In last week’s segment, I posted a series of cash-secured put trades with Etsy, Inc. (Nasdaq: ETSY). Some trades were executed before an earnings report and a few post-earnings. This article will detail how to accurately enter and archive all trades using the BCI Trade Management Calculator.
Stage 1:
Pre-earnings report (ER) trades
- 7/18/22: ETSY trading at $85.53 with ER due out 7/27/22. Will write a weekly put option and skip the following week of the ER
- 7/18/22: The 10-Delta, deep OTM 7/22/22 put shows a strike of $76.00 (approximate 90% probability of no exercise based on Delta)
- 7/18/22: STO 1 x 7/22/22 $76.00 put at $0.37
- 7/20/22: ETSY trading at $92.66
- 7/20/22: BTC 1 x 7/22/22 $76.00 put at $0.05
- 7/20/22: STO 1 x 7/22/22 $84.00 put at $0.27 (roll-up #1)
- 7/21/22: ETSY trading at $96.87
- 7/21/22: BTC 1 x 7/22/22 $84.00 put at $0.03
- 7/21/22: STO 1 7/22/22 $88.00 put at $0.15 (roll-up #2)
- 7/22/22: The $88.00 put expires out-of-the-money and worthless
- 7/27/22: ETSY closes at $95.50 and reports earnings after closing
Pre-earnings trade entries & calculations
ETSY: Pre-Earnings Entries & Calculations
The final results after 2 roll-ups included returns of 0.78% + 0.14%. The spreadsheet shows 2 capital investments (red arrows) when there should be only 1 as the first is incorporated into the 2nd. We will account for this below in the capital adjustment section.
Pre-earnings rolling-up trade notes
TMC: Trade Journal Entries
Capital Adjustment Entry Section
Capital Adjustment for Accuracy
With this adjustment % returns will be accurate and reflect profit/losses based on actual cash invested.
Initial and final portfolio results after 2 rolling trades (5-day returns)
Final Portfolio Results After 2 Rolling-Up Adjustments
Post-ER initial trade entries and initial calculations
Initial Entries & Calculations Post-ER
The spreadsheet reflects an initial time-value return of 2.39%, 39.70% annualized based on a 22-day trade.
Discussion
The Trade Management Calculator (TMC) allows for pre-and post-earnings report trade entries and calculations. Using the Trade Journal and capital adjustment sections will also be useful in archiving and ensuring the accuracy of our trade calculations.
Selling cash-secured puts products available
Best online course with downloadable workbook
Coming soon: Streamlined Approach to Covered Call Writing
My 9th Book and 2 New Spreadsheets Available in the Near Future
Premium Member Benefits Video
This is a great time to join our premium member community with its stock screening and educational (over 200 videos) benefits. We offer more benefits than ever before. For information, click here.
For video explanation, click here.
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:
Dr. Ellman,
Upcoming events
To request a private webinar for your investment club, hosted by Alan & Barry: [email protected]
1.Long Island Stock Traders Meetup Group
Analyzing a 1-Month Covered Call Writing Portfolio from Start to Finish
A real-life example with a $100k ETF Select Sector SPDR portfolio
Thursday February 16,2023
7:30 PM ET- 9 PM ET
Covered call writing is a low-risk option-selling strategy that generates weekly or
monthly cash flow. This presentation will demonstrate how to implement this
strategy using a database of only 11 exchange-traded funds for a 1-month option
contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s
portfolios with screenshots verifying each trade. A final monthly contract result
compared to the performance of the S&P 500 will be calculated.
Topics included in this webinar:
What are the Select Sector SPDRs?
How to establish a covered call writing portfolio
What is the role of diversification?
What is the role of cash allocation?
Calculating initial returns
Analyzing each trade in the monthly contract
Final results
Next steps
Go to www.meetup.com/listmg
Click on join to become a member (Free membership)
Then click on RSVP (meeting is free) to obtain the ZOOM link.
2.Mad Hedge Investor’s Summit
Wednesday March 15th
11 AM ET – 12 PM ET
Portfolio Overwriting: Covered Call Writing Our Buy-And-Hold Stocks
Increasing profits and avoiding tax issues
Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”. Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk covered call writing-like strategy.
Registration link to follow.
3.NYC & Long Island Stock Traders Investment Groups
Thursday March 16th, 2023
7:30 – 9 PM ET
Topic related to multiple applications of selling cash-secured puts.
Specific time, date, topic & description and registration link to follow.
4. Money, Markets, & Monetary Policy Virtual Expo
April 11th – 13th, 2023.
Specific time, date, topic & description and registration link to follow.
