When we sell weekly cash-secured puts or write weekly covered calls, our trades are, typically, entered on Monday and completed on Friday. This avoids the weekend risk of longer-dated options. These Monday-Friday entries may create inflated initial annualized return calculations. This article will explain why the inaccuracies exist and offers a simple solution as how to generate accurate computations.

Why the inaccuracy of annualizing 5-day trades

When we enter Monday-Friday trades, our spreadsheets will calculate 5-day trades. So far, so good. However, when annualizing these trades, the Excel formulas will assume 73 timeframes in a calendar year (365/5). In reality, there is no trading 2 days per-week (Saturday & Sunday). In essence, each 5-day trade is really a 7-day trade, so we must adjust our expiration date an additional 2 days to generate an accurate annualized return. There will then be 52, 7-day time frames per calendar year (365/7).

Real-life examples with the Select Sector SPDRs in a CEO portfolio: 5-day entries

• Calculations using the BCI Trade Management Calculator (TMC)
• Brown cells: Entry and expiration dates reflect 5-days
• Yellow cells: Breakeven price points (share price – total premiums)
• Green cells: Initial time-value returns for the 5-day trades
• Purple cells (red arrow): Annualized returns based on 5-day trades
• Pink cells: Upside potential additional income for these out-of-the-money strikes
• In the next screenshot, the expiration date will change from 4/5/2024 to 4/7/2024, reflecting a 7-day trade

Real-life examples with the Select sector SPDRs in a CEO portfolio: 7-day entries

• Calculations using the BCI Trade Management Calculator (TMC)
• Brown cells: Entry and expiration dates reflect 7-days (expiration date changed from 4/5/2024 to 4/7/2024)
• Yellow cells: Breakeven price points (share price – total premiums)
• Green cells: Initial time-value returns for the 7-day trades (same as those for 5-day trades)
• Purple cells (red arrow): Annualized returns based on 7-day trades (lower, more accurate annualized returns because they are based on 52 timeframes per-year)
• Pink cells: Upside potential additional income for these out-of-the-money strikes (same as those for 5-day trades)

Discussion

When selling weekly options, accurate calculations for annualized returns can be generated by changing the expiration date from Friday to Sunday. This allows us to, more accurately, annualize based on 52, 7-day trades.

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Alan Ellman’s Selling Cash-Secured Puts

Using stocks and stock options to develop a low-risk, wealth-building strategy for retail investors. Selling puts is a strategy similar to, but not precisely the same as, covered call writing. Mastering either strategy is a huge opportunity for retail investors to secure our financial futures. Mastering both will allow us to focus on the best investment choices depending on market conditions and personal risk tolerance.

FOR ADDITIONAL INFORMATION AND PURCHASE LINK, CLICK HERE.

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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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:

Alan,

I have to take moment to complement you. I can’t imagine the email, communication, etc you get on a daily basis. Yet every time I need assistance, you are there with direct, insightful, meaningful, and helpful answers. Really taking the time to answer the questions. You are a tremendous asset to this community, and in the short time I have been doing this, I am starting to make money. It takes some effort, and insight but you make it very easy to learn and understand. Anyway, just really wanted to say => many thanks to you!

David

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Dividend Capture and A Streamlined Approach

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Course outline

Part I: Option Basics & Covered Call Writing

Part II: Dividend Capture

• The 3-required skills for all option trading
  • Stock selection for dividend capture covered call writing
  • Portfolio construction: Diversification & cash allocation
  • Portfolio initial trade calculations
  • The Blue Chip (Dow 30) Report
  • Option selection
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  • How to avoid early exercise?
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Part III: A Streamlined Approach: The CEO Strategy

Q&A

What is the CEO Strategy?

• What are exchange-traded funds (ETFs)?

• What are the Select Sector SPDRs?

• Exit strategies for traditional and CEO covered call writing

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• BCI ETF Report

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• Summary

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