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I Made a Lot of Money, So Why Am I Crying?

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Covered call writing trades have 2 components: we are long the stock and short the option. When evaluating the success or lack thereof for our trades, we must factor in both legs of the trade. In this article, we will analyze an example of how we can focus on the negative aspect of a trade but ignore the huge positive status of the trade. A real-life example with an exchange-traded fund (ETF), Vanguard Russell 1000 Growth Index Fund (Nasdaq: VONG) was shared with me by a BCI member and will be analyzed for this article.

VONG trades overview

  • 6/13/2023: Buy 4000 x VONG at $57.00
  • 6/13/2023: STO 40 x 10/19/2023 $65.00 calls
  • 10/19/2023: Rolled out-and-up as share price accelerates
  • 11/17/2023: Rolled out-and-up to the 5/17.2024 $73.00 call as share price continues to accelerate
  • The average option credit after the initial sale and 2 rolls is $1.66 per share
  • 2/4/2024: VONG trading at $82.68
  • 2/4/2024: The cost-to-close the 5/17/2024 $73.00 call is $12.00

What’s the problem here?

Our member is concerned that he is losing $24,000.00 on the options side, if the trade is closed.

Another perspective

If the short call is closed on 2/4/2024 for $12.00 per share, the share value no longer has a ceiling at $73.00, but is actually now worth $82.68 per share. The “Unwind Now” worksheet tab of the BCI Trade Management Calculator (TMC) will provide the calculations that will clarify the overall trade position. Will it be time for Kleenex or champagne?

VONG “Unwind Now” trade entries

VONG “Unwind Now” trade calculations per-contract

  • If the trade was closed (both legs) on 2/4/2024, the net credit would be $1534.00 per contract ($61,360.00 for 40 contracts)
  • This represents a return of 26.90%
  • Based on the 237 days in the trade (if closed on 2/4/2024), this annualizes to 41.00%
  • The actual time-value cost-to-close (eliminating the intrinsic-value captured from share appreciation to current market value), is 3.18%. We ask ourselves, Can we generate > 3.18% in profit between 2/4/2024 and 5/17/2024? I say yes.
  • So, champagne or Kleenex?

Discussion and valuable takeaways

  • These trades did not lose money, they were incredibly profitable
  • If the intention was to keep VONG as a long-term asset, then a different covered call writing approach should be implemented, Portfolio Overwriting. In this strategy, only deep out-of-the-money call strikes are sold
  • We must evaluate both legs of our covered call writing trades to properly evaluate trade results
  • Unwinding covered call trades (mid-contract unwind exit strategy), includes calculating the time-value cost-to-close
  • Despite the huge success of these trades, VONG is not an ideal candidate for option-selling because the open interest is quite low, and the bid-ask spreads are uncomfortably large


Selling Cash-Secured Puts Basic and Advanced Principles Video Course

Selling Cash-Secured Puts is a 6-part Video Series + downloadable workbook. All aspects of Put-Selling, including stock selection, option selection and position management. A huge section on exit strategies and a deeper dive into ultra-low risk approaches to selling cash-secured puts have been added to previous versions of this course. The Companion Workbook contains 111 all-color pages of all charts, graphs and slides. Download Table Of Contents (PDF)

This course contains 6- parts in the video course:

Section I: Option basics (definitions and foundational information)
Section II: Traditional put-selling (stock & option selection + position management)
Section III: PCP (wheel) strategy (adding covered calls to selling cash-secured puts)
Section IV: Buy a stock at a discount instead of a limit order (buy a stock at our target price or get paid not to buy the stock)
Section V: Ultra-low-risk put/Delta strategy (High probability, low-risk trades)
Section VI: Ultra-low-risk put/implied volatility strategy (High probability, low-risk trades)

Click here for more information.


