial gain.

      The other CMSCA trade, on the other hand at 2.0%, represents $73.70 per contract initial gain.

      Mario

  3. Barry B July 8, 2018 2:49 pm #

    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 07/06/18.

    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

    Our new book and 3 new calculators are now available in the BCI store/ Discount coupons

    The new book, “Covered Call Writing Alternative Strategies” and the 3 new calculators associated with the 3 strategies highlighted in this book (Portfolio Overwriting, The Collar Strategy, The Poor Man’s Covered Call) are now available in the BCI store. We are offering an early-order discount promo code for the book and the 3-calculator package:

    newbook5: $5.00 off the price of the new book ($27.00 – $5.00 = $22.00). The book will cost $35.00 when available on Amazon.com.

    3calculators20: $20.00 of the price of the 3-calculator package ($79.00 – $20.00 = $59.00)

    https://www.thebluecollarinvestor.com/store/

    One last point. I survived the Rugged Maniac Race on Saturday…

    Best,

    Barry and The BCI Team

    barry@thebluecollarinvestor.com

    • Jay July 8, 2018 6:42 pm #

      Well, Barry, you don’t look too worse for the wear :)! Looks like a perfect weather day in the back drop though likely hot?

      I ordered the new book today, got an instant confirm and shipping notice so I can not wait to dive into it. Your store function works well. – Jay

    • Roni July 9, 2018 3:58 pm #

      Barry,

      Congrats. I see a medal on your chest.
      Showered and changed your cloths for the podium ceremony ?

      Roni

  4. Bob July 9, 2018 5:55 am #

    Alan when you negotiate using the Show & Fill rule is there a set percentage of the spread that you use to find the right price to negotiate at? it appears from the examples I have seen in your new excellent book,” Covered Call Writing Alternative Strategies”,that the number appear to be around 60% to 75% of the asked price.

    Bob

    • Alan Ellman July 9, 2018 7:07 am #

      Bob,

      The best way to leverage the “Show or Fill Rule” is to first locate the “mark” or midpoint of the spread. Then enter a limit order that slightly favors the market-maker (slightly lower than the mark when selling and slightly higher than the mark when buying). If the spread is $2.50 – $3.00, I would set a limit order to sell at $2.70. Remember not to check the “All or None” box on the trade execution form.

      Glad you like the new book.

      Alan

    • Jay July 9, 2018 8:51 am #

      Hi Bob,

      It is a curious and interesting game! At the risk of sounding cynical if I want to buy 100 shares of BCI I place the limit order below the mark to offset the commission.

      The market maker’s computers know what their order flow looks like and will fill me more times than not. I buy things on down days since the market is not linear day to day so the mark comes down to me and I get a fill more often than not.

      I have had plenty of times where I got that wrong and the stock went up leaving me standing at the station! But the bus usually comes back around to pick up the stragglers :).. – Jay

      • Hoyt T July 9, 2018 5:26 pm #

        Hi Jay,

        You bring up a good point.

        Wouldn’t be great to be able to see how each broker writes it’s algorithms. Sometimes I think it depends on the backlog on bid and ask, volume, open interest and maybe even other exchange order books. Sometime I feel its a combination of the order’s percentage of backlog relative to the percentage of variation from the “mark”.

        Often, when I am in no hurry, I will enter an order to buy three steps below the “mark”, wait a while, and if its not filled, change the order to two steps and later to one mark and so forth.

        I don’t keep track of all of this (I am not that bored) so I really don’t know why one time its filled at three steps, two steps or one step. On the surface it seems there is no rhyme or reason. But we know with algorithms everything is finite.

        it seems like I tend to get filled closer to the “mark” with smaller quantity orders. When I sell calls the order quantity is usually smaller and when I buy calls the order quantity is usually larger.

