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Greeks Spreadsheet Showing the Impact of Time to Expiration, Volatility and Stock Price Change on Option Value

Covered call writing and selling cash-secured puts involve both buying and selling of call and put options. We are dealing with two types of options as well as utilizing both long and short positions of each. When we factor in the major Greeks, it is important to understand the relationship between time to expiration, stock implied volatility and change in share price as they relate to option value. It can get confusing and so I created a user-friendly spreadsheet, the focus of this week’s blog article.

 

Major Greeks when selling options

The three major factors that influence our option value are time to expiration measured by Theta, volatility of the underlying security measured by Vega and change in price of the security measured by Delta:

Theta measures the decline in option value for every calendar day that passes. Since we are selling decaying assets (options), Theta will work in our favor as the time value decreases as a result of Theta and it will cost less to buy back the options, all other factors remaining constant. We factor in Theta when deciding on the time frame for our option contracts (I favor 1-month options).

Vega determines the change in option value for every 1% change in implied volatility of the underlying security as calculated by an option-pricing model. High-Vega options generate higher option returns but also subject the option-seller to greater risk so we must find a comfort level that fits both our return goals and our personal risk-tolerance.

Delta is the Greek that calculates the change in option price for every $1.00 change in share value. The deeper in-the-money the strike, the higher the Delta and the more downside protection afforded to us in the form of intrinsic value. Here is a breakdown of Deltas as they relate to covered call risk:

  • 0: Most aggressive (deep out-of-the-money)
  • .50: Moderately aggressive (at-the-money)
  • 1.00: Most conservative (deep in-the-money)

 

Greek Spreadsheet

The major Greeks impact our positions in different ways depending on whether we are long or short the option and if we are dealing with calls or puts. The spreadsheet below is a quick-reference guide that highlights the impact of the major Greeks in each of these potential perspectives:

option-selling factors of Theta, Vega and Delta

Greeks spreadsheet for long and short calls and puts

For more information on the option Greeks click here:

My new E-Book

 

Discussion

It is critical to understand the major Greeks and the factors that influence option value. This skill must apply to both call and put options as well as long and short positions. It’s my hope that this spreadsheet will serve as a useful tool in the investment arsenal of our members.

 

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Next live appearance: Plainview, New York
Tuesday evening, April 19th
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Department of Labor ruling on covered call writing in self-directed IRAs

The DOL has ruled favorably regarding the continued use of covered call writing in our sheltered or self-directed IRA accounts. This represents a tremendous victory for educated retail investors who can continue to take advantage of this conservative option-selling strategy which allows us to enhance portfolio returns without tax concerns. Great job by the DOL and all those who were involved in crafting this decision. BCI will continue to monitor political and legal issues that impact our retail investor community.

 

Stock Traders Expo: Marriott Marquis Hotel NYC: Short video:

https://www.youtube.com/watch?v=TiBLFawLkZo&feature=youtu.be

 

Market tone

Global stocks declined slightly this week, with a sudden rise in Japan’s yen negatively impacting markets. The Chicago Board Options Exchange Volatility Index (VIX) was unchanged on the week at 15.36. West Texas Intermediate crude prices rose to $39.23 from $36.82 a week ago, and global Brent crude prices rose to $41.12 from $38.73 on hopes of an agreement on production caps among oil producing nations later this month. This week’s reports and international news of import:

  • In response to recent comments from presidential candidate Donald Trump, US Federal Reserve Chair Janet Yellen said that the US economy is still healing from the financial crisis and is not a bubble economy. She does not see evidence of imbalances, such as clearly overvalued asset prices, and noted that the labor market is improving
  • Despite the introduction of negative interest rates by the Bank of Japan at the end of January, the Japanese yen has risen roughly 10% versus the dollar so far this year, including a 3% gain this week. Finance minister Taro Aso warned that the government would take steps to counter one-sided moves in currency markets, calling the sharp appreciation “undesirable.”
  • Dutch voters rejected a trade and political agreement between the European Union and Ukraine earlier this week. The deal had already been approved by the parliaments of the 27 other members of the EU, The Dutch referendum was nonbinding, so it should not derail the pact’s implementation, but it does show signs of strain between the EU and its member states. This bears watching
  • On Tuesday, the US government imposed new rules designed to make it more difficult for US companies to combine with firms in other countries to reduce their tax liability. The rule had an immediate impact, with US-based Pfizer and Irish-domiciled Allergan calling off a pending $160 billion merger after the rule was released
  • The US Department of Labor finalized rules that will require financial advisors handling individual retirement accounts and 401(k)s to act as a fiduciary to their clients. Previously, advisors had been subject to a less-stringent suitability requirement. The broader definition of fiduciary will take effect in April 2017, with full implementation of the rule to begin January 1, 2018 (more on this above)
  • The US Department of Education reports that 43% of borrowers from the government’s main student loan program are not making payments or have fallen behind. That’s a slight improvement from a year ago, when the figure stood at 46%
  • After reaching an agreement with outstanding creditors earlier this year, Argentina is preparing to return to the bond market for the first time since 2001 with a $12.5 billion offering next week. The proceeds of the offering are expected to be used to pay back holders of the country’s defaulted debt
  • An impeachment committee of Brazil’s congress released a report recommending members vote for a Senate trial to impeach President Dilma Rousseff
  • Minutes of the March meeting of the Federal Open Market Committee (FOMC) suggest that rate hikes will come slowly until the global economy picks up steam. The FOMC discussed the possibility of hiking rates at its April meeting but said such a move would signal a sense of urgency that the committee did not think was appropriate
  • Governor Alejandro Garcia Padilla of Puerto Rico signed a one-year government debt moratorium into law. The move buys time for the island’s government to deal with its debt crisis while it awaits help from the US
  • India’s central bank lowered its repo rate 0.25% to 6.5%, the lowest level in five years
  • In March, foreign exchange reserves edged up in China for the first time in five months, a sign of stability after months of heavy outflows. Reserves rose $10.26 billion to $3.213 trillion

 

THE WEEK AHEAD

  • China releases its March consumer price index on Monday, April 11th
  • China reports its March trade balance on Wednesday, April 13th
  • US retails sales figures are released on Wednesday, April 13th
  • The Bank of Canada monetary policy committee meets to set interest rates on Wednesday, April 13th
  • The Bank of England monetary policy committee meets to set interest rates on Thursday, April 14th
  • China releases retail sales, industrial production and gross domestic product on Friday, April 15th

For the week, the S&P 500 declined by 1.21% for a year-to-date return of 0.18%.

Summary

IBD: Uptrend under pressure

GMI: 5/6- Buy signal since market close of March 2nd

BCI: Moderately bullish, favoring out-of-the-money strikes 2-to-1. I am anticipating a positive earnings season due to muted guidance from last quarter.

 

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The S&P 500 is currently in an uptrend (higher highs and higher lows) while the VIX (CBOE Volatility Index) is at 15.36. In the past six months, the S&P 500 is up 2% while the VIX has declined by 10%. The near term market trend is BULLISH.
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Wishing you the best in investing,

Alan (alan@thebluecollarinvestor.com)

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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.

24 Responses to “Greeks Spreadsheet Showing the Impact of Time to Expiration, Volatility and Stock Price Change on Option Value”

  1. Anthony April 9, 2016 8:52 am #

    Alan and team,

    What is the best way to find rich puts, I want to sell more of them, is it my trial and error?

    Anthony

    • Alan Ellman April 9, 2016 10:29 am #

      Anthony,

      Option returns are directly proportional to the implied volatility of the underlying security. Therefore, it’s market perception of future price movement based on calculations from option pricing models. These stats will vary. However, a good starting point to accomplish higher returns (be careful not to go too high as risk will also be elevated) is to look at securities that have historically had higher volatility. From our premium “running list” look at the “beta column” (6th column from right). Those stocks with higher beta values have historically and statistically been more volatile and therefore will tend to return higher premiums. The benchmark used in our BCI stock reports is the S&P 500 and the time frame is 1-year. Betas > 1 tend to be more volatile than the overall benchmark and vice-versa.