Premium Membership Price Increase Notification: No Rate Increase for Current Members

On September 1, 2024, BCI will be raising membership rates for new members only. This will not apply to current members. It has been 3 years since we had a rate increase. In that period, we have added dozens of training videos, additional downloads and resources and more quality data to our stock and ETF reports. We are fortunate to have such a robust and expanding membership and strive to provide the best high-quality information and tools at the lowest industry prices.

This price increase will not apply to current active members as you are grandfathered into the current rate for life or as long as your membership remains active. This is our loyalty pledge to you.

The increase for new members will go into effect on September 1, 2024, as follows:

Monthly: $19.95 for the first (trial) month and $69.00 each 30-days thereafter (currently $57.95).

Annual: $778.95 for the first 13 months (includes a reduced first month and a free last month) and then $828.00 every 13 months thereafter (includes 1 free month). Currently $657.40 and $695.40.

All new members who subscribe between now and 8/31/2024 will be grandfathered into the current rate and will see no price increase on 9/1/2021.

Thanks to all our loyal members for your support over the past 17 years and for putting BCI on the financial map.

Click here for member benefits video.

Click here for membership information.

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 several of these testimonials in our blog articles. We will never use a last name unless given permission:

Alan,

I wish I would have learned about you many years ago. You’re an excellent teacher. I have very been quick to use your structure of stock selection and when to initiate STO’s and BTC. 

My SEP/ IRA is growing even with the RMD distribution. My CPA wants to know what I’ve been doing. 😊

Bill (the Hoosier retired dentist)

Upcoming events

1. BCI-Only Webinar (Zoom)

July 18, 2024

Register here.

Exit Strategy Choices After Exercise of Cash-Secured Puts

When we sell cash-secured puts, we are undertaking the contractual obligation to buy shares at the strike price by the expiration date. Typically, we only sell puts on elite-performers that we would be agreeable to own in our portfolio.

This presentation will analyze 4 potential exit strategy opportunities to consider should the put option be exercised. Information on the following strategies will be highlighted:

  • Selling the stock
  • Holding the stock in our long-term buy-and-hold portfolio
  • Write a covered call (PCP or “wheel” strategy)
  • Implement the Stock Repair Strategy

In addition to these strategies, the following topics will also be included in the webinar:

  • Option basics for selling cash-secured puts
  • Option basics for covered call writing
  • Real-life examples
  • Calculations using the BCI Trade Management Calculator (TMC)
  • Event super discount offer

There will be information offered to all levels of options trades, from beginners to advanced.

A live Q&A will follow the presentation. Attendees can ask any questions related to covered call writing or selling cash-secured puts.

Register here.

2. Investment Masters Symposium (live, in person event)

August 1, 2024

Presentation #1: 8:45 AM – 10:45 AM

Paris Hotel, Las Vegas

Register here.

Covered Call Writing & Selling Cash-Secured Puts to Generate Consistent Cash Flow

Basic & advanced principles for trading low-risk stock options with capital preservation in mind

This presentation will detail stock selection, option selection and position management, the 3 required skills to become elite covered call writers and put sellers. It will also include ultra-conservative approaches to these strategies using Delta and implied volatility to create statistically beneficial trades. Rules and guidelines will be discussed to take the emotions out of our trades resulting in high-probability positive outcomes.

Detailed analysis will be provided regarding how to craft our trades to the current market environment, personal risk-tolerance and strategy return goals.

A multi-tiered option-selling strategy which combines both covered call writing and selling cash-secured puts will also be examined. It is known as the PCP (put-call-put) or “wheel strategy.”

Attendees will be introduced to a one-of-a-kind trade management tool, the Trade Management Calculator, which is used to enter, manage and generate final realized and unrealized trade results.

The course is structured to benefit both beginner and advanced option traders, using real-life examples to enhance the learning process.

Presentation #2: All Stars of Option Trading Event

Register here.

3. Stock Traders Expo- live event in Orlando Florida

October 17 -20

Details to follow.

