Early assignment of our covered call positions is rare but possible. When it does occur, it is frequently related to an ex-dividend date. These are dates that we must own the shares in order to be eligible to receive the dividend on the distribution date. Premium members can access ex-dates of the eligible stocks in our Premium Stock Reports in the column on the far right as shown below:
In the two rows highlighted in brown we see:
- GLW (top) has an ex-date of 5/26/2017
- MGM (bottom) has an ex-date of 6/7/2017
- Both ex-dates fall within the June 2017 monthly contracts
When should we write the calls if we want to avoid potential early exercise of shares we want to hold?
The BCI guidelines are to write the call the day of or the day after the ex-date when that ex-date falls within the first week of a monthly contract or to sell a 2-month option if the ex-date falls in the latter part of the monthly contract. The rationale for this is that the time value erosion (Theta) of an option is logarithmic in nature for near-the-money strikes which means that the longer we wait to sell the option, the less premium we receive. This is seen graphically in the chart below:
Time decay and Monthly contracts
There are 26 calendar days in the June 2017 contracts. If we wait to sell the covered call on the ex-date of these two securities, the percentage of calendar day time decay lost is as follows:
- GLW: 6/26 = 15.4%
- MGM: 17/26 = 65.4%
MGM is impacted even more than the percentages reflect because more time value is lost the closer we get to expiration Friday.
Best time to execute covered call trades based on these ex-dates
- GLW: 5/26/2017 or the next trading day
- MGM: Write a 2-month call (July expiration) after expiration of the May contracts, thereby moving the expiration date far away from the ex-date, making early exercise highly unlikely (although possible).
Technical versus practical application
From a technical perspective, call holders are better off selling the call, buying the stock prior to the ex-date and then capturing the dividend (assuming there is a time value component to the option premium). However, most retail investors will still exercise the option to capture that dividend so all call writers who want to retain the underlying must take these position management strategies seriously.
For many of us, early exercise is not a problem. It results in maximum returns for the current trade and having our cash back early to then re-invest. But for some, retention of current shares is important and so circumnavigating ex-dividend dates must be mastered. If the ex-date falls in the first week of the contract, we can write the call on that date of the next trading day and still generate decent premium for that month. If the date comes later in that contract month, writing a 2-month call after expiration of the previous month’s contracts is the better approach. Selling Weekly options, when available, is another way to circumnavigate ex-dates and avoiding the covered call position the week of the ex-date.
Global stocks set record highs during the week., against a backdrop of solid economic and earnings growth. The price of a barrel of West Texas Intermediate crude oil moved to $54.60 this week. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX), declined to 9.14 from 10.8 last week. This week’s economic and international news of importance:
- Donald Trump nominated Jerome Powell to replace Janet Yellen as Federal Reserve Board chair. Powell has been a member of the Fed Board of Governors since 2012. If confirmed, he is expected to maintain monetary policy continuity while rolling back some post–financial crisis banking reforms
- The US economy created 261,000 new jobs in October. The bounce-back was somewhat smaller than economists had forecast, falling short of the 310,000 consensus view
- The unemployment rate fell to 4.1%, a 16-year low
- Average hourly earnings disappointed, coming in unchanged versus the prior month, and rising at a 2.4% rate year over year, down from 2.8% last month
- Corporate tax cuts make up the centerpiece of the tax reform proposal unveiled this week by Republicans in the US House of Representatives
- The Bank of England’s Monetary Policy Committee hiked its policy rate from 0.25% to 0.5% this week, the first increase in more than 10 years
- The Federal Open Market Committee left rates unchanged at their November meeting but hinted that a rate hike remains likely at its December meeting
- The Conference Board’s consumer confidence index rose to the highest levels since December 2000
- With nearly 80% of the S&P 500 Index having reported, third-quarter earnings are expected to increase 5.9% compared with the same quarter a year ago
- The growth rate rose to 8.5
THE WEEK AHEAD
Mon Nov 6th
- Eurozone, UK: Service sector PMI and investor confidence index
Tue Nov 7th
- Australia: Rate-setting meeting
- Eurozone: Retail sales
Wed Nov 8th
- China: Trade balance
Thu Nov 9th
- US: Wholesale inventories
Fri Nov 10th
- UK: Industrial production and trade balance
For the week, the S&P 500 rose by 0.26% for a year-to-date return of 15.59%
IBD: Market in confirmed uptrend
GMI: 6/6- Buy signal since market close of August 31, 2017
BCI: My portfolio makeup reflects a slightly bullish bias, selling 3 out-of-the-money calls for every 2 in-the-money calls.
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 (9.14) moved down by 15%.
Much success to all,
Alan and the BCI team
Two days without a blog comment? Unacceptable :).
