Setting up our covered call writing and put-selling portfolios requires common sense analysis once our watch lists have been established. Considerations include proper stock and industry diversification, appropriate cash allocation to each position and. strike selection that will maximize our returns and reflect personal risk-tolerance and overall market assessment. In this article, I will dissect the very first covered call writing portfolio established by one of our members who we will call Carl E Olson…CEO for short.
Stocks purchased on 5/21/2018
- Yellow field: 5 different stocks selected
- Purple field: 5 different industries represented
- Brown field: Cash representation per position ranged from 12% to 27%
“A” – The 12% – 27% range isn’t bad considering the limited funds available.
Options sold on 5/22/2018
Uh oh. The stocks should be bought and the options sold at (relatively) the same time. let’s move on and look at the position spreadsheet:
- Red arrow on far left: VNOM is the only stock that is not in bold, and therefore has the weakest technical parameters of the 5 underlyings (still not bad from a technical perspective)
- Yellow field: 2 ITM strikes (blue arrows) and 3 OTM strikes selected, reflecting a neutral to slightly bullish market assessment
- Red arrow in center: An OTM strike was used for VNOM, the only non-bold stock
- Brown field: An initial time value return of 4.25% was generated, before trading commissions
- Blue field: An initial time value return of 4.10% was generated after trading commissions
- Note that TAL has an especially low ROO (initial time value return on the option) of 0.30%
“B” – Options should be sold when shares are purchased. This would have resulted in even higher initial 1-month returns than 4.10%. Also, when splitting OTM and ITM strikes, VNOM, the only non-bold stock, should have been affiliated with an ITM strike. Overall, an excellent first portfolio set-up for our friend, CEO.
When setting up our option-selling portfolios after our watch lists have been established there are several considerations that need be factored in to elevate our final returns:
- Stock purchase and option sale must be done simultaneously unless using stocks already in our buy-and-hold portfolios
- Stock and industry diversification
- Cash allocation per position
- Technical analysis of underlyings: bullish or mixed
- Strike price selection based on chart technicals and market assessment as well as personal risk tolerance
- Calculations must meet our initial return goals
February 7th – 10th, 2019
Orlando Money Show
Omni Orlando Resort @ Champions Gate
February 7th – 10th 2019
1. Getting Started with Stock Options: Creating Monthly Cash Flow with Covered Call Writing
February 8, 2019, 3:10 pm – 3:40 pm
2. Getting Started with Stock Options: How to Select the Best Options in Bull and Bear markets
February 9, 2019, 2:00 pm – 2:45 pm
This week’s economic news of importance:
- NFIB small-business index Oct. 107.4 (107.9 last)
- Federal budget Oct. -$100 billion (-$63 billion last)
- Consumer price index Oct. 0.3% (0.1% last)
- Weekly jobless claims 11/10 216,000 (210,000 last)
- Retail sales Oct. 0.8% (0.6% expected)
- Philly Fed Nov. 12.9 (20.0 expected)
- Business inventories Sept. 0.3% (0.5% last)
- Industrial production Oct. 0.1 (0.2% expected)
THE WEEK AHEAD
Mon Nov. 19th
- Home builders’ index Nov.
Tue Nov. 20th
- Housing starts Oct.
- Building permits Oct.
Wed Nov. 21st
- Weekly jobless claims 11/17
Durable goods orders Oct.
Existing home sales Oct.
Consumer sentiment Nov.
Leading economic indicators Oct.
Thu November 22nd
- None- Thanksgiving Day
Fri November 23rd
- Markit manufacturing index Nov.
- Markit services index
For the week, the S&P 500 moved down by 1,61%% for a year-to-date return of 2.34%
IBD: Market uptrend under pressure
GMI: 1/6- Bearish signal since market close of November 11th, 2018
BCI: Selling only in-the-money strikes until market recovery is confirmed. Remain confident in long-term health of the stock market. No change from last week.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a bearish tone. In the past six months, the S&P 500 was up 1% while the VIX (18.14) moved up by 35%.
Wishing you much success,
Alan and the BCI team