Strike price selection is the second required skill for our covered call writing and put-selling portfolios. Stock (and ETF) selection and position management (exit strategies) are the other two. This article will highlight how we can use overall market assessment and price chart analysis to help guide us to the best strike price selections.
Overall market assessment as of 1/10/2020 (prior to the current coronavirus crisis)
General Market Index: 5/6
Investor Business daily: Market in confirmed uptrend
S&P 500/VIX Comparison Chart:
Combining Dr. Eric Wish’s GMI, IBD’s market analysis and the comparison chart, it is reasonable to move into our trades with a bullish bias. That leaves individual chart analysis to dictate final decisions regarding moneyness and laddering composition (percent in-the-money and out-of-the-money) of our strikes.
Bullish price charts favor out-of-the-money (OTM) call strikes: Boot Barn Holdings Inc. (NYSE: BOOT)
The purple highlighted areas show:
- Bullish moving averages
- Bullish MACD histogram
- Bullish stochastic oscillator
Mixed price charts favor in-the-money (ITM) call strikes: Teleflex Inc. (NYSE: TFX)
- Purple highlighted area shows bullish moving averages
- Black highlighted areas show bearish MACD histogram (slightly below “0”)
- Black highlighted area (bottom) shows the stochastic oscillator recently moving below the 80%, a bearish signal
Favoring ITM or OTM strikes can result in all or a higher percentage of each strike type. For example, if we are selling 3 contracts with a specific stock and are bullish, we can sell 2 or 3 OTM strikes. For a bearish bias, we may go with 2 or 3 ITM strikes. We do so by checking an option-chain and, after determining the moneyness of the option, selecting the strike that generates our stated initial time-value return goal range.
Strike price selection is based on overall market assessment, technical analysis and personal risk-tolerance and goals. This article highlights how the first two of these parameters will help guide us to the most appropriate option strike prices.
For more information on technical analysis/book
For more information on technical analysis/ online DVD program
Both resources are comprehensive covered call writing programs.
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:
Good morning Alan,
After attempting to work with 6-7 market gurus and strategies, I feel I have found a home and peace of mind with BCI!
Sacramento Options Traders webinar
Covered Call Writing with 4 Practical Applications
Sunday July 19th
12:30 – 4 PM
Login information to be sent to registered members (club and premium members)
Market tone data is now located on page 1 of our premium member stock reports and page 8 of our mid-week ETF reports.
Why do you prefer to sell covered calls instead of cash secured PUT?
Should I sell weekly CALL or PUT?
What is your reasons of your preferred choice?
Both are great strategies to generate cash flow in a low-risk environment. There is no right or wrong here.
I prefer covered call writing because it gives me the flexibility to write OTM calls for a potential 2-income stream trade. When selling puts, our max is the put premium (some exit strategy exceptions).
I do use cash-secured puts to enter a covered call trade in challenging markets for additional protection to the downside.
I also prefer Monthlys but Weeklys will work fine as well. I like the opportunity to manage my positions over 4 – 5 weeks rather than one and get better option liquidity (generally) with Monthlys. Weeklys assist in circumnavigating around earnings and ex-dividend dates.
I encourage our members to make personal decisions regarding ccw and put-selling and for Monthlys versus Weeklys. I’m a Monthly covered call writing guy most of the time.
Alan’s reply was excellent. Please keep both the csp and the cc in your tool box using both often!
Please also flex your expirations to fit your point of view. I sell options anywhere from a few days out to 6 weeks out. I have friends who sell them a year out and same day expiry. They both make money!
I like csp’s when I am bullish and just want to get a return on cash selling them OTM. Actually this month I sold some csp’s ITM betting on a summer rally, got that, so lucky guess :)! But they were on tickers I want to accumulate longer term regardless.
We are coming into the seasonally weaker time of the year, particularly in an election cycle with all the COVID unknown.
So I will favor the more bearish strategy of selling cc’s, likely NTM, over writing portfolio holdings. I might go out a few more weeks to capture a bit more time decay and only sell calls on a rally day when calls are priced higher, layering in, not selling them all in one whack since I will never get the peak or low perfectly and commissions are a non-issue these days. I may do the exact opposite on down days when puts are up and sell some OTM csp’s on things I would like to add.
