One of the three required skills for covered call writing and put-selling is the selection of the underlying security. Along with this we also must avoid quarterly earnings reports. Since most corporations report earnings in similar time frames (known as earnings season) the number of eligible candidates is dramatically reduced during these time frames. The BCI way is NOT to moan about these challenges but rather to develop a methodology to circumvent and overcome them. Here are some of the strategies we have developed regarding enhancing the number of eligible underlying securities during the heart of earnings season when employing monthly options:
- Consider all eligible stocks in the “white cells” of our Premium Reports
- Consider all eligible exchange-traded funds in our Premium ETF Reports
- Use stocks that report in the first week of the contract period AFTER the report passes thereby still capturing three to four weeks of time value premium
In this article, I will discuss how to use Weekly-expiring options in conjunction with our Premium Reports to enhance the number of eligible stocks while still adhering to our rule of avoiding earnings reports.
Premium Report (page 3 shown) at the start of the November, 2015 contracts
Premium member Stock Report dated 10/16/2015
We will focus in on page 3 of this report with the understanding that there are a few more candidates on page 2. Please note the following:
- The stocks highlighted in the gold rows at the top all report earnings during the November contracts (contract month, not calendar month)
- The stocks in the white cells at the bottom of the screenshot do not report during the November contracts and are eligible for consideration. Eight total with adequate option liquidity-OI)
- The blue oval highlights the projected earnings dates for the stocks reporting during the November contracts
- The red oval highlights those stocks that also have Weekly option expirations
Implementing the strategy
There are six stocks in the gold rows that also have Weeklys. Since this is a 5-week contract, each of these six securities will be eligible for four of those five weeks. Here is a breakdown of how we can use this approach to add more eligible securities:
Covered call writing with Weekly Options
Discussion
By using our Premium Watch Lists and Weekly options, we can enrich the quality and quantity of eligible stocks during the heart of earnings season. All the required information is located on pages 2 – 4 of our Premium Reports.
Blue Collar Scholar Competition:
The six winners will be published in the January 10, 2016 newsletter.
Upcoming live appearances
1- Saturday January 23rd, 2016: Kansas City, Missouri
9 AM – 12:30 PM
Matt Ross Community Center
2- New York Stock Traders Expo
February 21st – 23rd
Marriott Marquis Hotel, NYC
http://www.newyorktradersexpo.com/expert-details.asp?speakerID=891071A
Market tone
US economic indicators were modestly positive but global reports pointed to challenges regarding slower growth. Reflecting relatively calm markets, the Chicago Board Options Exchange Volatility Index (VIX) trended down to the 15 range after beginning last week near 20. This week’s reports:
- The US economy grew at a revised annualized 2.0% rate in the third quarter, down slightly from the previously reported 2.1%, and down from 3.9% in the second quarter
- Consumer spending provided strength, driven by a healthier jobs market and low fuel prices
- The University of Michigan final December consumer sentiment index rose to 92.6 from 91.3 in November
- Lower inflation helped increase real incomes and support demand for household durable goods
- The average sentiment for 2015 was 92.9, the highest since 2004
- US household incomes rose 0.3% in November after a 0.4% gain in October, according to the US Department of Commerce
- Consumer spending also increased an inflation-adjusted 0.3% after holding steady in October
- Disposable income rose 3.5% year over year while the core personal consumption expenditures index, the Federal Reserve’s preferred inflation gauge, rose 1.3%
- Orders for nondefense capital goods orders excluding aircraft, a key proxy for business spending plans, fell 0.4% in November after a 0.6% gain in October. Overall capital goods orders were unchanged
- Sales of previously owned homes fell by 10.5% in November, reportedly tied to new federal mortgage-disclosure rules that are causing delays in home sale closings. Evidence of this was confirmed by a 4.3% increase in purchases of new single-family homes, which were up 9.1% from a year earlier
- Initial jobless claims dropped 5,000 to 267,000 for the week ending December 19th
- Continuing claims dropped by 47,000 to 2.20 million for the week ending December 12th
- US retail sales grew by 7.9% this holiday season, boosted by a 20% rise in online sales
For the week, the S&P 500 declined by 0.83% for a final end of the year return of – 0.73%%.
