Covered call writers and sellers of cash-secured puts know the importance of portfolio diversification. If one security under-performs, the others can compensate. This article will demonstrate how to craft a portfolio of large-cap tech and blue-chip companies for our option-selling strategies.
- Portfolio mix of blue-chip and technology companies
- User-friendly system
- Broad diversification
- Initial 1-month time-value return goal range of 1% – 3%
Large-cap technology companies
We will use the Invesco QQQ Trust (NASDAQ: QQQ) which consists of 100 of the largest non-financial companies listed on the Nasdaq exchange (MSFT, AAPL, AMZN, FB, INTC etc.). One security will represent a broad diversification of quality technology companies.
We will use the best-performing Select Sector SPDRs which divide the S&P 500 into 11 sector index funds that each trade as stocks:
- Consumer Discretionary (XLY)
- Consumer Staples (XLP)
- Energy (XLE)
- Financials (XLF)
- Health Care (XLV)
- Industrials (XLI)
- Materials (XLB)
- Real Estate (XLRE)
- Technology (XLK)
- Utilities (XLU)
- Communications (XLC)
Evaluating the price performance of our securities
We can create a comparison chart for QQQ versus the S&P 500 in 1-month and 3-month time-frames and check the Select Sector SPDR Tracker also for 1- and 3-month price performance (as of June 2020):
Real-life calculations with a 1% – 3% monthly initial time-value return goal range
Using a portfolio consisting of QQQ, XLK, XLU and XLV, the multiple tab of the Ellman Calculator shows an average 1-month initial time-value return of 2.4% (yellow field) with an additional upside potential component of 0.4% (brown field):
A practical way of selecting blue-chip S&P 500 stocks is by locating the top-performing Select Sector SPDRs. Similarly, a time-efficient way of incorporating tech companies into our option-selling portfolios is by using the Qs. An initial 1-month time-value return goal range of 1% – 3% is reasonable using slightly out-of-the-money strikes.
Best covered call writing resources
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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:
I just wanted to share with you my happiness…Yesterday was the end of the options cycle and it was also my 12th options cycle trading with the covered call writing and cash secured put method that I learned with you with of course some personalization.
Since I Belgium they remove taxes immediately when you exit your positions, I knew immediately how much I made net with each trade, so after 1 year/12 cycles I made 33,5% net…This is great!
Before I started working seriously with the BCI method, I thought this level of gain was only reachable with age funds 🙂
So, I really hope it is going to continue this way and I really would like to thank you guys for the great job you do making your education really affordable.
Have a good week-end!
PS: We live now in Belgium but we have lived in the US (2013-2016) in San Francisco and Santa Barbara…We miss it 🙂
1. How to Trade It Podcast
May: A link to the interview will posted on this site and in social media when provided to BCI
Interview with Casey Stubbs
The focus will be on “my story” and analysis of my go-to strategies
2. Mad Hedge Traders and Investors Summit
June 8th – June 10th
The Many Uses of Stock Options: Portfolio Overwriting & the Stock Repair Strategy
Details to follow.
3. Money Show Virtual Expo
July 13th – July 15th
2-hour Money Masters Course (paid event to The Money Show)
4 Practical Applications to Selling Cash-Secured Puts
Details to come
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 really appreciate your prompt reply. Thank you.
I would like your thoughts about weeklys PMCC for TLT.
Here’s my reasoning:
• TLT being Twenty Year Long Term Treasury is probably safe.
o Though the worry is the possible rise in Interest Rate by the Fed due to possible inflation.
o Your thoughts on the possibility of Fed increasing Interest Rate?
• I am not too concerned about dividends itself as I am in Singapore (not USA)
o I will be taxed 30% for dividends by US Gov (even for small amounts)
o I would rather generate income from Covered Calls (FYI, we are not taxed for Capital Gains in Singapore)
• With the reason above, is it a good idea to do PMCC on TLT?
o Using Weeklys to circumvent ex-dividends
o You mentioned 40 weeks instead of 52
I had used your formula to create an excel calculator on Initial Trade Calculation. Are they correct?
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Based on recent comments by the Fed Chairman and the Treasury Secretary, it is unlikely we will see any meaningful rise in interest rates anytime soon. Even less likely after yesterday’s jobs report. It does, however, remain a concern for many investors.
TLT is a reasonable candidate for the PMCC strategy and your formulas are accurate. In the screenshot from tab #1 of the BCI PMCC Calculator, the calculations are exactly the same.