So let’s get this conversation started! The regulars know I live in New Orleans. The Saints are now 6 and 2. So if you are in search of a second favorite team we welcome and love our out of town fans :).
At the end of August I sold half of my SPY and QQQ positions in anticipation of seasonal weakness. That did not work. I got it wrong.
Since then I have been a dip buyer and a call spread buyer with option premium so low.
As always there is money to be made buying stocks and selling calls. But these days, to me, it is better to split the trade: buy your stocks on down days and sell your calls on up days.
The market is not linear. Only my opinion :). – Jay
good to see you.
The market is very difficult to read.
Alan is slightly bullish, with 3 OTM and 2 ITM, and I am trying to do the same.
AAPL had great results with all their products and numbers. I suspect they will be greater stil this holiday season, and the stock may reach 200.00 again.
Cheers – Roni
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 11/03/17.
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:
Since we are in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
Barry and The BCI Team
There has been a change in the ER date for YY. In the report, it shows the ER date as 11/20/17. As of this morning’s news, the company has changed the date to 11/14/17.
Some of our members have noticed that some stocks have changed their ER date just before reporting. As it turns out, many of these stocks are micro-cap to small-cap Chinese stocks. Where possible, I’ll try to identify these stocks in future reports so anyone planning to trade them will be aware of this behavior.
Nov. 9 ExDiv for Stock symbol DAN
Currently – Strike 30 time value if 0.22, Delta ,741
Since it is only paying $0.06 per share it should it would not benefit an option holder to exercise the option. Maybe an unknowing investor will exercise their option by end of the day Nov. 8 and do me a favor so I can use the cash again. It’s happened to me before.
EWZ (Brazil) up 2.67% today ($315.00 for 300 shares.). Hope it continues… I am 4.45% down from my BEP point. What I find out however, is when the market shoots up, it goes the other way. Let’s hope that’s no more.
Since Expiration Friday 10/20, in my 4 accounts portfolio. using Fidelity Watchlist/Portfoliol, i am up 1.2% in 2 weeks which is on target. Time decay and some share appreciation
In my 4 account portfolio, I have initial filled orders of 11 contract OTM, 9 contract ITM balance. All are ITM now except for MKSI (OTM order). It is only 0.1% down from purchase price.
Roni, You asked me last week why don’t I sue BCI DCCC spreadsheet. I find that creating creating a real time portfolio at Fidelity including the OPTIONS sold allow me to know everything you need to know during day in real time and I can quickly monitor the time values and Purchase price (20/10% rule) and Gap Up (0.1% threshold) for all my accounts..I do not have to enter manually price at the end of the day. you can quickly look at your account value, including your cash position.
Why don’t you try it for your your 7 contract portfolio. You may find it interesting and useful to you. You can create an account at Fidelity for free without funding an account. You can then use the watchlists / portfolios. Once you add a symbol, quantity and purchase price, you can open an option chain. In the Option chain left click on the option name (at your strike) and there you will see another alert settings window with a link in the bottom to add to the Watchlist you created.
There is a box to enter a cash position so you can have an account value automatically calculated. I do not like the Cash box and use instead a dummy Money Market account (like FDLXX or FDRXX) to enter cash balances. That way you can have multiple cash accounts (like a reserve for a Csput or another cash account. Once you do this, refresh your position windows to see the Option symbol you added. Remember to sue a negative number for the number of contracts to get an accurate Account value.
Regarding the account value, it might be a little off compared to your Brokers account value since Fidelity use the ASK value to calculate Account value for an option. That is a minor problem as long as you recognize that. Etrade, for instance uses the Mark or Midpoint value with other criteria.
I created a new portfolio with several of your position to check it out with Fidelity’s latest changes (don’t want to give you bad information). found they do not have an Intrinsic or Time Value column in their browser version, so you mentally calculate that for ITM options but for OTM scenarios the premium is the time value.. I submitted feedback on this to Fidelity. On my Fidelity Active Trade Pro platform of course I have those columns with Delta also. You also have to add the STRIKE column to the Fidelity Watchlist. You can easily drag with the mouse on the browser the columns to any place you want. That is something new they upgraded this year.
The good thing about Fidelity Browser and Active Trader Pro platform is whatever you create in either appears in both the browser and Active Trader pro.
Maybe the above information will help others, if not you, who want to try out the Fidelity Watchlist features and how I keep track of my account values and combine several accounts into one watchlist. A lot of us have shelterred and non-sheltered account and it is nice to see the whole portfolio in one watchlist to me. I have not found any other site that I can use with that power.
With my 4 account portfolio in one watchlist, i keep tack of four cash positions accurately plus option and stock positions. There is a 50 max symbol entry by the way.
thank you so much for the complete and detailed explanation.