      Alan

  2. Preacher John April 9, 2016 10:21 am #

    Alan,

    I just read the user’s manual for the Weekly Stock Screen and Watch list and I NOW UNDERSTAND how the data is presented and it will save me at least 10-15 hours /month in trying to choose and monitor my 10 candidate stocks for each upcoming NEW option month. I’ve typically started the process of searching for new candidates as soon as the old option month expired. This will also help considerably because i used to have to check all of the Green dots, the chart indicators, earnings dates, etc. (I have adopted use a 10 Green dot passing list that includes THE 6 from IBD, an ROE above 15% from IBD and the Industry segment below 40 as my top 8 plus one more for the E20 above the E100 and a goal of at least an ROO of 3% or more. I consider the stock price above the E20, the stock being first in its industry segment as PLUSES in case of close decisions. I also use various levels of investment of AVAILABLE investment money, the cash on hand and the % ITM versus the Market tones of Confirmed uptrend, under pressure and in correction. But again, your WSS and Watch list plus your opinion of the market tone and location of ITM/OTM percentages will help immensely. believe me Alan, every day my wife and I thank God for your “Cashing In on Covered calls” first book and your willingness to share your vast trading experience. I have all of your books but doubt I will ever use or preach about the use of “PUT” Covered calls are enough for me.One last thought: I hadn’t been using Exit strategies since I started learning your strategy in 2010 until 6 months ago, and I have made at least 1 to 2 % more a month since I started using them, especially the MCUW strategy!!!I now realize I’ve left many $1,000’s on the table but NO MORE!

    As always the BCI’s biggest Fan

    Preacher John

    • Jay April 9, 2016 9:18 pm #

      Preacher John.

      Since it is Masters weekend please pardon golf metaphors:)

      When I started I had a set with only even numbered irons, one wedge, two woods and a putter.

      As I progressed I wanted the odd numbered irons and an extra wood. Even though the bag got heavier as I walked.

      Selling options is like that. At first covered calls are enough. Then cash covered puts. Then credit spreads. Then how to manage those. Then you realize your learning has no end!

      So as long as you understand and manage risk I wish you all the best with your congregation! And always have 14 clubs in your bag :). -Jay

      • Roni April 12, 2016 3:53 pm #

        Hello Jay,
        Thank you for this great post.
        I must confess that I am turning back to the covered calls only system.
        I was having a hard time managing several tools at the same time.

        As you said, the bag got too heavy for this old man.
        Maybe if I had a caddy or a golf cart ? Hee, hee, hee….

        I guess I still have a lot to learn. Even cash secured puts seem somehow more difficult to handle, and less profitable than the covered calls.

        Brazil’s congress is voting this week to impeach the president.
        If approved, the country will turn right, after 13 years of an extreem left and corrupt administration.

        Cheers – Roni

        • Jay April 12, 2016 6:49 pm #

          Hey Roni,

          Thanks for the Brazil update. Never a dull moment down there or up here lately in politics!

          At the risk of over simplifying cash secured puts have become my preferred way of acquiring stocks and some ETF’s then manage the positions with covered calls once in them. They can be supportive of each other. – Jay

          • Roni April 14, 2016 11:28 am
            #

            You are right Jay.
            I must start to use the cash secured puts method to help improve aquisition prices of best stocks.
            I will keep you posted of my results in the future.
            Thanks – Roni

          • Jay April 14, 2016 7:23 pm
            #

            Roni,

            I encourage you to use cash secured puts to buy stocks.

            But I recognize the psychology is different from covered calls even though risk is the same. An investor perfectly willing to “rent out their stock” with a covered call may be reluctant to rent a property they do not yet own for fear it may go down.

            Well, what the heck is the difference :)?

            if you see a stock you want to own rent it first with a cash secured put. Then once you own it get regular rent with covered calls.

            My experience is only rent out half the shares with covered calls once you own it. Property tends to appreciate :), – Jay

          • Roni April 17, 2016 12:32 pm
            #

            Thanks Jay,
            I will follow your sound advice.
            Roni

    • Barry B April 9, 2016 10:10 pm #

      John,

      Thank you.

      It is comments and experiences like yours that drive us to continue to refine and improve the tools that we bring to our subscribers.

      Best,

      Barry

    • Alan Ellman April 10, 2016 10:36 am #

      John,

      You are a stellar representative of the retail investor community in general and the BCI community in particular. You continue to learn and then share your knowledge with others. Keep up the great work and thanks for your generous comments.

      Alan

  3. Ron April 9, 2016 10:34 am #

    Alan, in your class you seem to use a portfolio of $50k. Is your strategy any different for $100k or $150k?