So to conclude I don’t think options decisions should be binary: this one or that one. Instead try different things and let your success dictate your path forward on the ones that work best for you fitting your style. – Jay
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 07/10/20.
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:
The BCI team has added additional information and improved the format of our weekly ETF Reports, enhancing the quality of these reports, and making them more user-friendly and time-efficient. Here is a link to a video overview of these new upgrades:
On the front page of the Weekly Stock Report, we display the Top 10 ETFs and the Top 3 SPDR Sector Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Barry and The Blue Collar Investor Team
I’m new to the list and I have a question. I’ve read your book, “Complete Encyclopedia for Covered Call Writing” and in it you say to avoid holding a stock and it’s option if the stock reports earnings before the option expires. Well, on the watch list basically every stock on there will report earnings before 8/21/20. Do we only consider the last 6 stocks listed for possible trades? I’m just paper trading at this point, so it doesn’t really matter but I wanted to know the correct way to approach this.
During the heart of earnings season, stock selection becomes more challenging but there are always answers.
The 3 stocks in the gold cells will become eligible at the start of the August contracts.
During the 1st week of the August contracts, 10 of our screened stocks will become “eligible” because earnings will pass that week. We can use those securities as the reports are made public.
We also have our entire list of ETFs which is quite robust at this time.
Bottom line: There will be plenty of solid choices when the August contracts begin.
From this week’s report:
“I am near maximum returns for the contract and none of my BTC 20% limit orders were executed. I have rolled-down on these positions and then set new 10% BTC limit orders.”
Is it common for you to roll-down in the last week of the contract after the stock price appreciates? I had understanding that rolling-down is a strategy used only when the stock price goes down and 20% option buyback rule is executed, but not when the stock goes up. Can you explain this in more detail please?
Thanks so much for pointing this out. The BCI market tone was not updated from the previous week. It should read:
BCI: I remain 50% in cash and favor OTM calls 2-to-1 for the best-performing stocks and ETFs. I am near maximum returns for the contract and several of my BTC 10% limit orders were executed. I have rolled-down on these positions and then set new 10% BTC limit orders.
I’ll ask my team to update this in our recent report and post on the member site.
The Weekly Report for 07/10/20 has been revised and updated. Under “The Weekly Summary” section, the BCI entry should read:
“I remain 50% in cash and favor OTM calls 2-to-1 for the best-performing stocks and ETFs. I am near maximum returns for the contract and several of my BTC 10% limit orders were executed. I have rolled-down on these positions and then set new 10% BTC limit orders.”
None of the stocks in the report were impacted by the revision. Look for the report dated 07/10/20-RevA.
Trading Experiences 7/13/20:
Good decision today. I had bought QLYS on 6/2 at 114.805 and it has under performed since then, dipping down as low as 101 (12% loss). Today it rose at Noon to a good peak that I unloaded it at a loss of only -2.45% at 112 per share.
By the end of the day, the price closed at 106.93/ share, which would have been a 6.9% loss had I decided to keep it.
Regarding FB Facebook, I bought on a dip on on 6/26 at 224.7278 per share when the advertising conflict news was just starting and it had dropped 4%.
On 7/2 it was at 235.9 with a Gain% 5.0%. Looking at its price history (which is not a predictor of the future, but gives me a look at the resistance levels), I decided to overwrite it (STO) on 7/2 at strike 237.50 for a 2.4% (5.7/224.73) premium benefit. The 5.7 premium meant the stock could rise to 242.50 and i would be even. Was I wise to overwrite it?
Since 7/2, the stock has rose over many days up to 248. Today’s sharp afternoon drop ended the price at 239, not far from my strike, which was comforting.
How the picture can change quickly. Wonder what Friday will bring. Implied Volatility for FB is 50%..
If we add protective puts to our cc trades, do we manage those trades differently than without the puts? I’m nervous about the market with the spiking of covid-19.
It makes sense to be particularly cautious in the current market environment and buying protective puts is one way to accomplish this.
The collar strategy (covered call + protective put) must be viewed as a covered call trade and the short call is the main position we focus in on when managing these trades. Therefore, we should view this as a covered call trade and manage accordingly with the “insurance policy” in place to prevent catastrophic gap-down losses.
