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“Hitting a Double” with XBI: Earn $100 in Four Minutes

Position management (exit strategies) is one of the 3-required skills for successful covered call writing and put-selling. “Hitting a double” involves buying back the short call using our 20%/10% guidelines and then re-selling that same option when share price recovers. On 3/13/2019, Mario was kind enough to share with us his trades with SPDR S&P Biotech ETF (NYSE: XBI) where he astutely applied this exit strategy.

 

Mario’s trades

  • Trade opened end of February
  • 300 shares XBI purchased
  • Sell-t0-open 3 contracts of the April $92.00 calls at $1.50
  • 3/6/2019: Buy-to-close the $92.00 calls at $0.15 (10% guideline)
  • 3/13/2019: Sell-to-open the $92.00 calls at $0.55

 

Price chart of XBI showing the classic V-shaped “hitting a double” pattern

 

covered call writing exit vstrategies

XBI: V-Shaped Chart Pattern

 

To implement this strategy, we must be prepared to close the short call when our 20%/10% guidelines are met and this aspect of the strategy can be automated. Once the covered call trade is executed, we can enter a buy-to-close limit order based on our guidelines and if the threshold is met, the call will be bought back. If and when share value recovers, the option can be re-sold. This implies share value declines from its original chart position and then recovers at a later date during the contract, resulting in the classic V-shaped chart pattern.

 

Free dinner for Mr. and Mrs. Mario

Since Mario has 3 contracts, utilizing this exit strategy resulted in a net option credit of $120.00 less trading commissions, about $100.00. It takes less than 4 minutes to close and re-open these trades. Now Mario can take his wife out for a “free” dinner at his favorite restaurant in south Florida thanks to his option trading skills. Keep in mind that this profit is over-and-above the original option credit generated.

 

Discussion

Entering a covered call trade encompasses the first 2 required skills, stock and option selection. The 3rd required skill, position management, will allow us to both mitigate potential losses and enhance potential gains as was the case here where Mario shrewdly “hit a double”

 

***For more information on covered call writing position management, see the exit strategy chapters in these books and the new covered call writing DVD program shown below:

The Complete Encyclopedia for Covered Call Writing- Classic edition

The Complete Encyclopedia for Covered Call Writing- Volume 2

 

New covered call writing DVD program now available with early-order $50 discount expiring this week

Our objective was to create the most complete and comprehensive video program on covered call writing found anywhere. The 4-set video curriculum takes us through the 3-required skills: stock selection, option selection, and position management. The 4th section highlights special circumstances like writing calls against long-term buy-and-hold portfolios.

You Will Learn:
– How to locate the greatest performing stocks for option-selling
– Which Is the best option to sell
– How To calculate your returns
– How To utilize exit strategies – Decrease losses & enhance gains

The program is based on 25 years of actual trading options, not on computer models. All the rules and guidelines presented are based on these real-life experiences. This series will benefit both beginners and more experienced investors and addresses all scenarios that can arise before, during and after trade executions.

https://thebluecollarinvestor.com/minimembership/covered-call-writing-package-4-dvd-series-workbook/

Use this promo code for a $50.00 discount off the $149.00 price:

newdvd50

The program also includes a downloadable workbook.

 

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:

Encyclopedia book review on Amazon.com:

Alan,

The content of your books is potentially life-changing. Thank you so much for sharing your knowledge.

Regards,

Cedric

 

 

Upcoming events

September 14, 2019: Charlotte Chapter of The American Association for Individual Investors

“Converting Non-Dividend Stocks to Dividend-Like Securities”

Live webinar (link to follow)

Saturday from 10 AM – 12:PM ET

 

September 27, 2019 at 1:30 PM ET: Philadelphia Money Show

“How to Select the Best Options in Bull and Bear Markets”

 

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Market tone data is now located on page 1 of our premium member stock reports.

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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.

18 Responses to ““Hitting a Double” with XBI: Earn $100 in Four Minutes”

  1. Barry B August 24, 2019 10:48 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 08/23/19.

    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:

    http://www.youtube.com/user/BlueCollarInvestor

    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:

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

    Please note that the report for 09/06/19 will be posted late on Monday, 09/09/19. I will be out of the country and will not be back home until late on 09/08/19.

    Best,

    Barry and The Blue Collar Investor Team

    [email protected]

  2. Marsha August 25, 2019 6:14 am #

    Alan,

    On Friday with the market down so much I did buy back several options. Would this be a good example to wait to hit a double or sell because of the amount of the decline?