When I first started trading options, I searched for a broker, and the only discount broker who accepted international accounts from Brazilian residents was Schwab.
I do not know if this has changed, but I will check it out.
As Barry explains, Schwab has some of the same features that you described, which I must look up and learn to use. Otherwise I am very satisfied with Schwab, and as I focus on buy/write CC trades only, it is quite simple to watch and trade on their platform.
Thanks again – Roni
Glad you you happy with Schwab and that they served your International account needs for a broker.
I was just trying to explain to you how I manage 4 accounts in real time in ONE watchlist which is also a portfolio with cash accounts so I can see the following on one screen any time: Total account value, Option prices, intrinsic, time value, Gap ups – (by looking at Time values to meet my 0.1 to 0.2% of STRIKE thresholds , 20/10% gap down – by looking at OTMs with zero intrinsic taking 20% or 10% of option purchase price.
Maybe someone will try out Fidelity’s feature and comment on what they found. I will check out Schwab on their policies.
Having just filled out the Schwab application myself (dozens of pages filled with mysterious acronyms and dense legal jargon) I’ve come to the conclusion that you Americans have way too many lawyers. Do yourselves a favor and fire 99% of them into space – the world will be a better place for it! 😛
Thank you as always for your great contributions to our discussions!
I am also an EWZ investor though I don’t have it covered at the moment until I can spot a resistance level it is up against. I put my International ETF’s on a chart together and was a bit surprised to see the one year relative performance.
From best to worst, though all are positive, they are: PGJ (China), EWG (Germany), INDA (India), EWJ (Japan) and bringing up the rear is EWZ (Brazil). SPY would be in fourth place behind INDA in that group.
The order changes if you switch time parameters. In the past three months EWG and EWJ have done the best with SPY still middle of the pack and EWZ moves up a couple places.
The point for me as a US investor was remember not to be myopic in my investing thinking the US market is the only place to be – which I tend to do. It’s a big world. There are many countries with optionable ETF’s that out perform SPY. – Jay
Mario and Roni,
Schwab has a similar capability which I use every day. First thing in the AM I check for any news on my stocks (using Finviz). Then during the day, I use the real-time data from my Schwab account.
A. Do you know if I can create an account, not fund it, and use the watchlists / portfolio to evaluate their system?
B. B1 – Does Scwab has a platform software that you can create watchlists which include Purchase price Quantity and Option symbols, and option prices that you can add so you can enter information from other accounts you have elsewhere? B2 – Or does it just monitor the stock purchases you make at Schwab only? B3 Can you use a browser to monitor your account positions as well that mimics the platform information or vice-versa?
Thanks for your comments on the real time aspect..
A> Yes you can. When you sign up, be sure to check that you intend to trade at least three times or more per year. This will put you into Schwab’s Trading Services category and that will allow you to download the StreetSmart Edge platform. If you don’t do any trades over time (I don’t know what that time period is), they will shut down access to the platform. When you use the platform, you can get real-time and level 2 quotes as well.
B1> Yes, but they pull quantity from your account. The watch list function is VERY extensive. You can enter symbols from other portfolios but not quantity.
B2> Quantity only from Schwab purchases. They pull quantity from your associated accounts.
B3> You can either use their downloaded platform or their cloud-based platform. However, I recommend downloading the platform for a better overall user experience. It is far more responsive. The only item to note is that you really need an up-to-date system…windows recommended
As an aside, I was an external beta tester for StreetSmart Edge, so I can answer most questions for you.
I will connect when time is available, to Schwab and try out their capabilities. Thank you for describing them very thoroughly. If I find some goodies I will report back.
From what you describe, Fidelity is the only that allows, in addition, to your account positions (just like Schwab), use of watchlists to function also as portfolios with complete purchase, quantity information for both Stocks and Options. And the watchlists are accessible from the Active Trader Pro platform as well as from the browser or their Mobile App.
I joined as a premium member 3 months ago and I’m really enjoying the learning process. I plan to start investing after paper trading for another month. I’m hoping you can answer a question I am a bit confused about. When rolling out and up to the next month can you explain “bought up” value maybe with a simple example.
Glad to help. Let’s set up the following hypothetical trade:
Buy More Money Corp. (MMC) for $28
Sell the Nov $30 call for $1
Near expiration MMC is trading at $32
The cost-to-close the $30 call is $2.10
The Dec $35 call generates $1.50
We enter this information into the “What Now” tab of the Ellman Calculator (see screenshot below). When the initial $30 call obligation is in place our shares cannot be worth more than $30. However, if we roll; out-and-up to the $35 strike our shares are now worth $32, market value. This $2 “credit” is the same as the $2 debit in the cost-to-close the $30 call($2 + $0.10 of time value)…it’s a wash. In this case, there’s an option debit of (-) $0.60 ($1.50 – $2.10). On the stock side, we have a credit of $2 ($32 – $30) plus the possibility of share appreciation to the new strike of $3 or $300 per contract.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG
Thanks. That makes sense. If you deduct intrinsic value to close then it should be adding in when we re-open. I get it.