Summary
IBD: Confirmed uptrend
GMI: 3/6- Sell signal since market close of December 10, 2015
BCI: Cautiously bullish but maintaining a defensive posture selling at least 50% in-the-money strikes and deeper out-of-the-money puts. The market was flat to slightly down in 2015. For those of us who were able to generate a decent profit for the year selling options…congratulations as all ther hard work and due-diligence has paid off. For those starting out, the market historically rises by 8-10% which provides an environment much easier to generate significant returns.
The BCI team wishes you a happy and healthy New Year and a lucrative 2016,
Alan ([email protected]) and the BCI team
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 01/01/16.
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:
http://www.youtube.com/user/BlueCollarInvestor
We had technical issues with the “cut and paste” section (last section) during the preparation of this week’s report. If you need to copy the list to your own purpose-built spreadsheet, please send me an email and I’ll send you a page that will work for you.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan,
Thanks for all your advice. I have read several of your books and appreciate the education.
My question for you is: I am trying to learn more about Deep-In-The-Money covered calls. I can find a lot of general information about the system on the web but that is about as much as I can find. I am curious where I can learn more about how to:
1)Scan and find DITM’s
2)What criteria to use for scanning
3)What to expect as far as possible downside protection versus Return
4)How often can a person expect to find a good DITM trade to take
5)What are the best Market / Stocks conditions that would led to a good potential DITM trade (Gap up, Gap Downs, Unexpected High Volumes ect..)
6) What stocks/ETF would a person want to stay away from
7)What is the best available resources to learn more about DITM covered calls
8) Most DITM potential trades I find have relatively low open interest and low volume which make for high bid ask spreads. Any advice about how to handle this or am I not scanning correctly.
9) It is recommended that the delta of the call option be a close to 1.0 as possible do you have any suggestion about this
I would appreciate any information and response you may be able to offer. I wish you the best in the new year.
Thank You,
Brad
Brad,
You bare asking excellent questions that require much more detailed responses than i can give in this venue. However, i’m happy to provide some preliminary direction that can be supplemented by the information in my books/DVDs:
1- Underlying securities should be first scanned for fundamentals, technicals and common sense principles before looking at returns. This is very important.
2- see above
3- We select our strike based on the amount of protection and ROO we are looking for. The more protection, the lower the time value returns. I look for a 2-4% initial time value return.
4- Slightly ITM strikes will provide good trades routinely. DITM strikes offer great protection but time value profit will suffer.
5- VIX > 20
6- Avoid selecting securities based solely on returns. The screening process alluded to in 1 and 2 will keep us out of trouble.
7- Rhetorical question?
8- The deeper ITM we go, the lower the OI. We must manage our expectations.
9– An option with a Delta of 1.0 will offer no time value profit. First, set your goal for your monthly return and then choose the option with the most protection that meets that goal.
Much more in my books/DVDs.
Alan
Alan,
Just wanted to say thank you for everything. I bought your DVD’s and books roughly 4 years ago. In the beginning, it took me roughly 9 months before it finally sinked in. ( very slow learner). It wasn’t until this last year that I finally hit my stride doing 70 to 80 contracts per month. 2 years ago, helped out a friend with medical bills and this last year made a sizeable donation to charity. Now I understand why you took early retirement. I am forever grateful for your advice and teaching. Wishing you a very Happy New Year!
Your friend and forever grateful, Todd
Todd,
Your email was the best New Year’s gift I could have asked for. What a great way to start off 2016. Thanks for sharing your story and for your generous comments.
To a great 2016,
Alan
Todd,
That was an inspiring post. Thank you!
