When we roll-out our covered call trades, we are actually combining 2 months of option premiums, the current month and the next contract cycle. This may create some confusion as how to enter these combination trades into our trading logs. As you will see, there is no perfect solution, but BCI has created guidelines that will represent a reasonable approach to this dilemma. My philosophy is that there is not always a perfect solution, but there is always a best solution.
Hypothetical trade
- 12/27/2021: Buy 100 x BCI at $48.00
- 12/27/2021: STO 1 x 1/21/2022 $50.00 call at $1.50
- 1/21/2022: BCI trading at $52.00
- 1/21/2022: BTC the 1/21/2022 $50.00 call at $2.05 ($2.00 intrinsic-value + $0.05 time-value)
- 1/21/2022: STO the 2/18/2022 $50.00 call at $3.50
- How to we calculate the current month results?
- Where do we place the 2 option credits and 1 option debit?
- What cost-basis do we use for the next month entry?
BCI guidelines for rolling trade entries: current contract month
The current month concludes with the final stock price as the in-the-money strike (ITM), $50.00, in this hypothetical (we generally roll strikes that are ITM), our contract obligation. This means we have maximized our trade as initially structured as shown in this screenshot:
Rolling-Out in First Contract Cycle
Using our BCI Trade Management Calculator, we determine our initial month final results.
In this hypothetical trade, a 1-month return of $350.00 or 7.29% (red arrows on bottom) was realized.
BCI guidelines for rolling trade entries: next contract month
At the time we roll the option, shares can be worth no more than our contract obligation to sell at $50.00, so we enter $50.00 as the price per-share. Since we are rolling-out, the strike is the same $50.00 but we enter the new contract expiration date, 2/18/2022, in this case. We then use the BTC and STO net option credit of $1.45 ($3.50 – $2.05) as our option $/Share entry. This results in a 2.9%, 1-month initial time-value return (red arrow).
Now, here is the (minor) flaw in this approach. We see downside protection of 0%, when, in fact, it is 3.8% ($2.00/$52.00) because the shares are, in fact, trading at $52.00 at the time of the roll. If we entered $52.00, it would skew the initial time-value return which is a much more important stat than the downside protection. As I said, not a perfect world but the best world we can provide. Here is the screenshot for the next month calculations:
Roll-Out Entries in The Second Contract Cycle
Discussion
When rolling-out our covered call trades, we must break up our trade entries over the 2 contract cycles. This includes having rules and guidelines for:
- Stock price entry
- Final stock price
- Dividing option credits and debits over 2 contract cycles
Next week’s article: How to Enter Our Rolling-Out-And-Up Trades into Our Monthly Trading Logs
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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 share some of these testimonials in our blog articles. We will never use a last name unless given permission:
Alan,
This is an incredibly thoughtful response. Thank you so much.
All of these bullet points are extremely helpful.
I can’t wait to dive into your encyclopedia for covered call writing!!
Thank you so much all you do!!!
You’re truly changing lives!!
Sincerely,
Cheryl & Ryan
Upcoming events
1.Mad Hedge Investor Summit
Thursday September 15th, 2022
12 PM ET – 1 PM ET
Analyzing a 1-Month Covered Call Writing Portfolio from Start-To-Finish
A real-life example with a $100k ETF Select Sector SPDR portfolio
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
2.Wealth365 Investor Summit
October 10th – 15th 2022
Using Both Covered Call Writing and Put-Selling to Generate Monthly Cash Flow
The PCP Strategy (Put-Call-Put or “wheel” strategy)
Hosted by:
Dr. Alan Ellman, President of The Blue Collar Investor Corp.
Barry Bergman, BCI managing Director
Selling stock options is a proven way to lower our cost-basis and beat the market on a consistent basis. Two such low-risk strategies are covered call writing and selling cash-secured puts. This presentation will detail how to incorporate both strategies into one multi-tiered option-selling strategy where we either generate cash-flow or buy a stock at a discount. I refer to this as the Put-Call-Put (PCP) Strategy, also referred to as the wheel strategy.