    Thanks as always,
    Marsha

    • Hamish August 25, 2019 8:55 am #

      Hi Marsha,

      Good point. I’ve had the same feeling a few days ago. Volatility remains pretty high so the likelihood of the options being overvalued is huge, however, I’ve closely watched the 2925-2940 level in the S&P-500 to be breached (which didn’t occur, I now foresee a further decline to 2750-2700 over the next weeks), therefore I’m just keeping 25% in cash right now, while 75% is allocated to defensive utility and real estate stocks. But I do know that these stocks don’t give as much premium as I normally would receive utilizing other stocks, but they give me the possibility of still benefitting from a stabilizing situation (and thus a decreasing IV) while collecting a more guaranteed premium. Unless we break through the declining trend line and get above the SMA 50, I remain very cautious and select low-beta stocks or stocks that are actually non-correlated with the stock market. Once the trend becomes favorable, I start to deploy my cash and allocate to more aggressive stocks. But at this point, I feel the VIX could go up to even higher levels and then it may be time to benefit from excessive premiums.

      Best of luck
      Hamish

      • Marsha August 25, 2019 9:53 am #

        Hamish,

        Thanks for your terrific assessment. Makes a lot of sense. I also watch the VIX (about 20 now) and curious which direction it will take on Monday. Like you, I’m using low volatility stocks and sacrificing premium as a defensive play.

        Marsha

        • Hamish August 25, 2019 4:24 pm #

          One of my favorite stocks is Next Era. Terrific stock, however if the VIX closes at 26 or more, you’ll tend to see a broader market selloff like the one we’ve suffered last December, because at some point, every stock get dragged down (the baby is thrown out with the bathwater). As long as we see a ‘smooth’ decline, I feel very comfortable with these low-beta stocks, but again, I’m now much more active and re-evaluate my trades every weekend. I’ve read several studies on when to take profits and 50% of your credit received (using short puts) might be a good solution to rebalance your portfolio, maintain flexibility and reduce excessive risk. Adding IV rank to the equation and we can throw the odds dramatically into our favor along with other essential aspects of option selling. Difficult times to handle right now 🙂 A disciplined approach is the only thing we have to keep a keen eye on. Without that, we get stuck in a labyrinth of confusions, impulsive trades and mounting losses.

    • Roni August 25, 2019 12:03 pm #

      Marsha,

      as Hamish says, it depends on the stocks you chose.

      In my experience, it is very rare to hit a double. Maybe it’s just my luck.

      The big problem is that when you buy back a monthly option at the beginning of the cycle, the stock must have gone down considerably, and you are looking at a very important paper loss.
      Nobody knows what will happen tomorrow.

      Normally the stock goes down by the elevator, and comes back by the stairs.
      So, you wait and worry.

      Therefore, I prefer to unwind, and enter a new trade with a better performing ticker.

      Roni

      • Alan Ellman August 26, 2019 5:56 am #

        Marsha,

        Let me add this to the great responses from Hamish and Roni:

        We are more likely to wait to “hit a double” in the first have of a contract and more likely to sell an underlying when it is significantly under-performing the overall market.

        Alan

      • Jay August 26, 2019 10:38 pm #

        Marsha, Hamish and Roni,

        Call me nostalgic but I miss the days when fundamentals, technicals, earnings and sentiment gauges meant more to the market than Tweets, bluster levels and exaggerated dramas all feeding on each other :).

        I certainly realize the news cycle, current events and even personalities have always moved markets. Just rarely to this degree or duration. Plus it is easy to get caught up in the fray emotionally these days.

        So I agree with you: there have been few better times to approach things with a disciplined, cautious and rule based mind set than now. – Jay

        • Hamish August 27, 2019 4:27 pm #

          Jay

          Exactly. Trump and other news drive markets crazy. I stick to defensive outperforming stocks but take profits earlier off the table so that I can re-evaluate my portfolio every single weekend. This allows for more flexibility, safety, less volatility and less exposure to one particular sector (one day, apparels get slaughtered the other day, financials are dragged down by the inverted yield curve).T
          hroughout the week, there’s a lot of noise that can turn out to be costly mistakes or ‘adventures’ although markets as a whole are going nowhere these days, except WEC Energy, Next Era, Sun Communities and other boring stocks. As long as there’s plenty to worry about, I’m not taking on excessive risk. However, I’m still very happy with 1.5 to 2% every single month. Difficult times to go through, but acting as a really non-emotional and disciplined option seller will help us survive the tweet storms :))

          Hamish

  3. Herb August 25, 2019 3:53 pm #

    Alan,

    In many of your e-mails you talk about 20%/10% guidelines, can you please send me a definition of that guideline.

