Covered call writers are frequently faced with scenarios when earnings reports are due out on securities where we have long-term bullish assumptions. In October 2019, Mark shares with me a dilemma he was facing with TEAM. The October 2019 monthly contracts expired on 10/18/2019 but there was an earnings release due on 10/17/2019. This article will highlight how to manage such situations.
1- Year Price chart of TEAM in November 2019
TEAM Price Chart Pre- and Post-Earnings
TEAM was an uptrending stock through the end of August and then declined and began consolidating until the earnings release (note the spike in volume). The initial market reaction caused a sharp decline in share price (red arrow on top) despite a favorable report but then quickly recovered (blue arrow). Why the decline and then recovery?
IBD article regarding earnings expectations of software companies
TEAM; IBD News Release
Outstanding earnings stats initially disappointed the market’s illogical expectations but then reality set in that this was, in fact, a quality report from a excellent company.
How to manage option-selling trades when holding stocks through earnings reports/ Discussion
When we have long-term bullish assumptions on securities about to report earnings, we hold the stock through the report and start selling options after the report passes. In those circumstances (as with TEAM), when weekly options are available, we can sell Weeklys that contract month and skip the week of the report and then return to Weeklys or Monthlys whichever is preferred (Monthlys, for me).
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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:
Hi Alan,
Attached is my homebrewed cash-secured puts spreadsheet showing two triples for monthly April contracts in HD and LOW. I never hit two triples even in little league baseball!!
Thanks for all you do.
Tom H.
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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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Alan,
When we roll out a covered call trade, where do we put our credits and debits. In the current or next month?
Thanks,
Dennis
Dennis,
When calculating monthly (contract) returns, the best way to archive rolling-out trades is as follows:
Near month: The initial STO trade (credit) and BTC trade (debit)
Next month: New STO trade (credit) and then monitor from there.
Barry and I are working on a trade management tool (I believe the only one of its kind) and that is exactly how this spreadsheet is set up for rolling-out and rolling-out-and-up.
We have been working on this tool for several months and still a couple of months away… stay tuned.
Alan
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 04/30/21.
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:
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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
Since we are now 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/.
Best,
Barry and The Blue Collar Investor Team
barry@thebluecollarinvestor.com
Alan,
I know ETSY is one of your favorites, what do you make of the last week drop in price, given that the earning are not until mid this coming week, why has it gone down so much recently?
Do they know something i don’t on the earnings? I would think they would have another good quarter, as people still stayed home, and got even more stimulus money.
Would you recommend to keep ETSY off the list of potential for selling puts on Monday? i think the earnings is either Wed/Thur.
Thanks
Amit.
Amit,
It appears that last week’s price decline was due to a combination of pre-report profit-taking and an analysts short-term downgrade. I did have short-puts in place last week that expired out-of-the-money. That’s the advantage of using a Delta of 10 or less.
According to earningswhispers.com, ETSY reports this Wednesday, so I am not planning on selling ETSY puts this week. There are plenty of other elite candidates available with out having to undertake earnings risk.
Alan
Alam,
Good morning, I am using the Street Smart Edge platform and I’m not sure which price to use (Bid, Mid or Ask) to plug into the Elite Calculator spread sheet single tab for comparing options.
On the Street Smart Edge the Bid is highlighted on the stock purchase Ask column and on the option the Bid is highlighted. However on their Estimates they show a figure from the Mid column as your Max gain, Break even and Max loss.
Hence I’m not sure which number to use in calculating my choice of option to invest in. thank you in advance for you assistance.
Craig
Craig,
Use the “Multiple Tab” for option comparison stats. This way you can enter multiple positions for multiple stocks.
For the stock purchase, use the “ask” price and for option sales, use the “bid” price. These are worst case scenarios as we may end up paying less for the stock and receiving more for the option.
Alan
Hi Alan,
I noticed that Cowen Inc (ticker COWN) has been on the running list for the last 12 weeks. When I look at the current quarter’s estimated quarterly earnings growth compared to the year-ago quarter (Current Quarter EPS Estimate % Change on IBD), it currently shows negative -71%. What are your thoughts on this particular metric? It doesn’t appear to be much of a factor in the BCI screening criteria. Could you confirm?
Thanks,
Roger
Roger,
BCI factors in several fundamental factors, focusing in on earnings and sales growth. These are the main metrics the institutional investors care about. Earnings estimates become important when the actual earnings reports are made public and consensus is either met, exceeded or missed.
One of the many screens the BCI looks at when creating our Premium Member Watch List for stocks is the IBD Smart Select screen. This analyzes the stock and the industry the stock resides in from both technical and fundamental perspectives.
The screenshot below shows COWN performing at an elite level for all 6 parameters.
On the lower right side of the screenshot we see that COWN earnings-per-share accelerated by 1064% the last quarter. That may account for the lower estimates moving forward.