Alan speaking at a Money Show

15 Responses to “I Made a Lot of Money, So Why Am I Crying?”

  1. Charlie June 22, 2024 2:12 am #

    Alan,

    I’ve been trying to work my way through as many podcast episodes as I can mainly to understand how the TMC works. I keep hearing you say it is a game changer so I want to take full advantage of it.

    Here is a screen grab from one that was titled “How To Enter and Archive a Covered Call Trade with 1 Exit Strategy That is Closed at Expiration.” In the member’s description of what he did, he sold the stock as part of the exit strategy.

    When you set it up on the TMC, you chose “Roll-Down/Keep Stock.” Does that make a difference to the final accounting?

    Thanks

    Charlie

    CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

  2. Alan Ellman June 22, 2024 6:03 am #

    Charlie,

    Nice observation and good question.

    The spreadsheet will generate precise and exactly the same calculations with whichever exit strategy dropdown choice is selected.

    In this real-life example, the correct exit strategy (Roll-Down & Keep Stock) was selected at the time of the roll-down.

    As expiration approached, Jim bought back the short call and sold the shares. That aspect of the trade is accounted for in the Trade Journal (last row of the screenshot).

    Bottom line: The calculations are not impacted by the exit strategy title selected.

    Alan

    • Charlie June 22, 2024 7:28 am #

      Alan,

      Is it allowed to go back and change the exit strategy and forget the Note?

      Charlie

      • Alan Ellman June 23, 2024 12:45 pm #

        Charlie,

        Yes, both approaches make sense and are accurate.

        I would suggest using the approach you select consistently throughout all similar trades & adjustments. This will make it easier to review your trades days, weeks or years later.

        Alan

  3. Barry B June 22, 2024 9:21 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 06/21/24.

    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:

    https://www.youtube.com/user/BlueCollarInvestor

    Reminder: Premium Member’s pricing is locked into your current rate and you will never see a rate increase as long as the membership remains active.

    Barry and The Blue Collar Investor Team

  4. Phil June 23, 2024 10:56 am #

    Good morning Alan,

    I have purchased and read 3 of your books at this point. Since I am still working full time and taking care of my mother in law and father in law. The book that fits me the best for right now is “Covered Call Writing A Streamlined Approach”. I love it!

    Quick Question:

    In looking for the ETFs that are beating the S&P for the month and there are only 2 of them do you just buy those two and leave the balance of the funds in the money market or do you buy the last 2 (assuming you divided the portfolio in 4) ITM?

    Thank you!

    Phil

    • Alan Ellman June 24, 2024 5:26 am #

      Phil,

      Here’s how I did it in my book, “Covered call Writing: A Streamlined Approach”, and still using now:

      I select the 4 or 5 best-performing Select Sector SPDRs, based on 1-month price performance. These may or may not be outperforming the S&P 500. That is not a criterion for the CEO Strategy, although it is for entry to our ETF Report of eligible exchange-traded funds (located above the CEO section).

      There are currently 4 funds that are in positive territory for the last month.

      I base the “moneyness” of the strikes on overall market assessment, where I am currently bullish and favoring OTM call strikes.

      ITM call strikes are appropriate when we want to take a more defensive posture to our trades.

      Alan

  5. Ted June 24, 2024 8:30 am #

    Hello Alan,

    I’ve been using the TMC spreadsheet for about 6 months now and it has been a tremendous help. Two questions that I can’t seem to wrap my head around.

    I have a few stocks that I have held long term, that I sell covered calls repeatedly each month. In cell G7, I believe, it says enter the stock price upon trade entry. Since my cost basis is significantly below today’s price, do I use my cost basis or the actual stock price?.

    When I roll a stock up and out to the next month, and I transpose the trade to the next month’s spreadsheet, the profit from receiving the premium has already shown in the current month. If I am copying the trade to the next month, do I delete it from the current month so as to not double up on the profit? Or, rather than use the BTC-STO cells when rolling, should I just BTC the trade and enter it as a new one.