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I hold an XHB cc 73 strike May 21 expiry.
XHB is [email protected] and the cost to close the 73 strike is $5.
Initially I bought XHB at 72.61 and sold the 73 strike for $1.75
The 20% rule does not apply or does it? It seems to me that I should close this position and move on to another one since all I would lose is .11 from my $1.75 premium.
You are 100% correct… the 20% guideline does not apply. That is used when share price declines.
When share price accelerates substantially as it has with XHB, we consider the mid-contract unwind exit strategy where we evaluate the time-value cost-to-close. Use the “Unwind Now” tab of the Elite or Elite-Plus Calculators. If we can generate 1% more than the time-value cost-to-close, we close both legs of the XHB trade and start a 2nd income stream with a different security.
Check the cost-to-close. The $73.00 strike is $5.11 in-the-money, so the cost-to-close will be a bit higher than that.
Great job keeping an eye out for exit strategy opportunities.
i have a question on timing the covered call portfolio.
a. do you do this on the Monday morning ? is there a particular time like mid day or 3:00pm or so. reason is the first hr is always volatile and also option prices are not fully known.
b. do you use any guideline mid week to exit all position if market starts to correct severely ?
1. I do enter my new covered call trades on the Monday after expiration Friday between the hours of 11 AM ET and 3 PM ET to avoid the volatility of early morning and late afternoon computerized institutional trading.
2. We always have our 20%/10% buy-to-close limit orders in place after entering all covered call trades. These will be executed automatically if and when the thresholds are reached.
When using the bci stock repair calculator, what guidelines do you use for the strike selection of the 2 strikes?
We buy 1 near-the-money strike (close to current market value) and sell 2 out-of-the-money strikes (usually between current market value and original share purchase price. We also make sure that cost of the long call is paid for (or almost completely paid for)
by the premiums received from selling the 2 short calls.
Our goal is to significantly lower our breakeven without adding additional cash to an already losing trade.
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 05/07/21.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close
Since we are now in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
Barry and The Blue Collar Investor Team
I’ve been selling covered calls for over 5 years and then I bought your encyclopedia (both actually). WOW… I can’t believe how much I didn’t know.
My question relates to stocks versus ETFs. I consider myself a very conservative investor and that’s why I was attracted to covered call writing. Is it safer to use ETFs over stocks to reduce risk?
Thank you for all you do.
In general, ETFs do have lower implied volatility than individual stocks, especially growth companies.
However, there are numerous exceptions. This is the reason the BCI team publishes the implied volatility of all our eligible ETFs along with that of the S&P 500. This way, members can decide if the IV of a particular security aligns with their personal risk-tolerance.
I just read your recent article, “How To Set Up A Portfolio Of Nasdaq And S&P 500 Stocks In A User-Friendly Approach” and was fascinated by it. I had a couple of questions about the strategy.
1. Do you utilize all the BCI strategies, like 20%/10% option buy back, rolling down if necessary and strike selection depending on market tone (in or out of the money)?
2. I noticed that you compare the QQQ with the SPY. What is the purpose? Would you not choose the QQQ for months that they lag the SPY?
1. Absolutely. Position management is an integral part of every approach to our option-selling strategies… no exceptions.
2. Yes, if large-cap tech companies (QQQ) are under-performing, I would avoid that security for that particular week or month depending on the time-frame of our contract expirations.
May I know how you will be managing the exit strategy for weeklys?
1. 20% / 10% rule – when should it be a “cut off” or mid-point?
2. Any suggestion on the “Rolling Dates”?
1. The 20% guideline is changed to a 10% guideline in the final 2 weeks of a monthly contract. This means week 3 of a 4-week contract or week 3 of a 5-week contract.
2. I roll options as close to contract expiration as possible. I usually start about 2 PM ET on expiration Friday. If I am unavailable that day, then Thursday will suffice.
Does the premium watch list report apply to cash secured puts as well as Covered calls ? Because I mainly sell cash secured puts.
Absolutely. The same securities that are eligible for covered call writing are precisely the same ones we should use for selling cash-secured puts. These are elite-performers from fundamental, technical and common-sense perspectives.
I have been successfully using these same watch lists for both strategies for over 2 decades.
Long time no questions – but have one now.