    Thanks, Ron

    • Alan Ellman April 10, 2016 10:41 am #

      Ron,

      The strategy is exactly the same but the number of underlying securities will increase to allow for greater diversification. The specific number of stocks will depend on the comfort level of the investor but as a guideline:

      $100k: 7-10 stocks

      $150k: 8-12 stocks

      If using ETFs, the number of different securities can be much less due to the instant diversification ETFs offer.

      Alan

  4. Nate April 9, 2016 4:53 pm #

    Alan, I was reading your book once again. At the ETF section it got me wondering. What staple ETFs do you use in your mother’s account? Which ones seem to be there month after month?

    • Alan Ellman April 10, 2016 10:45 am #

      Nate,

      I use the same list we provide to our premium members. I look for ETFs that generate 1-2% per month initially and rotate the securities based on the most current price performance of eligible ETFs. If I had to name a particular ETF that I have used the most in my mother’s account over the years, it would be QQQ…made a lot of money for Mom with this one (not currently on our list).

      Alan

  5. Barry B April 9, 2016 10:29 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 04/08/16.

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

    https://www.thebluecollarinvestor.com/member/login.php

    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

    Since we are close to Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:

    https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

    Best,

    Barry and The Blue Collar Investor Team

  6. Bob April 10, 2016 10:28 am #

    Are you sure about this stat?

    “For the week, the S&P 500 rose by 1.64%”

    My numbers show it was down.

    • Alan Ellman April 10, 2016 10:55 am #

      Bob,

      Yes you are correct…those were last week’s stats…see the chart below…correction made and thanks for the heads-up…

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG

      Alan

  7. Alex April 10, 2016 3:01 pm #

    Alan,

    I have a question, i see how stocks which were passing all the screens a week, they don’t pass the following one, so what’s the line of action? If i wrote a call on a stock that the following week doesnt pass the screening, is there something to worry about?

    Also, i understand that one can switch from calls to puts in the event of a prolonged bear, but will you advise when in your opinion it will be time to switch strategy?

    Regards!
    Alex

    • Alan Ellman April 11, 2016 8:03 am #

      Alex,

      Once a position is established using a stock/ETF from our Premium Reports, it is managed with exit strategy opportunities as described in my books/DVDs, NOT by its removal from our “running list”

      Covered call writing and selling cash-secured puts are similar strategies (not exactly the same as some will say), both highly appropriate for retail investors. My preference is ccw but will use put-selling in conjunction with ccw (PCP strategy) in established bear market environments. I have been bullish on the overall market since 3/2009 and share my portfolio mix on page 1 of our member reports. We do have many members that prefer put-selling. Again, both great strategies and a matter of preference.

      Alan

  8. Barry B April 10, 2016 7:27 pm #

    Premium Members,

    The Weekly Report has been revised and uploaded to the Premium Member website. Look for the report dated 04/08/16-RevA. There was an update to the “Weekly Summary” section. The revision did not impact any of the stocks in the report.

    Best,

    Barry and the Blue Collar Investor Team

  9. Troy April 12, 2016 3:38 pm #

    Hello Allen,

    Thanks for your newsletter, on the subject of benefits for CC writing in an IRA, does selling puts in the IRA qualify for the same benefits as CCs?

    Thanks,
    Troy

    • Alan Ellman April 12, 2016 3:46 pm #

      Troy,

      When put-selling is allowed in IRAs, it has the same tax-deferral benefits as covered call writing. However, whereas ccw is universally allowed by brokers in sheltered accounts, put-selling is not. The reason is that brokers are subject to the KYC (Know your customer) SEC regulation and covered call writing is considered more intuitive to retail investors. Although the strategies are similar and graphically have the same risk/reward profile, retail investors do have an easier time of understanding ccw over put-selling especially when initially learning the strategies. Check with your broker to see which option strategies are permitted in sheltered accounts.

      Alan

  10. Barry B April 12, 2016 5:13 pm #

    Premium Members,

    The Weekly Report has been revised and uploaded to the Premium Members website. There was an update to the ER date for the stock “FIX”. For past 4 or so weeks, the date presented on the Earnings Whispers website was 5/24/16. Since the current Weekly Report was uploaded, the company changed the ER date to 4/28/16 according to Earnings Whispers.

    Look for the report dated 04/08/16-RevB.

    Best,

    Barry and the Blue Collar Investor Team

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