5. Wealth365 Summit
April 17th – 22nd
Specific time, date, topic & description and registration link to follow.
6. Your Mid-Year Portfolio Review Virtual Expo
June 27th – 29th, 2023
Specific time, date, topic & description and registration link to follow.
***********************************************************************************************************************
Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
****************************************************************************************************************
Hello Alan.
In a previous email you mentioned that you would soon have your own seminar regarding using the SPDRs. When do you expect that?
Barry
Barry,
On Friday, I sent the publisher my final approval of the proof. I expect printing to begin this week. Once I receive the 1st 500 author copies, I’ll send out an invitation to premium members to attend a live webinar introducing this streamlined approach to covered call writing. At a later date, I’ll do the same for the entire BCI community.
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 02/10/23.
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:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as the membership remains active.
A note…the Weekly Report for 02/24/23 will be published a day earlier on 02/23/23 using the closing prices for Thursday, 02/23/24.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan,
if i may bother,
i have decent knowledge of options covered call and puts, but interested in learning how to build a portfolio based on stocks as well as ETFS and which one to use between covered call and cash secured puts. wondering what’d be your recommended starting point to learn for
a. covered call writing based on stocks, blue chips and ETFS
b. cash secured puts – where to use this strategy and also what instrument (Stocks or ETFS) for the same
c. if you have a recommended playlist to watch, please let me know, i’d do that diligently as well.
d. lastly what criteria do you use to say sell a stock or ETF – if it breaches both 20 and 100 day MA or something else. i have listened to your 20/10 for covered call exit and 3% below strike to exit cash secured puts. but more interested in knowing when to get out of a stock or etf in between holding period
Raam
Raam,
Both stocks and ETFs can be used for both strategies. As a premium member, you can use our stock, ETF and Blue Chip (Dow 30) Reports for both strategies.
Your current knowledge of calls and puts will allow you to achieve a masters level of these strategies faster than those who are just starting out. I would start with covered call writing and then, once mastered, move on to puts.
For both strategies, stock reports provide opportunities for the highest returns with a bit more risk, because of the higher implied volatility of these securities (with some exceptions). ETF and Blue Chip reports will provide underlying securities with lower premium returns, with lower risk due to their lower implied volatility (with some exceptions).
Strategy preference is a personal preference, but I’m happy to share mine. I favor covered call writing in most market conditions because it allows the 2-income stream potential when using out-of-the-money calls. In bear and volatile markets, I use cash-secured puts to enter my covered call trades, strategy known as Put-Call-Put (PCP) in the BCI community, the “wheel” strategy outside the BCI community. I have multiple option-selling portfolios, most using traditional covered call writing with monthly options. I also have some with puts and weekly options. My opinion is to start with traditional covered call writing.
Videos:
Start with our free beginners’ tutorials if you haven’t already gone through them:
https://www.thebluecollarinvestor.com/beginners-corner/
As a premium member, you have access to over 250 educational videos. Start with the videos adjacent to the stock and ETF Reports. Then, scroll down on the left side of the member site where you will find > 200 “Ask Alan” videos where we break down trades from my accounts or those members who shares their trades with BCI.
You will also find about 20 Blue Hour detailed webinars above the Ask Alan videos.
To master covered call writing:
Best books:
https://www.thebluecollarinvestor.com/alan-ellmans-complete-encyclopedia-for-covered-call-writing-scover/
https://thebluecollarinvestor.com/minimembership/softcover-exit-strategies-for-covered-call-writing-and-selling-cash-secured-puts/
Best online video course with downloadable workbook:
https://thebluecollarinvestor.com/minimembership/covered-call-writing-package-4-dvd-series-workbook/
Best calculator and includes exit strategy book (spreadsheet):
https://thebluecollarinvestor.com/minimembership/bci-trade-management-system/
We also have our all-in-one packages:
https://thebluecollarinvestor.com/minimembership/bci-investor-program/
When to sell a stock: Detailed information with real-life examples is found in our books and videos but let me give you a brief overview. The 20%/10% guidelines for covered call writing will dictate when to close the short calls. The next steps will vary based on several factors. The decision to sell a stock or ETF is based on its performance relative to the S&P 500. If significantly under-performing, it’s time to go and bring in a better performer. For those looking for a specific % price decline, 7% is reasonable. When replacing a stock or ETF we decide to sell, use the most recent stock or ETF reports.
Alan
Thank you as always for prompt response. have a great sunday and if you are a NFL fan, have a greate super bowl time with friends and family.
Regards
Raam
Allan,
I recently found your site from your YouTube channel. I find your information both fascinating and easy to understand. Thank you.