I’m having a tough time setting up alarms or sell limits when options drop to 20%. Interactive Brokers doesn’t have alerts for option prices and if Think or Swim has it, I can’t find it. How do you do it?
After entering the 20% or 10% BTC limit orders, we can have in place a portfolio alert to be notified (email, text) if a trade has been executed or expires. See the screenshot below as an example of an alert broker form.
To get to this form will vary from broker-to-broker but a typical protocol would be SERVICE-ALERTS-PORTFOLIO ALERTS. If you can’t locate this form, call your broker rep for guidance.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Also, I note that you are 50% in cash. Can you comment on that? Why are you that conservative? Do you see storm clouds ahead?
My personal risk-tolerance, given the current market conditions, translates into remaining 50% in cash. Even if the market continues to accelerate, I will not second guess this decision.
My concerns relate to the economic data I read each week, the rise in Covid-19 cases in much of our country, images I see on TV that concern me and the fact that the Fed will not be able to continue to infuse trillions of dollars into the global financial community at the current pace.
This doesn’t mean that I am 100% convinced that the market will crash again. But I am concerned enough to only expose 50% of the cash I have allocated to stock and stock option investing.
That can change, and if it does, I will publish my perspective in our weekly stock reports.
Can you comment on holding cash vs. holding inverse ETF’s? If cash/equities are 50/50, what are the preferences of this instead of having equities/inverse ETF’s, let’s say, 75/25?
For example, 50% low beta blue chips + 50% cash, versus holding 75% low beta blue chips + 25% inverse S&P 500 ETF.
I use inverse ETFs in rare extremely bearish market conditions as I did in March this year. The market has been in a bullish trend of late and inverse ETFs have been depreciating as a result.
Although I moved away from inverse ETFs the past few months, I am prepared to implement them again if market conditions change.
I am a premium member. All my etf’s: XLC, XLY, XLK July expiries are now ITM. The cost to close is less than .10. Is it too early to roll out? And how do I decide how far ITM I should roll out and up to for Aug 21 expiry?
This is what I would do today:
XLC July 17 55 strike roll out to Aug 21 56 strike
XLK July 17 102 strike roll out to Aug 21 106 strike
XLY July 17 131 strike roll out to Aug 21 134 strike
I also have the QQQ July 17 245 strike and was looking at rolling out and up to Aug 21 expiry 258 strike but might wait because the time value is still around .25.
I usually wait until expiration Friday to roll my options unless I am traveling and then roll on Thursday. The time-value of the premiums will decrease more for the near month than the next contract month.
Use the “What Now” tab of the Ellman Calculator to determine returns for rolling-out or rolling-out-and-up. Make sure the initial time-value returns meet our strategy stated goal range. The calculator will show upside potential and downside protection where applicable.
This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site and is available in the “ETF Reports” section. Look for the report dated 7-15-2020.
Also, the Blue Chip report of eligible Dow 30 stocks for the August contracts has been added to the member site on the right side of the page.
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
How does one buy back the option if it isn’t on the option chain?
If you sold an option that no longer exists on an option-chain, it may be the result of a contract adjustment (stock split etc.). Let me know the underlying security you are referencing.
I sold the $130.00 strike for Roku and in terms of buying it back it is no where to be found on the option chain, is it because the stock shot up so high? And I’m assuming that I can’t buy back a higher option? It has to be the exact strike price? I’ve reviewed all you videos and I obviously missed an important point.
Please refer or advise.
The $130.00 strike is definitely listed. See the screenshot below.
You may have to scroll down on the option-chain or choose “all” strikes rather than “near-the-money” but its there.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Trading Experiences 7/15/20:
(Note: I also present a trading tip at the end of this post that will save you time and money by being able to set up a limit order that guarantees a maximum cost to close for a Deep In The Money Covered Call Option (Mid-Contract Unwind).)
To Steve and members:
*** Using the Unwind Now Tab for a Rolled Out trade to calculate Cost to Close ***
I present here what Strike and Premium values you can use the Unwind Now tab to calculate the Cost to Close for a rolled out trade. You can then make a decision whether or not to execute the Mid-Contract Unwind (MCU) exit strategy.
Steve presented this scenario on a July 7 post last week and asked what values to use in the calculator.