Just a quick question, is the Weekly Stock Report applicable to put selling as well as call writing?
In other words, can I use the running list (that has passed all your
screens) to do put selling (or is it just for call writing)?
I’ve now finished your book ‘Selling Cash-Secured Puts’ and am interested in your premium membership.
All the best,
Yes, you can use the Premium Weekly Stock Screen and Watch List for selecting Cash-Secured Puts. You can also use it for selecting stocks suitable for other types of options trading strategies as well.
I have the Cash Secured Puts book as well. I also highly recommend, if you do not have it, Alan’s Classic Encyclopedia which covers Covered Calls and has other related investing information.
Good luck with you investing.
I’ve been trading with NVDA for over 4 months since it first appeared on your stock list. I sold it briefly before the 8/10 earnings report and that turned out well as the stock dropped quite a bit after the report. I bought it back a week later and still own it as it has again appreciated, over 100 points in 4 months. With the earnings due on 11/10 my question is when is the best time to sell? Or should I take a chance and hold through the report and sell the option after the report?
Holding a stock through an earnings report is risky and not part of our BCI methodology. However, there are times when we have confidence in a positive report based on historical precedent. In those cases, the option is written after the report passes and any post-report volatility subsides.
Trading Experiences through 11/8/17
Week 3 of 4 Exp.Fri 11/17
Tuesday – 11/7:
** QQQ (Sold Last price 153.69) – Unwound 100 shares Covered Call Strike 149 Purchased 9/20/172 cycles back (rolled up and out OTM Exp. Friday 10/20) Strike 149. Net results: Net Investment $14,900. Net ROO-Gain 2.77% or $401.50 with Cost Basis $144.98.
* After Gap up time value was approaching 0.30 with is 0.2% of the Strike. I start looking to unwind when I saw 0.1% to 0.2% in Time Value BTC loss, especially in the 3rd week, since i would have to look to at least 1% (Alan’s recommendation to make it worthwhile) plus the closing loss in a new security. With a strike of 149, 0.1% = is 0.15 or $15 per contract.at 0.1% or $30 per contract at 0.2%. (In actuality, thinking back, it is more correct to say 0.2% is 0.28 using my Cost Basis, which is a constant). My actual BTC loss was 0.26. It is amazing that you can use the Time Value predict and trade over $15,000 and have a closing loss of $0.26 per share or $26 net, but the numbers show that.
** New Investment SOXX: Looking for a new trade, since this is m ETF or low risk account I went through the ETF Report and found SOXX ETF paying an ROO% of 1.45% Week 3 of a 4 week cycle. By the time I filled my order the price of SOOX rose (trading downside protection for profit) and filled 100 shares at 177.58 Strike 177 Net ROO = 1.2%. That amounts, based on cost basis of 177, to $212.40 additional profit this cycle, losing on $26 by unwinding QQQ in Week 3.
Notice that had my original net investment had been $10,000, ROO% of 1% is only $100.00. 1.2% $120.00 (Profit then would be $94) and the closing BTC cost becomes more significant and should direct you t finding a higher interest security.
Notice also I did not include any mention of commission for the above trade. That’s because that was none essentially. I only paid FINRA, Regulatory fees of 0.36 (Sell QQQ)) , 0.04 (BTC QQQ), 0.05 STO.QQQ) Total $0.45 net. When I opened up the Joint Trust Account with Fidelity with $50,000, their free trade offer was commission free for 2 years.
With my other accounts at Fidelity and OptionsHouse/Etrade, I do pay commissions so the analysis has to include the effect on your cost. With Fidelity a Covered Call (2 legs) for 1 contract is $5.60 ($4.95 plus 0.65 per contract). The same trade at Etrade is $10.40 (4.95 per leg plus $0.50 per contract, With 5 contracts the numbers are $8.20 and $12.40 respectively. With 1 contract per share cost is $0.056 with Fidelity and $0.104 with Etrade. Those costs can be significant when determining at what price to close and open up a new trade.and it totally depends on your Cost Basis (Strike or Purchase price) and the number of shares in your trade. That is why I am now preferring trades with 200 or more shares to lower the commission cost effect on my trades.
PYPL: Gap up, Unwound at a BTC loss of 0.2%. Found TER with a good chart, which was paying 1.4% OTM, and 1.65% including share appreciation to the strike.