I was wondering if you use delta when deciding on which strikes you use for calls? If so,, which one do you recommend?
Thanks a lot.
Randy
Randy,
With the exception of one of our ultra-low risk approaches to option selling, we do not use Delta as our sole determination for strike selection.
The factors we use are:
1. Initial time-value return goal range (2% – 4% per-month, as an example).
2. Moneyness decisions (ITM, ATM, OTM). These choices are based on overall market assessment, technical indicators and personal risk-tolerance.
Once we have made these 2 determinations, we go to an option-chain and there will be clarity regarding strike selection.
Let’s face it, our goal is not to achieve a specific Delta, but rather to craft our trades to meet our strategy goals and align with our trading style.
Finally, the strike we select will, of course, have a corresponding Delta, but that Delta is the end point, not the starting point.
Alan
Hi Alan,
I have a question and wanted to know your thought.
I know you say in a bullish market you like to write cc over puts, why is that? My reasoning I would favor otm or atm puts is you have the opportunity to roll up if equity rises where if you have the calls you would just make the gain on the premium plus any capital appreciation which would probably be less than rolling up several times.
Also the other question would be in a choppy or slightly bearish market you say not to hold cc through er but wouldn’t that give you some downside protection in case of poor earnings.
Thank you for your response.
Jeff
Jeff,
I love the strategy of rolling up put options when those opportunities present.
When we have a normal market-to-bullish outlook, our portfolios will benefit to a greater extent by using OTM covered calls as opposed to cash-secured puts and then rolling up the put strikes.
This relates to the impact Delta has on premium value. Stocks have deltas of 1.0; slightly OTM puts about -0.4 (as a realistic example). This means that for every $1.00 increase in share price, our OTM covered calls will benefit by $1.00 per-share, $100.00 per-contract.
Rolling puts will benefit by $0.40 per-share to buyback the put, $40.00 per-contract. Then, we will benefit from the sale of the high-strike put.
In the option-chain below for INTC, taken this morning pre-market opening, the initial time-value is greater for the put because the call is deeper OTM ($1.00 to $0.42 or +$0.58 for the put).
With INTC trading at $27.90, there is opportunity to benefit by $2.10 per-share using the OTM covered call. Can we achieve an additional $1.52 per-share by rolling up the put option? Unlikely.
Let’s say INTC moves up $1.50 to $29.40 by expiration. Our total covered call return will be an unrealized (if shares are retained) $1.92.
The cost-to-close the $27.50 put will be less than the original $1.00 (perhaps $0.40 (deducting $0.60 from the original $1.00), if we assign a Delta of -0.4 to the put strike) and rolling-up will result in a net credit, but not close to $1.00. Another factor for option credit, is that we are also fighting Theta, or time-value erosion.
Bottom line: If our outlook for the market is bullish, both covered call writing and selling cash-secured puts with rolling-up opportunities can be successful trades. However, covered call writing OTM strikes will present the greatest upside in these conditions.
Earnings reports: I have studied this topic over 2+ decades. We must avoid having an option in place when there is an upcoming ER. Either do not hold that stock in our portfolios or own it, but don’t write the call. Over the past several years, there are many more “beats” than disappointments. We shouldn’t cap the upside in return for mitigating if the report goes against us. The risk-reward profile simply is not to our advantage.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Hello Alan –
A quick question if I may. I’m a little confused.
When my 10% BTC is executed and I decide to keep the stock and sell calls in the next contract cycle, what cost basis do I use?
Should I use as my new cost basis the “break even value” or “final unsold stock price,” of the closed trade, or start fresh and use the price of the stock at the time I sell the new call
Thank you.
Jim
Jim,
We use the final unsold price of the stock at contract expiration.
In our TMC spreadsheet, the exit strategy dropdown we select is roll-down and keep stock. If we don’t sell a 2nd option, do not fill in a new STO premium or simply adjust the 1st premium down by the BTC amount without a trade adjustment. I would opt for the former with a note in the Trade Journal.
See pages 40 -42 of my 8th book, “Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts”. This will provide an accurate calculation of our realized option profit and unrealized share loss.
We enter the final unsold share price into the new spreadsheet for the next contract cycle along with the new covered call position.
Alan
Hello Alan,
Quick question on the Trade Management Calculator.
If I am selling calls on the same stock repeatedly, and my stock cost basis is continually dropping, is that the next entry price I should use on the next trade, or is it the current stock price, Can’t seem to wrap my brain around this.
Ted
Ted,
When continuing a trade from 1 contract expiration cycle to another, the share price entered into the next TMC spreadsheet is the lower of current market value or the previous strike.