Alan answered you correctly for the Net Return by summing up the Credits and debits on the Stock and Option side as 5.02%
Here is the trade:
6/8 – Buy 200 shares KWEB at 56.50
6/8 – STO 2 Cn 56 Ca @ 1.65 Exp 6/19/20
6/19 – Rolled out and Up
6/19 – BTC 2 Cn 56 Ca @ 5.90
6/19 – STO 2 Cn 61 Ca @ 2.90
Notice in the above the Sum of Credits and Debits is 1.65 – 5.90 +2.90 = -1.35 (This is the sum of premiums received so far)
What is cost to close on 7/6/20 and the net return?
7/6 Stock at 67.64
7/6 BTC 61 Strike is 6.95
Alan’s calculations for the net return are summarized below:
Stock side credit: 67.64 – 56.50= 11.14
Option side: From above -1.35 – 6.95 = -8.3
Total Debits and Credits -8.3 (Option) + 11.14 (Stock) = 2.84
Net Return is therefore 2.84 / 56.50 (Original stock price) = 5.026%. (Alan stated 5.02%)
Now what is the Cost to Close? The Cost to Close is the Time Value of the Closing BTC premium. I prove this in the Trading tip at the end of this post. The Percent Close to Close is the Percent that the Time Value represents of the strike price of the option, or Percent (Time Value / Strike Price).
Time Value = Premium – Intrinsic
Time Value = Premium – (Share Price – Strike)
Time Value = 6.95 – (67.64-61) = 0.31
Cost to close = 0.31 / 61 = 0.508%
To use the Calculator to get the above results I prepared the attached graphic showing the values to enter on the input side. I modified the calculator text in 4 places as a guide on what to enter or a rolled option. (I have written to Alan about incorporating these changes into the calculator.)
For the Option Strike I entered 61 (Your Last Strike)
For the Option Sale Price / share I entered -1.35 (Sum of premiums received)
Current Stock Price: 67.64
Current option price / share: 6.95
On the results side of the calculator, the answers are:
Net Return 5.03%
Percentage lost to time value 0.51%
Trading Tip – Guaranteeing a Maximum Cost to Close for a Deep In The Money Covered Call (Sell shares, close option):
** There is a way to set a open order limit price that will guarantee a maximum cost to close. Once set, you might find your open order is filled automatically at a spike in the market at the opening bell or some other active news time.
** Alan’s guideline is that you perform a Mid-Contract Unwind (MCU) if you use the released money to sell a new call for an additional 1% gain above you cost to close percentage. For example, If you know you can sell a new call for 1.5%, you can afford a 0.5% cost to close. You can guarantee that with an open order to close your trade.
** The formula to set the limit order is:
(Strike – Time Value of Option) (Important: Valid for ITM calls only)
For the example in this blog post:
0.5% of Strike 61 = (0.005) * 61 = 0.305.
The value of your broker’s limit order is then 61 – 0.305 = 60.695
** Proof of formula:
When you set a limit order to close the covered call, you set a limit price as follows:
Limit Price = Share price – Premium
(Notice this limit price represents your change in the Cash Balance of your account. When you close the call, you sell the shares, add it to your cash, and subtract the premium price from the balance)
Limit Price = Share price – (Intrinsic value + Time Value)
Limit Price = (Share price – Intrinsic value) – Time Value
Limit Price = Strike price – Time Value
** Proof Complete
The above equation amazingly shows several facts. 1. No matter what the price of your shares are sold for, your cash balance will only increase by the Strike Price less the Time Value (Time the number of shares). 2. If the Time value was zero your Cash Balance will only increase by the Strike Price / share.
Hope the above has been helpful.
I create spreadsheets each time I start using a new strategy. It requires much tweaking over time to get it just right. I then use the new spreadsheet for a month or so, recording each new position, the data. the close and analysis. Then I gradually stop using the spreadsheet.
What I learned years ago was that by constructing the spreadsheet and running it through its paces for a while it helped me more fully understand the strategy so that it became intuitive to me. The strategy, adjustments and exit strategies all became more clear and intuitive because I constructed the spreadsheet.
I began with VisiCalc. then Lotus 1-2-3, then Quattro Pro(when it was Borland) and finally Excel. Quattro Pro was the best of all but it had such a small percentage of the market that I needed something that could be shared with a lot of people, thus Excel.