Alan’s work has made a difference in my life too. I am in my third year of retirement at age 58 and have yet to tap my nest egg. I hope I never will. I sell weekly credit spreads on the SPX/SPY and monthly calls on my dividend stocks.
This is a wonderful comment community. A prosperous New Year to all! – Jay
Todd,
Your note captures everything that we have been working towards with The Blue Collar Investor. When I joined Alan back in late 2007, our shared goal was to be able to hear stories such as yours.
Thank you for sharing it.
Best,
Barry
Alan,
I did some trades so I am ahead now around $800.00. I took a nice premium on AAPL 110 strike but expiring February. This gives me time to see what happens to AAPL and perhaps buy back and sale again.
I was wondering if I could use the recommended stocks that pass your check list the previous weeks? Or are your recommendations good only for that list.
Anthony
Anthony,
If you have selected a stock from a previous report, that position is managed as described in my books/DVDs, not based on its presence or absence from subsequent reports. If you are selecting a stock for a new position, it is best to use the most recent report.
Alan
Premium Members,
We received the latest Risk/Reward (StockScouter) rankings late yesterday. As a result, three stoccks have gone from “Passed” to “Fail”. Those stocks are:
ABMD
HPY
SEDG
Best,
Barry and The Blue Collar Investor Team
Premium members:
This week’s 7-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 as well as the implied volatility of all eligible candidates. For your convenience, here is the link to login to the premium site:
http://www.thebluecollarinvestor.com/member/login.php
NOT A PREMIUM MEMBER? Check out this link:
http://www.thebluecollarinvestor.com/membership.shtml
Alan and the BCI team
Alan,
I spent a couple of years buying options and finally realized that selling options is theasy better road. I’ve been researching covered calls and know the right equity is a key piece to profit. Multiple contractsources is next. I have about 20k available for covered calls. I would like to know if I should sell cc’s on just one or two equities over and over, or use a service like yours to pick different stocks on a cycle?
Hoping to hear back from you,
Ed
Ed,
In my view, diversification is essential in any investment strategy and one or two stocks for a covered call portfolio will not provide that for us. However, exchange-traded funds can accomplish that goal. These are mutual funds that behave like stocks and represent a basket of stocks. Whether you use our service or select based on your own criteria this is a viable way to diversify in a covered call portfolio while building equity and eventually moving to stocks as the underlyings. As a guideline, when using stocks, I like at least 5 different stocks in 5 different industries.
Alan
Alan,
I have a quick questions that I cannot seem to find the answer to. As I’m learning about covered call options, I see on yahoo finance that there are call options available for me to sell which expire every Friday, as opposed to ever 3rd Friday of the month. I was taught that options expire every 3rd Friday of the month, and so I’m confused why there are options every Friday. Any information would be very much appreciated.
Thank you!
Eugene
Eugene,
A few years ago the Options Clearing Corporation approved the implementation of Weekly options for certain highly-traded securities. Today, there are a few hundred securities that trade Weeklys in addition to Monthlys. There are thousands of securities that trade only Monthlys. It’s all a matter of supply and demand as options have become extremely popular during the past several years.
Alan
Under the current market conditions are you completely out stocks and in cash? Would you consider buying puts? If neither of the above how does BCI handle such a significant downturn?
Dennis,
The first 4 days of 2016 have been the worst start to a trading year in the history of the stock market (a bit of a rebound so far today). That said, whether we stay in the market or on the sidelines is a matter of personal risk-tolerance. If we are in, some ideas to consider:
1- Consider only ITM calls and deep OTM puts
2- Use low-beta stocks
3- Use low IV ETFs
4- Use inverse-ETFs
5- ***Extreme diligence with position management arsenal (exit strategies)
6. Buy protective puts (collar strategy)
I personally favor #s 1 and 5 but all are available defensive strategies.
Markets in the short-term can be our best friend or worst enemy. Currently we are not on talking terms but that can turn around abruptly.
Alan