How many option positions do you typically have at a given time. I’ve been doing CSP/CC wheels and just curious (on say a 250k of cash) how many positions you have –
I’m trying to be diversified but without so may that my head spins. I’ve been doing about 7 -10 at any given time but finding that if one or two go bad it can be very bad result.
Each investor must determine their comfort level with the number of positions they manage. You are spot on focusing in on maximum diversification… the more the better. We must,. however, set ourselves up for success and staying within our comfort level.
In general, a portfolio of $250k will have between 10 and 15 positions. Slowly, start bumping up the # of positions in your portfolio until you find the number right for you.
Roni, you called it. I completed a triple with XLU on Monday… 3 income streams with the same security in the same contract month with the same investment.
The screenshot below shows the classic V-shaped patterns associated with these exit strategies.
I currently have a 10% BTC limit order in place. With 9 trading days remaining until contract expiration, is my first ever 4-bagger possible?
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I only saw your post a few moments ago, and I congratulate you on your superb position management ability.
At this point, you must be close to your quadruple. The market is dropping like a rock today.
On the other hand, I have only 3 positions in the green out of 12, and several CCs buyback orders were filled first at 20% last week, and then at 10% since Monday.
Hoping that the market will recover soon – Roni
The 10% BTC threshold on the 3rd XLU option sale has not been reached so the trade remains a “triple” as of now.
Now It looks like you will not get a quadruple, and I sincerely hope that the market continues to stabilize.
Your “Reasons to remain calm” letter was very reassuring and your forecast came true.
I have not sold any of my shares, and my portfolio is getting slowly back to normal.
Thank you for your prompt response. few other questions
1. i want to invest in ETFS and sell covered calls. if the list (top 3 sector ) published weekly changes, do we stay in our original positions on the ETFS started beginning for the month or should those be closed per our rule (20%/10%) or regardless exit and go to new top 3 ETFS based on the weekly report.
2. Also do you use any major market monitor to pull out of the market mid week/mid month, if market drops huge ?
Once a position is entered, we manage based on the BCI exit strategy arsenal which includes the 20%/10% guidelines, not on its inclusion or removal from subsequent reports. These guidelines guide us as when to close the short calls but do not necessarily mean we also sell the ETF. We may roll-down or seek to “hit a double” depending on circumstances. If we need a replacement security, we use the most recent report for our selections.
In all our member reports, we provide a “market tone” which includes the IBD assessment, the GMI (general market indicator) and our BCI view. I also look at charts of the S&P 500 and the CBOE Volatility Index (VIX) as well as follow the weekly economic reports. These are included in our reports.
I am almost always fully invested with some rare exceptions (start of COVID, crash of 2008) elections. I am transparent about when I am not fully invested in our reports.
Ultimately, we must only invest when our comfort level and personal risk-tolerance permits and that will vary from investor-to-investor.
I’ve had a rough couple months mainly due to my picking of some more volatile stocks.
I know you strive for 3 to 5% ROO on your selections for OTM calls but I’m really struggling to find stocks with these numbers without high risk in volatility and it’s tough with etfs as you point out a lot.
I find that when I get 3-5% I have to select calls near the money and I end up having to decide to roll out and up or do nothing a lot and lose some of the appreciation.
Do you prefer to go lower on the ROO and wait for the stock appreciation?
Just wondering if you have any ideas of what I may be overlooking or do I just keep pressing on. 🙂
Despite, encouraging economic news and outstanding earnings reports the past 2 quarters, the market continues to look for direction. Money is moving from 1 security to another but not leaving the market which is a positive.
To continue the cash flow, turning a bit more conservative makes sense. I generally seek initial time-value returns between 2% – 4%, 1% – 2% in my mother’s portfolio. 3% – 5% is a bit aggressive.
Lowering the initial time-value return goal range and incorporating some in-the-money call options will create a more defensive portfolio.
Another approach would be to first sell a deep out-of-the-money put option before entering a covered call trade. Check our information on this “PCP Strategy”
This week’s 5-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.
I added a page 5 to discuss “Why we should remain calm in this current market downturn”
For your convenience, here is the link to login to the premium site:
NOT A PREMIUM MEMBER? Check out this link:
Alan and the BCI team
May I know if you apply the same principles for weeklys (TLT or circumventing earnings for others e.g.)?
How do you divide between 20%/10% rule for weeklys?
A weekly option is comparable to the final week of a monthly contract. The 10% guideline applies.