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How to Select the Best Covered Call Writing Strikes in Bear & Volatile Markets

Option selection is the 2nd of the 3 required skills for achieving the highest possible returns when writing covered calls or selling cash-secured puts. Option decisions include strike and expiration date choices. This article will focus in on strike selection for covered call writing in bear and volatile market where we take defensive positions that will still yield significant returns. A real-life example using Jabil, Inc. (NYSE: JBL) will be highlighted.

 

Explanation of defensive covered call writing positions

We favor in-the-money (ITM) call strikes in challenging market environments. These strikes have 2 components: time-value + intrinsic-value. At-the-money (ATM) and out-of-the-money (OTM) strikes only have time-value components. This means that ITM strikes offer greater protection to the lower breakeven price point. So, we start with a conclusion to favor ITM strikes when deciding on the moneyness of options (ITM, ATM or OTM) in bear and volatile markets.

The other major factor when selecting strikes is to make sure the time-value of the premiums align with our stated initial time-value return goal range (2% – 4% per-month, for me). We can divide a monthly goal by “4” when using weekly options.

 

Real-life example with JBL ($59.17): Option-chain on 10/14/2022 for the 11/18/2022 expiration

Let’s assume a goal of 2% – 4% per-month as our guideline. We then check the current option-chain.

 

JBL Option-Chain on 10-14-2022

 

With JBL trading at $59.17 0n 10/14/2022, we will evaluate the $45.00, $50.00 and $55.00 ITM strikes. We will use the published bid prices of $14.20, $9.30 and $5.40. Members of our BCI community should always leverage the Show or Fill Rule to negotiate better prices when such opportunities present.

 

Initial calculations and exit points using the BCI Trade Management Calculator

 

JBL: ITM Calculations with the Trade Management Calculator

 

Note the following:

  • Only the $55.00 strike meets our stated goal of a minimum initial return of 2% as highlighted in the brown cells (goals can be adjusted in either direction … there is no right or wrong)
  • There is never upside potential when using ITM call strikes as we are agreeing to sell the shares at a price lower than current market value
  • The $55.00 strike offers an initial 36-day time-value return of 2.24%, 22.67% annualized
  • This 2.24% initial profit will be realized if share value does not decline by more than 7.05% (downside protection) by contract expiration
  • The exit price points are highlighted by the blue arrow at the bottom of the screenshot (for exit strategy intervention)
  • The red arrows at the top of the screenshot shows that the ex- date is prior to contract expiration. If it is critical to avoid exercise, this trade should be avoided. This may apply if trading in a non-sheltered account with shares of a low cost- and concerns of negative tax consequences. Typically, if we don’t want exercise of the call option, we would avoid ITM strikes

 

Discussion

When selecting the most appropriate covered call strikes in bear and volatile markets, we must factor in the moneyness of the option (ITM) and the initial time-value return offered by that strike. Using standard option-chains and the BCI Trade Management Calculator will facilitate these decisions.

 

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.

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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:

Facebook comment

7 minutes and 14 seconds of your covered call writing 8-part lessons changed my entire financial future! Self-education from Dr. Ellman led us to learn how to use money to make money – safely.

Thank you, again sir.

Randy

 

Upcoming events

To request a private webinar for your investment club, hosted by Alan & Barry: [email protected]

1.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

Register here

 

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 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
  • Bear and volatile markets
  • Low interest-rate environments

A popular large-cap technology exchange-traded fund, Invesco QQQ Trus, will be used to establish rules and guidelines to benefit in these market circumstances.

Registration link 

 

2. Money Show’s Post-Election Strategies Virtual Expo

November 10th

2:10 ET – 2:40 ET

Register here

Portfolio Overwriting

Increasing Profits in Our Buy-And-Hold Portfolios Using Covered Call Writing 

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.