Finally, The institutional investors know about projected earnings stats. This information is already baked into the share price. The danger is if the next earnings report doesn’t measure up to analyst expectations. However, at BCI, we have that covered… we always avoid earnings reports.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Thanks Alan. This makes complete sense. Roger
Hi Alan,
1. When choosing between 2 OTM for 1 ITM, do you choose it for contracts or for companies? For example, you might sell 3 contracts for BCI, 2 of them being OTM and 1 ITM. Or you just decide to sell all BCI contracts OTM and go for another company ITM?
2. Does the stock price on option selling Monday impacts your decisions in some way? Let’s say BCI passes all the screens and is listed on premium report at Friday closing price of $100. On Monday it opens at $103, up 3%. Will this affect your decision to sell or not to sell option on this stock, or choosing between OTM or ITM strikes?
Sunny
Sunny,
1. I favor OTM strikes on the stocks with a stronger technical chart and ITM strikes for those with a mixed chart. If I am trading multiple contracts for a particular security, I may “ladder” strikes in a ratio based on the chart overview. Let’s say I am selling 5 contracts of BCI with a strong technical chart. I may go 4 OTM and 1 ITM. Mildly bullish 3/2. These are guidelines. When I publish the “moneyness” of my current portfolio in our member reports, I am referring to a total portfolio overview.
2. When I do my preparation for the new contract month on the Sunday (using the most recent premium watch list) after expiration Friday, my plan is in place. I understand that there will be price adjustments when the market opens on Monday. If share price moves up or down, the option premiums will also change and, typically, the initial time-value returns, upside potential and downside protection will align with our weekend research.
Alan
Hi Alan,
In regards to this post, “Holding a Stock Through An Earnings Report”…….
I have to say that this example with TEAM showed off a Best Case Scenario. The stock trades weekly options. The expiration date was one day after the earnings report….And the stock dropped after earnings.
If you did sell the Oct 18 options, the trade would have worked out in your favor.
How about a stock that only trades Monthly contracts……The earnings report is 2 weeks before expiration…… And the report is so good, it catapults the stock above your short strike. You wanted to hold long term because you expected great things from the company but you didn’t expect it to happen this soon.
I personally feel I might be in this exact situation soon.
FNKO……currently trading at 21.50
I sold the May 21st 25 call for a credit of 1.28……it is now trading at 0.95
Earnings are this Thursday May 6th
I don’t expect it to hit 25 but the latest estimates I’ve seen say it will have a blowout quarter so maybe it will.
I could buy back the option and make a bit of profit but if it doesn’t hit 25, I would be giving back a lot.
DECISIONS DECISIONS……
Any thoughts?
As Always,
Thanks for all you do.
Ron
Ron,
In the BCI methodology, we never have an option in place when there is a scheduled earnings report prior to contract expiration.
If we have confidence in a stock and want to hold it through that report, then we write the call after the report passes and the price settles.
Most companies beat consensus but some disappoint. ERs represent risk and each of us must decide if we want to be subject to that risk. Of course, there can also be great reward from a report that beats.
The BCI guidelines would lead us to closing the short call prior to Thursday, settling for a small short-term profit and then allowing the report to pass.
Alan
Great advice as always Alan.
They only trade monthlies and I wasn’t expecting the move that they have had so far. But now is the time to act.
Ron
Exit strategies:
I hit a double with 4 contracts of XLU today in one of my portfolios. Notice the classic V-shaped chart pattern in the screenshot below when we implement this exit strategy.
Preparation and opportunity allowed me to generate an additional $200.00 of premium into my account for about 4 minutes of time and effort.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Hello Alan,
Sorry for having so many questions:
I am doing some research and realized the following: Weekly covered calls seemed to generate more income than Monthly covered calls. May I know your reason for doing Monthly CC instead?
Thanks,
Dennis
Dennis,
We can succeed with both Weeklys and Monthlys and each has its pros & cons. I use both but do favor Monthlys for the majority of my positions. Here are some of the advantages of Monthlys over Weeklys:
1. Greater pool of stocks to choose from as the underlying security.
2. More time for position management.
3. 4x fewer rolling decisions for options expiring in-the-money.
4. A minor factor: 1/4 the number and amount of option trading commissions.
Now, Weeklys have the advantage of potentially a greater annualized return and make it easy to circumvent earnings and ex-dividend dates when applicable.
Bottom line: Both work and each investor must select based on their trading style.
Alan
Our 20%/10% guidelines are made for days like today.
Alan
Alan,
It was touch and go this morning, but none of my 12 position’s 20% buyback orders got a fill, and now they are all improving. Which is good. 🙂
Roni
Alan,
the 20/20 guideline is a superb tactic. You should get a patent for it.
Roni
Correction: 20/10
Alan,
it looks like you will hit a triple with XLU.
Roni
Roni,
A strong possibility. Ironically, the 2nd 20% threshold was reached as I was reading your post. See the screenshot below.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Alan,
I am following the BCI method by the book, and the results are very good, despite the market “churning” as you call it.
Roni
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The mid-week market tone is located on page 1 of the report.
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Alan and the BCI team
Alan,
Since yesterday afternoon I am unable to log in to the member’s blog.
I get a message “Authentication Problem”.
My email messages to you and Barry were returned by Mailer Daemon.
Please check – Roni
Alan,
It is fixed.
Thank you.
Roni 🙂