The basics and pros and cons are discussed as well as a real-life example and introduction into the BCI PCP Calculator. This seminar is appropriate for those who look to generate modest, but consistent, returns which will enable us to beat the market on a steady basis while focusing in on capital preservation.
Registration link time and date to follow.
4.Money Show Orlando live event
October 30th – November 1st, 2022
OMNI ORLANDO RESORT AT CHAMPIONSGATE
Visit Alan, Barry and members of the BCI team at Booth # 415
Sunday, October 30, 2022, at 5:00 pm – 5:45 pm EDT
Covered Call Writing: Multiple Applications Based on Current Market Conditions
Monday, October 31, 2022, at 4:30 pm – 6:30 pm EDT
Selling Cash-Secured Puts: Detailed Start-to-Finish Six-Part Program*
Masters Class
Comprehensive Course on Selling Cash-Secured Puts
Detailed start-to-finish 6-part program
This presentation will provide all the information, with real-life examples, necessary to master the strategy of selling cash-secured puts. The program is divided into 6 sections:
- Section I:
- Option basics
- Section II
- Traditional put-selling
- Section III
- PCP (wheel) strategy
- Section IV
- Buy a stock at a discount instead of a limit order
- Section V
- Ultra-low-risk put/Delta strategy
- Section VI
- Ultra-low-risk put/Implied volatility strategy
This presentation was developed to benefit both beginner and experienced option traders and will provide all the information needed to initiate the strategy and elevate returns to the highest possible levels.
45-minute presentation
Covered Call Writing: Multiple Applications Based on Current Market Conditions
Real-life examples with Invesco QQQ Trust (Nasdaq: QQQ)
Covered call writing is a low-risk option-selling strategy geared to generating cash flow with capital preservation a key requirement. This presentation will demonstrate how the strategy can be crafted to benefit in all market environments. Market situations highlighted are:
- Normal to bull markets
- Bear and volatile markets
- Low interest-rate environments
A popular large-cap technology exchange-traded fund, Invesco QQQ Trust, will be used to establish rules and guidelines to benefit in these market circumstances.
5. Money Show’s Post-Election Strategies Virtual Expo
November 10th -11th, 2022
Information & registration link to follow
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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 and Barry good morning,
I’m using your Trade Management Calculator, excellent instrument but I need your help for the following situation:
• I open a weekly covered call 2 weeks ago
• At the end of the week the option expired but the equity was still OTM, so this week I sold again a call with the same strike.
• Till now ok to fill the Calculator
• This week it closed again OTM
• Next week I will sell again a call
• Question: how can I record the new Option Call on Trade Management Calculator in order to check the possible profit?
Thanks in advance and have a nice day
Mauro
Mauro,
There are 2 ways to manage this situation:
1. Dedicate a specific spreadsheet for each weekly expiration: Click on “File” on the top left of the spreadsheet and then “save as” … name the spreadsheet. For example, “TMC 9-2-2022” This way each weekly expiration will have its own dedicated spreadsheet.
2. If you want to keep all weekly expirations in a monthly contract expiration spreadsheet, we will need to use the capital adjustment section. Below is a screenshot taken from a put portfolio to show how this works. Since we don’t want to exaggerate the capital used in these combined trades, we deduct as shown in the image so the final % returns will be accurate. The capital adjustment section is explained and detailed in our TMC user guide.
If you are entering multiple weekly trades, I would favor a dedicated spreadsheet for each weekly expiration. Same for Monthlys.
Also, always save 1 copy of the TMC Calculator as “TMC Blank” All others can be named by expiration date.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Alan,
I usually consider an assignment of my C Calls a good thing. But do you consider an assignment of Puts a good or bad thing? I tend to consider it a bad thing unless I am able to bounce back with a C Call that gets assigned in the next week or current month, especially in a declining market.
Always appreciate your thoughts,
JP
JP,
Exercise of a cash-secured put can be a negative, positive or neutral outcome depending on our strategy goals.
When we enter any trade, we must identify our goals and have appropriate exit plans based on these objectives.
Sellers of cash-secured puts generally fall into 1 of 3 categories in addition to the income generation common in all 3:
1. Do not want to take possession of the underlying shares in which case an in-the-money (ITM) short put will be closed prior to contract expiration.
