Benefitting from exit strategies, in our covered call writing and put-selling portfolios, is the result of preparation and opportunity. Our 20%/10% guidelines for covered call writing protects us when share price declines and guides us as when to close the short calls. This allows us take further action including selling the stock, waiting to “hit a double” or rolling-down. During the May contracts of 2021, market volatility allowed me to go further than “hitting a double” when I actually “hit a triple”, generating 3 income streams in the same contract month, with the same stock and cash investment. This article will highlight those series of trades.
Covered call writing trades with Select Sector SPDR Utilities (NYSE: XLU), an exchange-traded fund (ETF)
- 4/19/2021: Buy 400 x XLU at $67.05
- 4/19/2021: STO 4 May 21, 2021 $68.00 calls at $0.66
- 4/28/2021: BTC 4 x May 21, 2021 $68.00 calls at $0.15 (20% guideline)
- 5/3/2021: STO 4 x May 21, 2021 $68.00 calls at $0.62 (that’s my “double”)
- 5/5/2021: BTC 4 x May 21, 2021 $68.00 calls at $0.12 (20% guideline)
- 5/10/2021: STO 4 x May 21, 2021 $68.00 calls at $0.33 (that’s my “triple”)
- 5/10/2021: Set a BTC limit order at $0.03 (10% guideline)
Preparation and opportunity
Part of the preparation involves setting the BTC limit orders after entering our covered call trades. Opportunities are created when share price declines and then recovers. If we were to envision the chart pattern of such trades, we would see one or more V-shaped patterns which is precisely what occurred in May 2021 with XLU.
Chart of XLU highlighting the STO and BTC “hitting a triple” trades
“Hitting a Triple” with XLU
Discussion
Mastering and incorporating the 3rd required skill, position management, into our option-selling trades, will assist in elevating our returns to the highest possible levels. The additional income streams created by using exit strategies are the result of the intersection of preparation and opportunity.
No price increase for premium members
On November 1, 2021, BCI will be raising membership rates for new members only. This will not apply to current members. It’s been 4 years since we had a rate increase. In that period, we have added dozens of training videos, additional downloads and resources and more quality data to our stock and ETF reports. We are fortunate to have such a robust and expanding membership and strive to provide the best high-quality information and tools at the lowest industry prices.
This price increase will not apply to current active members as you are grandfathered into the current rate for life or as long as your membership remains active. This is our way of showing our appreciation to our long-term members.
The increase for new members will go into effect on November 1, 2021 as follows:
Monthly: $19.95 for the first (trial) month and $57.95 each 30-days thereafter (currently $49.95).
Annual: $657.40 for the first 13 months (includes a reduced first month and a free last month) and then $695.40 every 13 months thereafter (includes 1 free month). Currently $569.40 and $599.40.
All new members who subscribe between now and 10/31/2021 will be grandfathered into the current rate and will see no price increase on 11/1/2021.
Thanks to all our loyal members for your support over the past 14 years and for putting on the financial map.
Premium membership information
Your generous testimonials
Over the years, the BCI community has been incredibly gracious by sending our BCI team email testimonials sharing stories as to what our educational content has meant to their families. Moving forward, we have decided to share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Upcoming events
1.Wealth365 Summit: Free webinar
Monday October 11th at 4 PM ET
Stock Options: How to Use Implied Volatility to Determine Strike Selection
Creating 84% probability successful trades
This presentation will detail how to use implied volatility stats, standard deviation bell curves and conversion formulas to establish projected high and low ranges for price movement of a security over the life of an option contract.
These formulas will allow us to create 84% probability of success trades where share price is highly unlikely to fall below the breakeven price point or above the out-of-the-money call strike where share retention is a critical aspect of our strategy.
While there is inherent risk in all strategies that seek to beat risk-free returns (Treasuries, for example), the strategies discussed in this webinar will be ultra low-risk and appropriate for most retail investors.
2. Money Show Virtual Event: Free webinar
November 2nd
Converting Non-Dividend Stocks into Dividend Stocks
Selling call options to create dividend-like cash-flow
Date, time and registration link to follow
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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
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Hi Alan,
Me again. I’m having trouble understanding this definition per Investopedia:
• Maximum Profit = (Call option strike price – Net of Put / Call premiums) – Stock purchase price
•
• Maximum Loss = Stock purchase price – (Put option strike price – Net of Put / Call premiums)
Wouldn’t we ADD the net credit for profit calculation?
Just having a bit of confusion.
– Ted
Ted,
Collar trades are structured such that there is a net option credit:
(Short call premium credit – put call debit) = a positive number.
Therefore, when calculating maximum gain (price of stock ends at or higher than call strike) or maximum loss (stock price ends lower than put strike), we must add in the net option credit to get accurate calculations.
In the example below (screenshot), if BCI is purchased at $83.32 and the call strike is $84.00 (credit of $3.16) while the put strike is $77.50 (debit of $1.26), the calculations are as follows:
Max gain: Stock gain ($84.00 – $83.32) = $0.68
Option net credit: ($3.16 – $1.26) = $1.90
Net position ($0.68 + $1.90) = $2.58
On a cost-basis of $83.32 = 3.10%
Max loss: Stock loss ($83.32 – 77.50) = -$5.82
Option net credit: $1.90
Net position: (-$5.82 + $1.90) = -$3.92
On a cost-basis of $83.32 = -4.70%
Bottom line: The net option credit must be added, not substracted from our calculations.
One caveat: It is subtracted (actually still adding, but a negative number) if there is a net option debit but then the trade was not structured properly.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Thank you Alan for this and the other response. I really appreciate it.
Have a great weekend.
– Ted
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 10/01/21.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
http://www.youtube.com/user/BlueCollarInvestor
On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.