    Thanks so much.

    Best Regards,

    Ted

    • Alan Ellman June 24, 2024 11:09 am #

      Ted,

      Glad to help.

      1. Enter the price of the stock at the time the trade is executed. Using anything different will skew the calculations and render them unusable and irrelevant.

      2. When rolling out-and-up, there are 2 ways to make our trade entries into the Trade Management Calculator. Here’s the one I slightly favor:

      – Enter the BTC in the current month and deduct it from the original premium.

      – Enter into column AJ of the current month, the price of the shares at the time of the roll.

      – Enter in the next contract cycle (another spreadsheet), the current price of the stock (same as the entry into column AJ of the current month).

      – Enter the next cycle premium and strike.

      -This approach will render the exit strategy buyback price points 100% accurate.

      Let me set up an example:

      CURRENT CONTRACT CYCLE

      – Buy BCI at $48.00

      – STO $50.00 call at $1.50

      – At expiration, BCI is trading at $52.00

      – BTC the $50.00 call at $2.10

      – Change the premium entry from $1.50 to -$0.60 ($1.50 – $2.10)

      – Enter final unsold stock price (Column AJ) as $52.00

      NEXT CONTRACT CYCLE (Rolled-out date)

      – Enter stock price as $52.00 (same as column AJ entry in the current month)

      – Enter premium as $1.50

      – Exit strategy buyback price points are 100% accurate

      I save each TMC spreadsheet after contract expiration. For example, I may name a spreadsheet “TMC_7-19-2024” and another “TMC_8-16-2024”

      Alan

      • Ted June 24, 2024 4:04 pm #

        Alan – thank you so much. I’ve been pulling what little hair I have out of my head going around in circles on this.

        Thank you,
        Ted

  6. Charlie June 25, 2024 11:11 am #

    Alan,

    I’ve been really working my way through the many podcasts and blog entries.

    I also did a number of Portfolio Overwrite trades in my real portfolio.

    I’m wondering you can point me in the direction of what choices I might have for a PO situation that is now in the money early in the contract cycle?

    Thanks,

    Charlie

    • Charlie June 25, 2024 12:07 pm #

      I found it.podcast #91

  7. Alan Ellman June 26, 2024 4:39 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs, along with our sample trade of the week, has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.

    We have also included a sample trade taken from one of our BCI watchlists.

    Premium member video link:

    https://youtu.be/EXMO-KwZuJs

    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

  8. Charlie June 28, 2024 1:05 am #

    Alan,

    Hope all is good with you.

    I’m not sure I understand the value of avoiding earnings reports when doing PO.

    We know we are not selling our long term stocks (at least based on a single earnings report) and once you’ve made the trade for the option, how can the earnings report effect things?

    Thanks.

    Charlie

    • Alan Ellman June 28, 2024 6:05 am #

      Charlie,

      Whether we are using traditional covered call writing or portfolio overwriting, it is to our advantage to always avoid earnings reports. Here’s why:

      1. If the report beats expectations share value can move well above the call strike and we would be susceptible to exercise, which we don’t want when portfolio overwriting. In this scenario, we would be forced to buy back the short call, potentially an expensive proposition depending on the intrinsic value component of the premium.

      2. If the report beats, we would not be able to take advantage of all the share appreciation potential, if share value moves above the strike.

      3. Covered call writing is a low-risk, option-selling strategy. By incorporating earnings into the equation, we are converting the strategy to much higher risk. Understood, that portfolio overwriting implies retaining the stock through the report, but let’s, at least, give ourselves the opportunity to take full advantage of positive reports which will mitigate disappointing ones and probably end up net positive as more reports beat than disappoint over the past several years.

      In my humble opinion, avoiding earnings is one of the most important rules in the BCI methodology. In fact, it one of the only “rules”, as most other principles are defined as “guidelines”.

      Avoiding earnings reports, even when portfolio overwriting, will put cash in our pockets in the long term.

      Alan

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