2. Wants to own the underlying shares “at a discount” in which case an ITM short put is “allowed” to exercise, and mission accomplished.
3. Using the Put-Call-Put (PCP or wheel) Strategy in which case a covered call is written after taking control of the underlying shares which resulted from exercise of the ITM put. An OTM call is used if a more aggressive approach is warranted or an ITM call is used to take a more defensive posture.
Bottom line: Evaluation of our cash-secured put trades is based on our strategy goals and its success will be influenced by using the appropriate exit strategies when those opportunities arise.
Alan
The answer for me is I always want the Put to be assigned at the end of the period, especially in a declining or iffy market. I use the PCP strategy when assigned. But wanted your thoughts…especially in an iffy market.
JP
Hi Alan – I’ve been investing for a long time and recently discovered your Covered Call writing methods.
I have a question – or observation. Do you ever do this – on a day when the market declines precipitously – buy back your covered calls? I have found that doing this – and then selling them again a week or two later can be profitable. I’m not sure if it would be more profitable than just holding onto the covered calls and not buying them back though.
What do you think? Am I making sense? Is it a mistake to buy back the covered calls and resell them? I’m also thinking that I can use this opportunity to restructure my portfolio – buy more energy stocks maybe.
Thanks in advance for any assistance or clarification you can provide.
Sincerely,
Joy
Joy,
You make amazing sense in your evaluation of these exit strategy opportunities.
This is a strategy approach I have been writing about for 15 years. I call it “hitting a double” … creating multiple income streams in the same contract cycle with the same security and cash investment.
It is one of our go-to exit strategy opportunities that we must take advantage of when presented and it is discussed in every one of my covered call writing books and online video courses.
I suggest taking your wonderful idea and bringing it to an even higher level by creating specific parameters as when to close the original short (see the BCI 20%/10% guidelines). This will partially automate the process.
Here is a link to 1 of the dozens of articles I have published on this topic:
https://www.thebluecollarinvestor.com/hitting-a-double-the-bci-trade-management-calculator-in-action-final-chance-to-register-for-tuesdays-webinar/
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 09/02/22.
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:
http://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Dear Alan,
I have not been very active over this last pullback, just holding on to any of the ETF’s I had rather than selling covered calls on any that may be on the updated ETF list, ignoring my 7% loss sell rule. I have faith and experience the market will again go forward as it has since its beginnings and since I do not use margin eventually the “losses” will recover. I have now been selling options with you going on 2 1/2 years and despite the pullbacks am still ahead from where I started profit wise.
However, I want to review all the most significant articles and chapters and take a look at possibly an immediate short-term strategy and eventual long term one. Would appreciate any guidance.
I am a premium member and especially rely upon The Complete Encyclopedia for Covered Call Writing and Exit Strategies for Covered Call Writing and Selling Cash Secured Puts plus the numerous blogs etc.
Thank you,
Donna
Donna,
The books you are relying on for traditional covered call writing and selling cash-secured puts are our best for these strategies.
As investors are moving back into the market, many are taking more defensive approaches so I will provide additional information from this perspective:
1. A few articles I published on defensive approaches to option-selling:
https://www.thebluecollarinvestor.com/comparing-implied-volatility-and-delta-when-establishing-projected-trading-ranges-during-our-option-contracts/
https://www.thebluecollarinvestor.com/covered-call-writing-strike-selection-in-bull-bear-and-neutral-markets-a-real-life-example-with-crocs-inc-nasdaq-crox-april-free-webinar-registration-link/
https://www.thebluecollarinvestor.com/reversing-delta-with-the-pcp-strategy-a-real-life-example-with-etsy-inc-nasdaq-etsy/
2. On our premium member site:
Login to the member site and scroll down to “E”
Read our “Emergency Management Report” and download our “Expected Price Movement Calculator”. The latter will assist in setting up high success probability trades.
3. Consider our online video course bundle for both covered call writing and selling cash-secured puts:
https://thebluecollarinvestor.com/minimembership/complete-dvd-bundle-package/
Thanks for your long-term membership with BCI.
