When selling covered calls or cash-secured put options, we must avoid the risk of earnings reports. This is an important rule of the BCI methodology. This article will detail how a series of put trades were managed during the August 2022 contracts from 7/18/2022 through 7/29/2022, demonstrating pre- and post-earnings report (ER) trades. Note that both weekly and the monthly contract expirations were utilized.

 

What are cash-secured puts?

Put options are sold obligating the seller to purchase shares at the strike price by the expiration date. In return for undertaking this contractual obligation, the put seller is paid a premium. The broker will require the seller to place an adequate amount of cash into the brokerage cash account to secure that put. The amount of cash required is determined by this formula:

[(put strike – put premium) x 100] x # contracts

In the BCI methodology, we prefer out-of-the-money put strikes (lower than current market value).

 

Real-life put trades with ETSY for the August 2022 contracts

  • 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
  • 7/27/22: After hours, a favorable ER
  • 7/28/22: ETSY price accelerates to $104.92
  • 7/29/22: ETSY price settles to $102.84
  • 7/29/22: STO 1 x 8/19/22 $92.00 put at $2.15

 

Game plan

The August 2022 contracts were of a 5-week duration with the ER coming in week #2. The plan was to sell a weekly option for week #1 and avoid the option sale for week # 2 until the ER passes. When the post-report volatility subsides (if any), the put trade is entered for the monthly expiration date, 8/19/2022, in this case.

 

ETSY price chart around the 7/27/2022 ER

 

ETSY Price Chart Pre- and Post-ER

 

Takeaways as of 7/29/2022

The option trades in week #1 included 3 premium credits, including the 2 rolling-up trades. The sale of the monthly (post-earnings) expiration put resulted in an unrealized additional return of 2.4%.

 

Discussion

When using the conservative option selling strategies of selling cash-secured puts and covered call writing, we must avoid the risk of earnings reports. When weekly options are available, this task is quite manageable by simply avoiding the week of the report.

*** Next week’s article will show how to enter and calculate all the steps shown in these trades using the BCI Trade Management Calculator. This will be a particularly useful and important demonstration of how to properly calculate and archive our initial and post-adjusted trades.

 

Selling cash-secured puts products available

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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 teaemail 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,

I love the BCI Package and all the excellent tutorials and resources!
Thanks so much,
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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.

Details to follow.

 

Alan speaking at a Money Show event

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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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