Best,
Barry and The Blue Collar Investor Team
Alan,
out of twelve of my CCs, six, hit the 20% buyback limit this week.
I am now rolling them down to mitigate the losses and changing the rest to 10%.
I wonder why none of your 20% buy-backs did not get a fill?
Roni
Roni,
I also had a few 20% Exits hit as well. Whether we were had to implement the “20% option Exit Strategy” depended on the stocks or ETFs that we selected, the strike prices that we selected, and our personal market outlook that we had at the time of our entry into our trades.
In my personal case, my stocks were all solid. My stocks and ETF selections fell due to “headline risk” from the inflation reports and other negative news.
The good news is that we have the tools to improve our trading situations.
Best,
Barry
Thank you, Barry, I understand.
Most of my CC buy-backs were ITM and chosen from the 09/17/21 Stock Screen.
I was hoping for a rebound today, but it seems the correction is really bad, and therefore we must wait for a more favorable moment to reduce our losses.
Good luck – Roni
You know, between selling cash secured puts vs. covered calls, I think I much prefer CCs because there are 2 legs of the trade where you make $$ whether the underlying is going up or down. With CSPs however, you show a profit only when the underlying is going up. I do realize that there are various alternative strategies/goals in CSPs, but I guess it’s more of a psychological thing.
Joanna,
I agree with you and I am totally focused on monthly CC trades.
Roni
Joanna,
Covered call writing has the advantage of offering the potential for 2 income streams per trade when using OTM strikes. Selling cash-secured puts allows us to achieve only premium unless we execute exit strategies. Both strategies have their pros & cons.
Alan
Alan,
I know that there are ways to calculate the beta of a portfolio and then hedging that beta by selling future Ps and Cs. Do you have any clips that describe how to do this?
Thanks
Jerome
Jerome,
Most portfolio managers focus on Delta hedging rather than Beta hedging.
Beta hedging is where we use securities with inversely related Betas to reduce the risk in our portfolios. If a stock has a beta of 1.2, it will move 1.2 times more than the market benchmark in either direction. To offset, we look for a security with a negative Beta. These are hard to find (some feel gold should have negative Betas), almost anomalies.
Delta hedging is where we use options and stocks to move to a Delta-neutral portfolio. Stocks have Deltas of “1” so if we own 200 shares of stock, we can achieve a Delta-neutral position by selling 4 x 50 Delta call contracts. By the way, this concept is precisely the reason covered call writing reduces risk and gives us a leg up on beating the market on a consistent basis. In our case, it’s not Delta-neutral but rather “Delta reduction”
Alan
Alan,
On September 27th, I entered 2 Cash secured put trades, but I want to talk about ETN here. STO the 8 OCT 21 152.5 put with a premium of 0.90.
The underlying is underperforming, and I’m right at the cusp of buying the put back because 147.00 is 3% below my strike price.
The thing is that even though the technicals are not so hot, I think ETN is a pretty outstanding company. I don’t know if I want to roll it, simply get assigned with an unrealized loss to sell CCs, or totally unwind it.
Opinions?
Thanks,
Joanna
Joanna,
ETN is slightly above the 3% BTC guideline ($147.93).
I can’t give specific advice as to which path to take but I can tell you that if the underlying is a security you would not mind owning in your portfolio, allowing assignment is a reasonable path to follow. I did that last week with 2 of my 10-Delta weekly cash-secured puts.
Now, let’s say the strike remains ITM and we allow assignment as the shares are “put” to us. We can:
1. Sell the shares if the price rises (I did that with ETSY several times)
2. Write covered calls on the stock
3. Retain the shares for the long-term
When we enter these put trades, we should have a plan in place for every scenario… “on this stock, if share price declines below the strike price, will I allow assignment or activate the 3% BTC limit order guideline?”
Alan
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
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Alan and the BCI team
Hello Alan,
I was watching your Exit Strategies DVD program for the nth time and I must say I always seem to pickup on something new or clarifying each time. On DVD #2 you mentioned that you do a weekly blog where you go through all of the financial reports. I couldn’t find it and was wondering if you still do this? The DVD program is several years old and you may have stopped this particular blog. Could you let me know where I can find this blog if you still provide it?
Thank You,
Alan K
Alan,
The segment of the DVD could have been related to 2 areas of information we provide to our members (I’ve produced over 400 videos over the years). I’ll address both:
1. Our team does a fundamental analysis and screening of all stocks before they are listed as “eligible” This is accomplished with a series of screens like the IBD 50 as well as our own database of stocks that we have identified over the years as potential candidates for options trades. We do not read the financial statements of these companies. All securities listed in our reports are fundamentally sound.
2. Each week we summarize the major economic reports that were published that week. The summary is found on page 1 of our stock reports under the heading of “market tone” We also publish the major reports that will made public in the upcoming week.
As a premium member, you have access to all this information.
Alan
Hi, Alan.
I have read the same thing and think what you are asking about has been moved to the weekly reports. If you scroll to the end of this blog, for example, it says:
“Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.”
William
Hi Mr. Ellman
I just watched the presentation you gave in Chicago on Covered calls. It was very good and better than most I have reviewed.
However, at one point you mentioned you kept going if the return was between 2%-4% for you or 1%-4% for your Mother.
Could you tell me please how you calculate theses percentages, ie. what is the numerator and what is the denominator, and what do you mean by the premium you receive ? Is the premium the amount by selling the Call ?
Thank you very much
Malcolm
Malcolm,
For at-the-money and out-of-the-money call strikes the initial return on the option is:
Option premium/price-per-share
For in-the-money call strikes:
(total premium- intrinsic-value of premium)/call strike price
Our calculators will do all the math for us.
Alan