Alan
Hello Alan,
I’ve been a short time subscriber to BCI and have a question about the weekly stock summary in Bold type. Last week, STLD (Steel Dynamics) , was one of ten listed in bold. I looked at the 1 year chart and it looked good. It was also the IBD stock of the day. I bought the 100 shares for $86.89 each and sold the ITM strike $85 -9/16 call for $457.47. The next morning the CEO announces their new plant in Texas will be delayed by at least 3 months. The stock dropped to $80.46. On 9/1 it tanked again and I sold out at $75.41, surpassing the BCI 7% exit rules, and experiencing an $691.00 loss.
When I looked at a 1 year chart, the next support level is around $65 in July and early August. I thought it would keep on dropping to that level, so I then bought an $80 put, exp 9/16 for $600.51.
Buying the put, I guess was an emotional reaction to try to recover. If the stock stays the same on goes up, I’m now probably looking at a probable total $1350.00 loss.
How might I have handled this differently?
By the way, I bought the BCI trade management excel spreadsheet and it works great!
Thanks in advance. I realize you don’t have time to answer individual questions, but if you see a mistake I made in my analysis and would point it out, I’d sure appreciate it, or would this just be considered a black swan event?
Thank you,
Ted
Ted,
STLD has been a stellar performer from fundamental, technical and common-sense perspectives during this challenging market environment. As you pointed out, unexpected negative news was published, and the market had an immediate negative reaction.
There is nothing we can do to prepare for unexpected bad news. We do avoid earnings reports, the main cause of stock price decline but we know the dates when these reports will become public.
Now, back to STLD. Nothing changed the quality of the company after the bad news came out. Closing the trade using the 7% guideline, waiting to “hit a double” or rolling-down were all on the table. Without the news event, I would have sold as you did. If an investor evaluated the news as a knee-jerk reaction and expected recovery, the other 2 choices are reasonable approaches.
I would not have opted to buy a put for 2 reasons:
1. The stock had too many positive attributes. I could have found a much better candidate (one with poor fundamentals and technical indicators) to take on a negative price projection.
2. I generally remain on the sell side of options … safer.
One more comment: Puts can be incorporated into our covered call trades by buying the put when the trade is entered, converting the covered call trade to a collar trade. This is known as a protective put.
Here is a link to an article I published on this topic:
https://www.thebluecollarinvestor.com/protective-puts-selecting-the-best-strike-price/
Alan
Alan,
As a new member how do I decide which of the stocks that pass the screen do I trade?
How can a stock be labeled passed fundamental and technical screens when the chart price column is @ and the technical column is ?
Should I only trade stocks that are bold?
Thank you
Jeff
Jeff,
There are many ways our members use the 3 reports of eligible securities. Since I have multiple option-selling portfolios, I use all 3 reports which always include securities not in bold. Bolded stocks represent those with 100% bullish technical indicators at the time the report was crafted. It certainly is a good starting point but there is no reason not to consider the non-bolded stocks in our weekly stock reports.
In our technical analysis, an “@” means that the price bars are at the same level of the 20-day exponential moving average and above the 100-day moving average. We do not eliminate stocks for this reason but do bring it to the attention of our members and, as a result, these stocks are not shown in bold.
A “?” relating to MACD histogram and the stochastic oscillator means that the indicator is showing neither a bullish nor bearish signal. Keep in mind that all these securities have already passed our rigorous fundamental and common-sense screens. We look at these eligible securities as a mosaic of more than 10 rigorous screens before entering them into our reports.
We are currently experiencing a challenging market environment and the # of eligible securities has declined. I find that I need to use all 3 of our reports to populate my portfolios. In better times, one approach to our stock report used by some of our members is to favor bold stocks with industry rankings of “A” or “B”
Some prefer stocks that also generate dividends. Others may prefer ETFs because many offer lower prices and there are no earnings report concerns.
Take your time to become familiar with all our reports. Perhaps paper-trade for a couple of months and then you will have years and decades to benefit from these great strategies.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
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.
Reminder: Premium members are grandfathered into your current rate and will never see a rate increase as long as membership remains active.
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://youtu.be/EXMO-KwZuJs
Alan and the BCI team