Each spreadsheet will accurately reflect the unrealized share profit or loss to date.
Let’s say we bought a stock at $48.00 and sold the $50.00 call and at expiration the stock price was $49.00. That spreadsheet will reflect an unrealized share gain of $1.00. $49.00 is entered in the next TMC spreadsheet for the subsequent covered call trade.
If share price at expiration is $52.00 and we roll that option, we enter the final unsold share price at $50.00 (what are shares are actually worth at the time of the roll). The spreadsheet will calculate an unrealized share gain of $2.00. $50.00 is entered in the next spreadsheet, and the option premium we enter is the net credit or debit factoring in the cost-to-close and premium to open.
If we execute multiple exit strategies in the same contract cycle and spreadsheet, it is critical that we utilize the capital adjustment section to ensure that the % returns generated by the calculator are 100% accurate.
Alan
Premium members,
The new Blue Chip report for the best-performing Dow stocks for the March 2023 contracts has been uploaded to your member site.
Look on the right side (“resources/downloads”) and scroll down to “B”.
Alan & the BCI team
Hello Alan,
Going through a wealth of information and have the basic questions and appreciate any guidance.
i have money to be put into the market and don’t have a lot of time to spend other than weekends and your strategy is good for my style.
to start with simple strategy and then go advanced say for a 500K portfolio what would be a good start/approach between going with covered call strategy or cash secured puts
a. ETF covered call or cash secured puts with ETFS
OR
b. Blue chip covered call or cash secured puts
OR
c. premium stock report based covered call or cash secured puts
general question is if i want to grow my portfolio, i’m assuming covered call is the strategy to focus than cash secured puts. are there scenarious where you’d go with cash secured puts over covered call strategy ?
sorry to ask lots of qsns. but wanted to start putting my money into action and to start conservatively and once i have the returns and confidence want to go to more advanced and bit risky approach.
Also do you recommend anything on hedging strategy ?
Regards
Raam
Raam,
Let me respond in general terms, not necessarily a recommendation for your specific situation.
To start with a time-efficient, low-risk and simple approach to option-selling, consider covered call writing low implied volatility ETFs. I use this approach in my mother’s portfolio. It will result in opportunities for lower, but still impressive, returns comparted to covered call writing with individual stocks, but checks all the other boxes.
I have multiple option-selling portfolios involving both calls and puts as well as stocks and ETFs. I like CSP in bear and volatile markets (combined with CCW (The “PCP” strategy) but use traditional covered call writing as my favorite strategy. Both work.
Hedging: Many choices here. These include:
ITM calls.
Deep OTM puts.
Low implied volatility ETFs.
Protective puts added to covered call writing (collar strategy).
20%/10% guidelines for buying back short calls.
See also our ultra-low-risk approaches (using Delta and implied volatility).
Lots to unpack here, but once mastered, it will be well worth the time and effort.
Alan
Hi Alan,
I just wanted to ask you about the trading hours in the U.S. for options.
In India, there is a proposal from one of the exchanges to extend the derivatives trading hours to 14 hours and 40 minutes a day. Currently, the markets are open only for 6 hours and 15 minutes.
It is close to impossible for traders to spend up to 15 hours a day trading.
Can you please tell me for how long the options markets are open in the U.S.? And, if the markets are open for more than 8 hours a day, any advice on how to handle extended traded hours?
I searched online but did not find a genuine answer to this question. Any input from you would be greatly appreciated.
Thank you,
Sagar
Sagar,
The US stock and option markets are open from 9:30 AM ET to 4 PM ET, Monday through Friday with several market recognized holiday closings.
After hour trading is from 4 PM ET to 8 PM ET weekdays. After hours, the trading volume is much lower and riskier to retail investors. Most retail traders should stay within the normal trading hours of 9:30 – 4 PM ET.
I hope this information is useful as it relates to the markets in India.
Alan
Premium members:
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:
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
Hello Alan
Good morning
Referring to Blue Chip Stocks March 2023 and in general, the ones in list
are they suitable and eligible for Covered Calls.
Requesting you to please clarify and oblige
Regards
Venkat
Venkat,
Yes.
Let me give you some background so you have an understanding of what you get in the Blue Chip (Dow 30) reports.
Over the years, a % of the BCI community has given feedback that they prefer to use only blue-chip type securities for option selling, so we created these reports more than 5 years ago.
The eligible stocks on these lists have out-performed the S&P 500 in both 1- and 3-month time frames and, therefore, have exhibited the strongest technical price performance.
Based on member request, we have added 1-week price performance, implied volatility, dividend yield, earnings report dates, sector/industry information and ex-dividend dates.
Alan