One of the golden rules of the BCI methodology is never to sell an option (call or put) when there is an earnings report due out prior to contract expiration. Most of the time we avoid holding these securities in our option-selling portfolios due to the risk inherent in these reports. However, there are exceptions when we have so much confidence in the underlying security that we decide to hold it through the report and sell the option after the report passes. We may consider this approach when a company has a history of favorable reports or when we want this stock to be part of our longer-term buy-and-hold portfolios. On 7/22/2021, Alan, a premium member, shared with me such a series of trades he executed with CROX with remarkable results. I will show these in 100 share increments although he held larger positions.
Alan’s trades with CROX
- 6/28/2021: Buy 100 x CROX at $115.73
- 6/28/2021: STO 1 x $120.00 7/16/2021 call at $2.73
- 7/08/2021: BTC 1 x $120.00 7/16/2021 call at $0.25
- 7/08/2021: STO 1 x $115.00 7/16/2021 call at $2.05 (roll-down)
- 7/16/2021: CROX closes at $112.26, and the $115.00 call expires worthless No option was written until the ER passes
- 7/22/2021 (pre-market): CROX reports a favorable earnings report
- 7/22/2021: CROX gaps-up in value to $131.00 when market opens
- 7/22/2021: STO 1 x 8/20/2021 $135.00 call at $5.00
CROX initial calculations with the multiple tab of the BCI calculators
The initial trade structuring shows a maximum 18-day return of 6.1% (2.4% + 3.7%)
The status of the trades as of 7/8/2021, after rolling-down was a 10-day return of $106.00 or 0.92%, 33.6% annualized. This incorporates the net option credit as well as the unrealized share loss at that point in time.
CROX post-earnings initial calculations with the multiple tab of the BCI calculators
After benefitting (unrealized, at this point) from the post-earnings gap-up in price, an additional 3.8% premium was generated with another potential 3.1% of share appreciation. Let’s calculate the current status of these trades as of 7/22/2021.
Overall trade status
- Stock side: $131.00 – $115.73 = +15.27 per-share
- Option side: $2.73 – $0.25 +2.05 + $5.00 = +$9.73 per-share
- Total net position: $24.80 per-share = 21.4% 53-day trade = 147.4% annualized
In our BCI methodology, it is critical to avoid selling options when there is an upcoming earnings report prior to contract obligation. There are times when we have extreme confidence in the underlying or simply want to hold it in our portfolios for the longer-term, in which case we allow the report to pass and then write the call. Of course, there is always the risk of a disappointing earnings report. In this case, a substantial (unrealized) return was enjoyed as of the date of the 3rd option sale.
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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:
Congratulations on your fantastic book, The Complete Encyclopedia for Covered Call Writing. Can’t say enough good things.
I have finished Vol 1 and I have familiarized myself with the calculator.
1.Money Show Virtual Expo
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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.
I understand using current VOLQ / 3.46
to get a target ITM bid price (for one month)
VOLQ /3.46 Bid
22.56 6.52 $25.67
What is formula to use for 2 weeks or 3 weeks to expiration?
The screenshot below shows the formula that can be used for every timeframe for VOLQ and implied volatility, in general.
There is a free copy of the BCI Expected Price Range Calculator in the “resources/downloads” section of the premium member site (right side). Scroll down to “E”
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
When entering long on stock prior to selling a call, do you have a preferred (bullish) entry signal, (new high, higher lows during accumulation period (wyckoff), after gap ups, breakouts from bases, Japanese candle signals, engulfing, doji etc.. etc. only AFTER price is above 21 ema and 21 ema above 100 ema…Is there a place on your website that addresses entry?
You are a great teacher. I appreciate what you do.
Thank you for your kind words.
Technical analysis represents 1/3 of the BCI screening process along with fundamental analysis and common-sense screening like minimum trading volume, avoiding earnings reports etc.
Our trades are entered on the Monday or Tuesday after expiration Friday while exit strategies can be executed at any time during the contracts when those opportunities present themselves.
Here are the technical parameters we use in the BCI methodology that are detailed in our books and online courses:
1. Exponential moving averages (20- day and 100-day)
2. MACD histogram (12,26,9)
3. Stochastic oscillator (14-day)
4. Volume (technical confirmation, volume divergence)
We use these parameters to create a mosaic to determine if the price chart is bullish, neutral or bearish (the last one requires screening rejection of that security).
Good morning Alan,
Does the limit order and bid ask price come into play when Buying to Close a PUT?
Yes, there are 2 scenarios where we would close the short put:
Stock price declines significantly:
We buy-to-close (BTC) the short call when share price declines >3% below the put strike. We always use a limit order and can frequently “negotiate” leveraging the “Show or Fill Rule”
Stock price accelerates significantly:
This will cause the value of the put premium to decline. When it reaches the 20%/10% thresholds detailed in my books and online courses, we close the short put using limit orders and leveraging the “Show or Fill Rule” with wider spreads.
Have you looked at buying puts for downside protection? I realize it would reduce return, but it appears to give you more flexibility in position management. What are your thoughts?
Buying protective puts will convert our covered call trades into collar trades. This adds an additional layer of “insurance” (the main advantage) and will lower our time-value returns (main disadvantage). This strategy is detailed in the following BCI resources:
Here is a link to one of the articles I previously published on this topic:
Could you comment on this? We have had several instances when the price blows through on our call. Example on 11.16.2021 we put a call on AAPL @ $155.00 expiring on 12.17.2021 with a premium of $2.30 100 share for $230.00. The stock is currently $179.45.