I commend you on the time and effort you put in to create this tool.
Well done my friend.
Thank you. The Unwind Now tab of the Alan’s Elite Calculator is their design and I just modified the text to adapt for the rolling trade after understanding the math behind calculations. I have made constructive suggestions on issues I have noticed.
When I worked at Bell Telephone Laboratories in Holmdel, NJ between 1965-70 right out of college, I remember I working on an MTBF (Mean Time Between Failures) spreadsheet (big computer printouts) to predict the probability of a failure a computer board. I used, I believe, a Unix based spreadsheet program on a terminal. There were no computer chips or solid state memory then, just individual transistors you put together. I used slide rules in those years instead of a very expensive HP Calculator (Released around 1962) coming out in those days ($500) or simple calculator for over $100.
I did not use Visicalc much, but I remember in the 70’s a Unix based version on a Super-Minicomputer of the company after moving back to sunny no snow Florida (Ft. Lauderdale). Then came Lotus 1-2-3, then Excel. Radio Shack TRS-80, Radio Shack Model II with the large 8 inch disks (side jobs).
Regarding Covered Calls, Option finance, Intrinsic, Time Value, Call Value, Spread theory, and Math relationships to your Cash Balance and Account value, it is only after 3 plus years that I am understanding better the concepts involved. In some cases, I thought I understood the process well but instead I was explaining it away, then later understanding it differently. There is much to understand. It is amazing that we all deal with the same market, but have different perspectives in dealing with it.
There was one issue with Intrinsic Value that bothered me for a long time. But it was not until I heard it explained slightly differently from another speaker in a web video that it finally lit a light and made sense to me. I then went back to Alan’s Vol. I Encyclopedia and he said the same thing, but it did not sink in earlier in my readings.
You are exactly right that creating a spreadsheet for yourself teaches you about the concepts and it give you a better understanding since you go through the different relationships.
Early on with Alan’s methodology, over many hours, I created an Excel spreadsheet to document my portfolio, Gain, 20%, 10% thresholds, supporting roll outs, Break even, Return Cost basis, etc. I expanded and enhanced a spreadsheet that was on Alan’s resources. Worked well, but too time consuming to keep up to date.
Now I have evolved to I think is an efficient process (Manual and computer based) to keep track of my Portfolio and trading data. It involves a (a) Trading worksheet (TW), for my calculations before placing a trade, check lists, (b) Trade Column Form (TCF) to vertically keep track of a position (10 per page), (c) Trade Log (TL) to document a transaction with Break even BEP, Return Cost Basis (RCB), cash balance, Gain%, (d) a powerful Fidelity Watch list to keep track in Real Time of 4 accounts in one Watch list including options sold (our Joint Trust account is a separate Watch list), (e) Finviz Portfolios to reflect the BCI Stock and ETF run lists, Dow Jones stocks.
I haven’t seen anything as powerful or better that the Fidelity Watchlists to keep track in real time 4 accounts, including cash balances, with Options sold and option prices. You can also set alerts for Stocks and Options as well. Up to 50 items can be listed per watchlist. No delayed prices (Finviz is delayed unless you subscribe and are very useful).
Recently I stumbled on the fact I can set alerts in Fidelity and Etrade for 3% increasing and 3% decreasing alerts which is cool as I receive them on my phone and email to make me know about market conditions on stocks of interest. Hope some others take this up after reading this. Etraded recently upgraded their alert system for Text and Email. Etrade automaticaly keeps them active after triggering but Fidelity requires me to Re-activate them if I want them active again. So I called up Customer Service and the solution is to set the Alerts in their Active Trader Pro platform, which will keep them active all the time, saving time. I stopped using the platform after using it for two years and I currently just use the website for trading since i wanted the knowledge of doing trading from any computer.
The Fidelity Watch lists also are supported from the Active Trader Pro Trading Platform so I do not have duplicate my work again.
Good luck with your trading.
Facebook Earning Reports is 7/29/20 in the next cycle.
Verified at EarningsWhispers website and stated in last 7/10 Run List.
Last price 2pm 7/27/20 at 242.34
I have a covered at Strike 237.50 with ROO% 8.22%