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
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
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%.
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.
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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
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.
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 have an issue regarding covered call adjustments.
Do you set your adjustments in a daily basis or monitor intraday market?
Also, do you set your orders based on option mid price?
1. After entering our covered call trades, we immediately enter the BCI 20%/10% BTC GTC limit orders. This will partially automate the process. Here is a link to an article I published on this topic:
2. When we buy or sell options, if the bid-ask spread is > $0.10, we leverage the “Show or Fill Rule” First, locate the midpoint of the spread (called the “mark”) and place a limit order slightly in favor of the market maker. Here’s an explanatory article I published:
What do you think of the covered call etfs on the tsx: QQCC and USCC? They hold the S&P 500 and Nasdaq 100 indices respectively and write OTM calls on about 50% of the index, instead of writing them individually, like the etf HTA.
Seems like these portfolio managers are using your strategies to write them discretionally. Note that QQCC and USCC’s charts officially started at the end of June 2022 due to a change in ticker and strategy.
I have never seen a covered call writing ETF that can achieve the results that we can by managing our own trades in the long run. The 2 you mention that trade on the Toronto Stock Exchange are no exceptions.
We have dozens of rules and guidelines regarding stock selection, option selection and position management. These funds use a few and position management is typically ignored.
In addition to these factors, we must also overcome to administrative fees inherent in these funds.
The screenshot below, is typical of every chart I ever created, comparing covered call writing ETFs to the overall market, where the under-performance is stunning.
It will take time and effort to self-manage our option-selling portfolios but, in my humble opinion, it will be well worth it in the long run. It certainly has for me over the past 25 years.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
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Barry and The Blue Collar Investor Team
I have a question?
After getting your watchlist, to start with which of the strategies should be
preferred any such priority among CC, CSP and PCP (Wheel).
Can I buy stocks from the watchlist and trade CC or start with CSP.
Requesting to please guide me.
All 3 strategy approaches will give us the opportunity to beat the market on a consistent basis, and many years significantly.
From a learning perspective, start with covered call writing as it is more intuitive and will serve as a foundation for learning CSPs and PCP.
Once both CCW and CSP are mastered, we can utilize PCP, where puts are used to enter covered call trades.
Each investor must find the strategy that meets their goals and personal risk tolerance.
I prefer covered call writing in normal-to-bull market environments and CSPs and PCP in volatile and bear markets. This gives us the opportunity to take advantage of the 2-income stream potential of out-of-the-money covered calls.
I do have multiple option-selling portfolios where I utilize all 3 approaches (I have written about all of these), but typically have most of my investment cash available dedicated to covered call writing.
Our premium member lists of eligible securities apply to all 3 strategies as well.
Thank you very much for your reply.
1. When the call option closed with 20%/10% rule, when do you open the new call option? On intraday market or next day?
2. Just to be sure, when price goes up, do you take profit overall covered call at 50% of credit or higher?
1. Once the 20%/10% BTC limit orders are breached and executed, we can roll-down, sell the stock or wait to resell the same option (“hit a double”). The action we take depends on multiple factors including the time to expiration.
2. Closing both legs of a covered call trade prior to contract expiration depends on the time-value cost-to-close, not on a specific % of profit. In the BCI methodology, this is known as the “mid-contract unwind” exit strategy.
That said, it would be unfair of me to lead you to believe that the brief answers I can provide in the venue are sufficient to invest and manage your hard-earned money.
I recently published an entire book on exit strategies and all of my books and online video courses have huge portions dedicated to position management. That is where you will find the information necessary to master how to manage our covered call writing and cash-secured put trades.
I purchased QCOM and recently rolled a 135 Feb10 call out and down to 127 as it surged into the middle 130s prior to earnings. As it peaked out at 138, I purchased a put for the same strike and expiration (FEB 17) as my written call, 127, for about 125 dollars. This trade along with one dividend and two months of call writing has me currently at around a +1700$ yield based on an entry of 117.
I’m wondering if I could roll the 127 call up to collect additional premium, thereby creating a conventional collar, but doing so with an eye to roll down to 127 if the shares drop substantially as expiration nears. I would want to have a clear exit with all of my current gains.
Am I missing any risk? I am aware that the strike gap could create a potential for being stuck with the shares upon expiration if I fail to manage the exit, and there’s a possibility for a non-exercise of either or both options as well.
Anyhow continued thanks for what you do
These series of trades can be a fantastic learning experience.
When I take an action, I ask myself why I took that action and, after expiration, I evaluate if I could have done better. This process never ends.
Right now, there is a floor and a ceiling on this trade at $127.00. It appears that on 2/17, the story will have a happy ending.
Rolling-up will result in an option debit and an unrealized share profit. The net will probably be a wash or a small debit unless we roll way up, creating the opportunity for additional share appreciation. Do we want to count on that on a security that has been surging since the start of the year?