    Thanks,
    Herb

    • Alan Ellman August 26, 2019 5:46 am #

      Herb,

      The 20%/10% guidelines refer to situations when a drop in stock price results in a decline in option value. It guides us as when to buy back the short call.

      If an option price drops to 20% or less of the original purchase price ion the first half of a contract, we buy back the option and evaluate our next step. In the latter part of the contract, we close the short call when the value drops to 10% of the original cash generated.

      For example, if we sold the option for $2, the thresholds to buy back the option would be $0.40 and $0.20 respectively.

      Alan

  4. Jae August 27, 2019 2:11 am #

    Alan,

    I am really curious about when to sell another option on a trade that has take profit at the 20% or 10% exit.

    When going for a double, do you have a guideline on when to resell an option? Are you looking for the same price as in the initial trade, or a certain percentage of that? does it change in a four or five week trading period?

    Thanks
    Jae

    • Alan Ellman August 27, 2019 6:40 am #

      Jae,

      With time-value erosion (Theta) increasing as we move to the latter part of a contract, I will look to “hit a double” through the early part of the 3rd week of a 4-week contract or the early part of the 4th week of a 5-week contract. If share price does not accelerate, we turn to plan B which could be to roll down or sell the stock.

      I, generally, look to generate an additional 1% when “hitting a double” but time restrictions may require us to accept less. I’m happy with more cash in my pocket for a few minutes of work and lots of preparation.

      ***Making money when “hitting a double” is the intersection of preparation and opportunity.

      Alan

      • Jae August 27, 2019 8:24 am #

        Excellent, thanks Alan.

        Do you ever sell a PUT when a stock has dropped say.. 10% to reduce cost basis? i.e. to either double the number of shares if the stock stays low, reducing overall cost basis. Or buying back the PUT if the stock returns back towards your original purchase price, offering the ability to buy back the PUT and sell another CALL.

        Or is this exit strategy considered too risky? and rolling down / selling stock is preferred.

        Jae

        • Alan Ellman August 27, 2019 12:23 pm #

          Jae,

          It is important to identify the strategy that best suits our trading style. If a stock decreases in value triggering the 20%/10% threshold(s), we have our exit strategy plans in place to react. I don’t believe in adding to a position in order to lower cost-basis.

          An alternative approach to lower breakeven would be the “stock repair strategy” where breakeven is lowered without adding additional cash to a losing trade.

          An excellent strategy in bear and volatile markets is the “PCP Strategy” where out-of-the-money cash-secured puts are sold to enter covered call trades. These strategies are detailed in my books and DVDs.

          Alan

  5. Alan Ellman August 28, 2019 10:26 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

    New members check out the video user guide located above the recent reports.

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

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

    NOT A PREMIUM MEMBER? Check out this link:

    https://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

  6. Jae August 29, 2019 8:37 am #

    Hi Alan,

    Given that we are aiming for 2% – 4% profit a month..

    I have had a few trades recently go above 2% within 24 hours. At first, I would wait and see if they would go higher, and sometimes they fell back down to zero or even into a loss.

    My current thinking is that if something goes quickly into a reasonable profit, that I take the trade off the table. Which offers the opportunity to enter another trade in another stock within the same period.

    Would you agree with this exit strategy? Do you ever do the same?

    Thanks
    Jae

    • Alan Ellman August 29, 2019 11:33 am #

      Jae,

      Before I respond, I want to clarify 1 point:

      When we sell options, we have an “initial time-value return goal range” For me, it’s 2% – 4% per month. From there our trades are managed to the highest possible final returns which may be higher or lower than our initial profits.

      Now, closing a trade when stock price moves up… we must factor in the time-value cost-to-close. The “Unwind Now” tab of the Elite version of the Ellman calculator (free to premium members) will do the math for us. When this cost-to-close approaches zero mid-contract, closing both legs of the trade will make sense. See the “mid-contract unwind” exit strategy in the exit strategy sections of my books and DVDs.

      Alan

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