One of the exit strategies for covered call writing that allows us to enhance portfolio returns is known in the BCI community as “hitting a double”. We implement this position management technique when option value meets our 20%/10% guidelines. The initial short call is closed (buy-to-close) as share value declines early to mid-contract and then re-sold if and when share value appreciates as a result of the Delta factor. Generally, the same option is sold for a second time, but we can also frequently benefit financially buy re-selling a lower strike option. What distinguishes this from rolling down is that the latter is usually accomplished simultaneously. Hitting a double involves a delay between the option close and re-open during which share appreciation takes place. In June of 2018, Joanna generously shared with me a series of trades she executed where she hit her first double. 

 

Joanna’s trades with E*TRADE Financial Corp. (NASDAQ: ETFC)

  • 5/21/2018: Buy 200 ETFC at $65.05
  • 5/21/2018: Sell 2 x June $68.50 call at $0.51
  • 5/31/2018: Buy-to-close the $68.50 call at $0.12 (approximating the 20% guideline)
  • 6/6/2018: Sell-to-open the June $66.50 call at $0.46

 

ETFC initial calculations with the Ellman Calculator (initial trade structure)

covered call writing calculations

ETFC Initial Time Value Returns and Upside Potential

Joanna’s trade generated an initial 4-week time return of 0.8% with 5.3% upside potential. This was a bullish approach to the trade.

 

 

ETFC price chart analysis

 

technical analysis for covered call writing

ETFC Price Chart May and June 2018

Points of interest

  • Red arrow: Initial trades entered
  • Dark green arrow: Short call closed
  • Light green arrow: Second option sold
  • Purple lines: Classic V-shaped pattern typical of “hitting a double” opportunities
  • Share price closed the contract month at $65.41

 

Current returns/calculations

Stock side of trade: ($65.41 – $65.05) x 200 = +$72.00 (unrealized until shares are sold)

Option side of trade: ($0.51 – $0.12 + $0.46) x 200 = $170.00 (less trading commissions)

 

Discussion

Position management is the third required skill for option-selling. Using the 20%/10% guidelines along with the “hitting a double” strategy can elevate returns to higher levels. We can hit a double even when using a lower strike for the second option sale.

 

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Upcoming event

February 7th – 10th, 2019

Orlando Money Show

Omni Orlando Resort @ Champions Gate

February 7th – 10th 2019

Speaking schedule:

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 

 

Market tone

This week’s economic news of importance:

  • Chicago Fed national activity index Oct. 0.24 (0.14 last)
  • Case-Shiller house prices Sept. 5.5% (5.7% last)
  • Consumer confidence index Nov. 135.7 (135.8 expected)
  • GDP Q3 3.5% (3.6% expected)
  • New home sales Oct. 544,000 (589,000 expected)
  • Weekly jobless claims 11/24 234,000 (220,000 expected)
  • Personal income Oct. 0.5% (0.4% expected)
  • Consumer spending Oct. 0.6% (0.5% expected)
  • Pending home sales Oct. -2.6% (0.7% last)
  • Chicago PMI Nov. 66.4 (58.4 last)

 

THE WEEK AHEAD

Mon Dec. 3rd

  • Markit manufacturing Nov.
  • ISM manufacturing index Nov.
  • Construction spending Oct.

Tue Dec. 4th

  • Motor vehicle sales Nov.

Wed Dec. 5th

  • ADP employment Nov.
  • Productivity Q3
  • Markit services PMI Nov.
  • ISM nonmanufacturing index Nov.

Thu December 6th

  • Weekly jobless claims 12/1
  • Trade deficit Oct.
  • Factory orders Oct.

Fri December 7h

  • Nonfarm payrolls Nov.
  • Unemployment rate Nov.
  • Average hourly earnings Nov.
  • Wholesale inventories Oct.
  • Consumer credit Oct.

 

For the week, the S&P 500 moved up 4.85%% for a year-to-date return of 3.24%

Summary

IBD: Market in confirmed uptrend

GMI: 1/6- Bearish signal since market close of November 13th, 2018 as of Friday morning

BCI: Selling an equal number of out-of-the-money and in-the-money strikes. The fundamentals are in place for a market turnaround which may have started this past week. 

 

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 2% while the VIX (18.07) moved up by 17%.

Wishing you much success,

Alan and the BCI team