We do use your strategy where we buy back calls when the option has a gain of 90% within two weeks of expiring and 80% longer than two weeks.
Yes, AAPL has been on fire. This trade should be viewed through the eyes of an optimist. It was structured such that a maximum return will be achieved if AAPL closes above $155.00 on 12/17. That result is looking quite good.
Using the “Unwind Now” tabs of the Elite and Elite-Plus Calculators will compute the time-value cost-to-close. If we can generate at least 1% more than the time-value cost-to-close, then consideration should be given to the mid-contract unwind exit strategy. If not, we continue to monitor the trade through 12/17.
Let’s celebrate all our trades that result in maximum returns.
Hello Alan –
I have a question about what you said in podcast @68 – Volatility – Our friend or our enemy?
I believe you said that when volatility declines we can take more aggressive positions and look to selling OTM calls, and slightly OTM or almost ATM CSPs. My question is if volatility is low and we sell ATM CSPs, wouldn’t it be more probable that volatility will increase from low to high and then we will have to buy back the puts at much higher premiums (a loss) to close a position?
I am not sure if I understood you correctly. Would appreciate some clarification please as I’m discovering there are a lot of nuances to options trading!
Thank you Alan!
BCI Podcast #68 highlights the inverse relationship between market volatility (I used the CBOE Volatility index or VIX) and the performance of the overall market (S&P 500). Several charts were provided.
A low VIX generally means an appreciating market where we would tend to favor more aggressive (but still low-risk) option-selling trades, calls or puts. A VIX that is spiking (2008 crash, COVID-19 in March 2020) would guide us to more defensive positions.
I understand your concern that a low VIX will eventually increase but here we have the advantage of our short-term positions by constantly re-evaluating our bullish, neutral or bearish stances.
Bottom line: A high VIX favors defensive positions; a low VIX favors more aggressive positions.
Your post shows that you are really thinking things through. That is very good as we never learn less.
Your statement “… there are a lot of nuances to options trading!” is profound.
One of the goals of the BCI methodology is to refine the nuances down to where we can be almost mechanical in our options trading. Of course, each of us has our own risk tolerance and our own goals.
Specific to your post, VIX measures the overall market volatility and thus gives us an overall view and how we generally approach selling premium.
VIX does tend more to decrease faster from a higher level but not so much increase as fast from a lower level to a higher level. That may be because we have been in a decade-long bull market. If you look at a 5-year and 10-year chart of the VIX you will see what I mean. Just remember that those two charts will be showing weekly data, not daily data. Weekly data makes the point even more emphatically.
Now to your point about volatility regressing to the mean. On individual stocks. that is very true. And here is where one of the nuances really comes into play.
As volatility increases premium prices increase and we don’t have to go as far OTM or ITM to get the return we seek. On most individual stocks volatility tends to increase as ERs approach and decrease just after an ER. Volatility is a two-edged sword, another nuance. One wants a higher premium, but with a higher premium comes higher risk. It would seem, that if your risk tolerance were higher, you would want to sell with higher volatility beginning to decrease so that the value of the premium sold would decrease more rapidly. It seems that this point would be shortly after an ER.
On the other hand, selling a month ahead of an ER might give you a higher probability of being assigned. In my opinion, being assigned is a good thing. I much prefer an assignment over buying back an option unless the stock has gone nowhere, and time decay is the reason for the option declining in value.
Thank you for your post and the best of luck.
Keep up the thinking.
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 12/10/21.
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:
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.
Barry and The Blue Collar Investor Team
The Weekly Report has been updated and uploaded to the Premium Member website. Look for the report dated 12/10/21-RevA.
The column, “# Weeks On Run List”, has been updated. The update did not impact any screening pass/fail outcome.
I’m reading through the Complete Encyclopedia now for the second time. Can’t believe how much I’m learning and didn’t know before!
I do have a question about earnings reports. If a stock reports earnings on a Friday, would you use it on Monday or wait longer… how much longer?
Thanks a lot.
A lot depends on if the report comes our pre- or post-market hours on Friday.
In general, if the report results in price volatility, either way, we wait for that volatility to subside and then enter our trades. If the Friday report comes out pre-market, that could be on Monday. If it comes out post-market hours, it will probably be on Tuesday.
I understand the concept of the 20%/10%. I do not think I understand the implementation of it. For example, If the premium is 1.90 a 20% reduction would be $0.38.
So, my issue is that I do not know how to apply that. How do I apply that info and to what? Does it get applied to the premium such that if the premium goes down to 1.52 that is when I would buy to close my PUT option or whatever maneuver I was planning?
After we sell a monthly option for $1.90, we immediately place a limit order to buy-to-close (BTC) that option at $0.38 which is 20% of the original option sale price.
Midway through the monthly contract, we change the BTC limit order to $0.19 which represents 10% of the original option sale price.
This process can be used for puts when stock price accelerates or calls when stock price declines.
Always use BTC limit orders, GTC (good-until-cancelled) and do not check the “All or None: box (AON) of the broker trading platform if there is one.
The latest Blue Chip Report (best-performing Dow 30 stocks) for the January 2022 contracts has been uploaded to your member site.
Look in the “resources/downloads” section (right side).
This week’s 4-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, mid-week market tone as well as the implied volatility of all eligible candidates.
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:
NOT A PREMIUM MEMBER? Check out this link:
Alan and the BCI team