        You are spot on about sometimes being left at the station. When that happens I feel foolish, missing what I thought to be a good deal by being too cheap.:)

        A lot of my trades are BAC calls, 50 and 100 lots, and the NTM strikes only have one to two pennies spread. Expiration Fridays
        are the hairiest days of all particularly if you are trying to squeeze out a few pennies when you are at the money but need to be out of the trade before 4:00pm. Its like playing Pac-Man in the early eighties.

        All in all, if you make a lot of trades it pays to try to get the best price possible. But sometimes it can be counter productive.

        Each of us have various skills and idiosyncrasies that determine how much time and effort we put into getting the best price. Whats really important is that most people need to follow the BCI methodology methodically. Hows that for alliteration?;)

        May the trend be your friend,

        Hoyt

    • MarioG July 9, 2018 6:33 pm #

      Bob,

      Interesting comments from Alan, Jay, and Hoyt on their “Play the Spread” Strategy. I like Hoyt’s steps nomenclature..

      I usually calculate the Mark value (Midway mark) and then add a amount in my favor that most likely will not fill. Wait a very short while. If if does not fill, (waiting usually does not work, it it does not fill right away), then I march down with Replace orders to get the best price for me.

      Rarely do I end up selling at the Bid or Buying at the Ask. Most of the time the final value end up on the Money Maker side. But I least tried!.

      But today was different. BRKS Sell-to-Open order had a spread of .85 – 1.05. Tried .90 – no fill, then .90 – no fill. 0.85 worked. I then looked at the History for the trade and actual fill was at 0.94. BRKS was very volatile while I was trying to fill the order. Usually that is not the case..

      I made similar trades in my 3 other accounts with BRKS and they ended up with fills at 0.97, 0.99, 0.96.

      Mario

  5. Jay July 9, 2018 6:24 pm #

    Thanks Hoyt – this is always fun stuff!

    I try to never be in a hurry or on a time table when making trades so I can let the market find me and my desired price levels. I have missed my share of buses but I have avoided a few that ran off the road too. :).

    Seems to me it is about making our trading fit our temperament so we are always comfortable with what we are doing instead of second guessing ourselves. – Jay

    • Hoyt T July 10, 2018 10:35 am #

      Absolutely!

      Remember the old saying, “Different strokes for different folks”?

      I also like the old saying, “Missing a stock (or option) is like missing a bus. Just wait at the bus stop, there will be another one coming shortly”

      May the trend be your friend,

      Hoyt

  6. Dave July 10, 2018 11:54 am #

    Alan,

    I’m new to your service and am finding it very helpful. I do have a question, though. You say in your video that all of the stocks in the white area of the weekly report are eligible for covered calls but all of them show earnings reports coming up in the next month. I think I’m missing something here, or maybe misunderstanding something. It seems to me that if an earnings report is coming up in the next few weeks (as is the case with the listed stocks) that they would not be eligible candidates for covered calls. Can you clarify this for me?

    Thanks and best regards.

    Dave

    • Alan Ellman July 10, 2018 2:05 pm #

      Dave,

      Our weekly stock reports are segmented by contract month, not by calendar month. On the most recent report, eligible stocks for the July contracts started under the solid black line with TRU and ended with TTGT for the current contract month but not the August contracts until those reports pass (dates given),. ROST through ADBE are eligible for August contract month as well (below broken black line).

      So, the black lines delineate contract month and each report reflects status for the current contract month no matter how close to expiration we are.

      Alan

  7. Jim July 10, 2018 3:42 pm #

    Alan,

    I’m a new BCI premium subscriber.

    I often read in the BCI report that BCI has “an equal number of in-the-money and out-of-the money strikes” or some other ratio of ITM to OTM strikes. How does an investor decide what stocks would be good to write OTM options on and which ones to write ITM options on? If a stock has an Earnings Release coming up in the next month, would that be a good reason to choose an ITM strike (because as a BC investor you’re going to sell the stock anyway at the end of the current options contract)?