Topics discussed

  • Brief review of covered call writing
  • Option basics
  • What is an option-chain?
  • Option selection
  • Calculating covered call returns: Real-Life examples
  • Portfolio overwriting defined
  • Pros and cons of portfolio overwriting
  • Why early exercise is so rare
  • Rolling options
  • Role of dividends
  • Locating ex- dates
  • How to avoid early exercise
  • Real-life examples with calculations
  • BCI Portfolio Overwriting Calculator
  • Summary

Registration link

 

3. Long Island Stock Traders Meetup Group (Private webinar)

Thursday February 16,2023

7:30 PM ET- 9 PM ET

A real-life example with a $100k ETF Select Sector SPDR portfolio
Covered call writing is a low-risk 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 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

 

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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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

9 Responses to “How to Select the Best Covered Call Writing Strikes in Bear & Volatile Markets”

  1. Barry B October 22, 2022 10:47 pm
    #

    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 10/21/22.

    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 the membership remains active.

    Best,

    Barry and The Blue Collar Investor Team
    [email protected]

  2. Lindsay October 23, 2022 3:24 am
    #

    Hi Alan,

    I hope all is well. I had a question for you regarding technical analysis. I know with respect to moving averages, you normally look at the 20d and 100d exp moving average.

    As I tend to often trade weekly options, would it make sense to also add in a 7d exp moving average or is that too short a period and will it just make the chart too untidy?

    Thanks,
    Lindsay

    • Alan Ellman October 24, 2022 7:07 am
      #

      Lindsay,

      Yes, additional indicators can be added to the ones BCI presents in our educational information.

      I encourage our members to use indicators they are comfortable with as long as the arsenal includes trend and momentum indicators along with volume data.

      20-day, 100-day EMAs, the MACD histogram, the stochastic oscillator and volume are the ones I have been using successfully for option-selling for 2+ decades. My way isn’t the only way.

      Alan

  3. Howard October 24, 2022 2:02 pm
    #

    Alan,

    I’m a big fan of the pcp strategy. If the put is assigned and we own the shares prior to an earnings event, do we sell or hold the shares? For example, ETSY is reporting on November 2nd and my last call expired worthless. What do I do now?

    Thanks a lot.

    Howard

    • Alan Ellman October 25, 2022 6:32 am
      #

      Howard,

      We have 2 choices in this scenario, depending on the confidence we have in the upcoming earnings report:

      1. Sell the stock prior to the report, if we want to avoid ER risk.

      2. Hold the stock through the ER. In the case of ETSY, we can write a weekly call expiring the week prior to the ER, skip the week of the report and then write another call that expires on 11/18/2022.

      Alan

      • Barry B October 26, 2022 9:46 pm
        #

        Randy,

        Another alternative you can use if you really want to trade the stock over an earnings period is to “Collar” your trade. That is to sell a covered call and buy an OTM protective put. Having the OTM put in place will protect you in the event of a poor Earnings Report with a known loss. Typically, the put is paid for (all or partially) by the sold call. You can get in-depth details on Collars in our book, “Covered Call Alternative Writing Strategies” as well as numerous blog articles on the subject.

        Best,

        Barry

  4. Randy October 25, 2022 11:53 am
    #

    Alan,

    If a company announced a special 1 time dividend, do you recommend closing the covered call option (buying it back) or not even selling the covered call if we know about it in advance?

    Thanks,
    Randy

    • Alan Ellman October 26, 2022 6:46 am
      #

      Randy,

      Let me initiate my response as it relates to traditional covered call writing:

      When we sell covered calls, we must focus like a laser on the goal of the strategy which is to generate option premium cash flow in a low-risk manner.

      If a company offers a dividend, traditional or special 1-time, we should consider it as potential “gravy” along with our focused premium goal. We must factor in the concept that on the ex-dividend date, the price of the stock or ETF will drop by the dividend amount. The ultimate price that day will include other factors as well, but the dividend amount will be a negative for share price on that ex-date. For special 1-time dividends, we must also recognize the fact that our option contracts will be adjusted such that buyers and sellers of calls and puts will be made whole.

      Bottom line: For traditional covered call writing, we do not change our approach if an ex-date is upcoming.

      My 2nd response applies to those who seek to “tweak” traditional covered call writing into a 3-income stream premium/dividend strategy. Here, we avoid ex-dates in addition to earnings dates. Here is a link to an article I published on this topic:

      https://www.thebluecollarinvestor.com/using-covered-call-options-and-stock-dividends-in-low-interest-rate-environments/

      Alan

  5. Alan Ellman October 26, 2022 5:09 pm
    #

    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