Let’s assume that significant returns are realized on these trades and use this experience as a learning tool. Some questions to ask ourselves:
1. Was this trade entered prior to an earnings report? If yes, could better results be achieved by not having the option in place until after the report?
2. Why was rolling-down selected on a surging stock, especially after the risk of an earnings report has passed?
3. What’s the rush? 2/17 is a long way away.
4. What is the time-value cost-to-close (mid-contract unwind exit strategy)?
5. Is there concern about profit-taking?
Bottom line: At this point in time, this series of trades may have more value as a learning experience rather than an opportunity for even greater returns. That depends on the amount of risk we are willing to incur.
If you send me all the details of these trades (option prices, share price at the time of each trade, dates etc.), I may create a blog article or video so the entire BCI community (including me) can benefit from these trades.
Thanks for the response. I’ve decided to wait
Attached is the entire campaign with QCOM up to the latest trade. Woops, my initial purchase was ~120.
I probably made some clumsy trades, especially as the share value dropped substantially in December, but I felt that diligent weekly OTM call selling along with the few catastrophic put purchases could eventually return my outcome to the initial cost basis or at least save me from a larger loss.
The January uptrend and large rally on 1/26 was a pleasant surprise for which I opted to protect as earnings loomed.
Your points highlight a challenge that I need to overcome, which is the need to be strategic and studious. I tend to impulsively phone-trade. Maintaining logs and having a defined goal and exit strategy before entering any trade would probably save me a lot of frustration ! Robert
Thanks for sharing. I’ll have a look at this series of trades and see if I can work them into one of our educational articles or videos.
Good evening, Alan.
I am a fairly new premium member and I am very excited to be part of this wonderful program. I have a few Q’s and could not figure out how to post on “Ask Alan”.
1. On this week’s Stock screen you mention that IF the market continues in its current direction and force that you will become more aggressive. Can you elaborate on that for me? Does it mean that you will select further out of the money strike prices on covered calls to capitalize on additional appreciation or something else?
2. I have primarily been an option PUT seller most of 2022. I have enjoyed using your 80/20 rule lately as I’ve been able to BTC and have the funds to make another trade in the same month. My question is when would you begin to shift from selling PUTS to CALLS? Or do you always have a combination of both?
Ps, I bought your e-book Exit strategies for Covered Call writing and selling cash protected puts as well as scoured through dozens of hours of your videos
Thank you for providing not only a great system but also great stock pick suggestions on a weekly basis.
Thank you for your generous comments.
1. For the February contracts, I took a neutral stance in my multiple option portfolios, selling an equal # of ITM and OTM calls and slightly deeper OTM puts. This was based on my concern over the Fed announcement on February 1st.
Now that the meeting past, and guidance was positively embraced by the market, my plan is to take a slightly more aggressive approach for the March contracts (at this point), selling a higher % of OTM calls and only slightly OTM puts. I will make my final plan for the March contracts the weekend after expiration of the February contracts.
2. I have both covered call writing and put-selling portfolios, most with monthly contracts, a few with weekly expirations. I favor covered call writing with monthly expirations so I can take advantage of OTM strikes setting up a 2-income stream potential for these trades.
There is no right or wrong here. We can all benefit from covered call writing or put-selling; with weekly or monthly contracts. We can integrate both strategies into our PCP strategy (wheel).
Each investor should master all the components of both strategies and then there will be clarity as to which (or both) aligns with their strategy goals and personal risk-tolerance.
I have few questions as below.
Comparing Watch lists of 01/27 and present 02/03 the stocks in bold letters are
mostly different for obvious reasons.
My questions are
If we have purchased few stocks from first week list and traded CC expiring in 4 weeks obviously we will continue either till it expires worthless or we close the trade. In case the stock is not listed in second week as in the present case are we to sell the stock at the end of closing CC or continue holding stocks and trading CC.
These stocks are they not for long term holding and for building up Portfolio.
Requesting to please clarify above doubts and oblige
With warm regards
Once we select a stock or ETF from our lists of elite-performing securities, we manage those trades as detailed in my books and online video courses, NOT by their removal from our reports due to our rigid screening process.
That said, if we do sell a stock based on the BCI guidelines, we select a replacement stock from the latest report. This is why we provide weekly stock & ETF reports to our 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.
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Alan and the BCI team
Please explain me why EMA is preferred to SMA and the reason of selecting 20 and 100 EMAs and chart time frame is it 1Y !D.
Regards and Thanks
The reason I prefer exponential moving averages to simple moving averages relates to the time frame of our trades, usually 1-month or less, but can apply to other short-term trades.
By putting more emphasis on the most recent prices, the trend line will change quicker than with SMA and allow us to take advantage of exit strategy opportunities if and when they present.
If I were using longer term investment strategies (buy-and-hold, as an example), I would defer to SMA.
20-day EMAs reflect approximately a 1-month contract and 100-day EMAs allow us a longer-term comparison perspective.