    Thanks,
    Jim

    • Jay July 10, 2018 10:16 pm #

      Hi Jim,

      Alan will likely get back to you with a better answer than mine but since I have asked myself your very question many times I hope you do not mind if I chime in!

      The easiest solution is if you have 200 or more shares of any position than you can split strikes in each. Or only cover half and let half run uncovered. Buy let’s say a person has 100 shares each of 6 stocks diversified in six different S&P sectors as defined by the XL series of ETF’s. Maybe one is from XLF, XLU, XLP, XLY, XLK and XLV. Then a way I have used is look at which sectors are doing best and favor those as the OTM candidates. In this case at this time the later three are doing better than the former three so I would lean more OTM on those and ITM on the others to hit a strike ITM/OTM ratio target.

      If your positions are sector concentrated as can often happen when focusing on what is outperforming at the time you replace stocks each month and write again than it becomes more of a matter of how you feel about your holdings not worth over working. The market often moves like the tide lifting and lowering boats simultaneously!

      Glad you here with us bloggers! – Jay

    • MarioG July 11, 2018 6:26 am #

      Jim,

      With regard to the “an equal number of in-the-money and out-of-the money strikes” in the weekly report, it refers to the proportion of stock symbol covered call trades that is recommended for the current market tone..

      Just because you have Earning Report the next month is not the reason to select an ITM or OTM strike. If a covered is OTM at Expiration, it expires worthless, and you sell the underlying the next week or wait till you are near Earnings Report date if the stock is trending in your favor for additional profit.

      As far as how I determine whether to select an ITM or OTM position or whether to invest at all a particular stock symbol, depends on several factors:
      * Run List – Positive (Bold in run list) or mixed technicals. Positive – good candidate for OTM if numbers and target goals are right – see below.
      * Market – Current downturn or dip in market – IF stock has dipped as well, may be time for an OTM selection to get both Static and share appreciation returns, Trending up – Sometimes an ITM better choice unless stock has a good trending up history.
      * Earning Reports – not in current cycle – see run list, verify at online sites (earningswhisper, brokers, other sites) if see contradicting information.
      * Analyst sentiment / summary scores / company information – Analyst sentiment or score may contradict run list status but I do not let that deter me completely from selecting the stock. It is in the run list after timely and rigorous screening.
      * Option table strikes values available (Some stocks increment by 1, others increment by 5, etc.)
      * Industry – am I diversifying as recommended or do I stray away from that?
      * Price of stock with respect to the ITM and the OTM strikes available
      * Price chart (trending up – good candidate for OTM, flat for an extended period – good candidate for ITM
      * Is the current price near the ITM or OTM strike (If near the OTM – picking iTM strike would not yield a good return, If near the ITM strike – best return and OTM strike probably not meet initial target return
      * Breakeven (Is it favorable to me when looking at the price chart, even for an ITM opporturnity with its downside protection, I look at the breakeven to see where it falls)
      * Volatility (large swings, smooth trend, I look for a good history to increase my chances of success – otherwise look for another opportunty.
      * Return – Meet your target goals?, If trending up, maybe positive technicals, and the OTM strike available does not meet your return goal (0.4% for example because it is nearer the ITM strike, I would buy the stock and wait for the stock to rise to yield a better OTM return, then you win because you have a lower cost basis and lower breakeven for the stock.

      Just some suggestions.

      Mario

    • Alan Ellman July 11, 2018 6:26 am #

      Jim,

      Great responses from Jay and Mario.

      As a general guideline to enhance portfolio returns, we favor OTM strikes for stocks that have the strongest technicals and ITM strikes for stocks with mixed technical (we are not interested in securities with bearish techicals). This allows us to factor in trend, momentum and volume into our strike selection as well as our stock selection.

      Your question is such an important one because subtle nuances like strike selection and “laddering strikes” based on security performance and chart technicals, is what allows us to be among the best-performing option-sellers…anywhere.

      Alan

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