Locating stocks for covered call writing and put-selling is the first step as we prepare to execute these income-generating strategies. In the BCI methodology we use a three-pronged approach to screening for these underlying securities:
- Fundamental analysis
- Technical analysis
- Common sense principles (like minimum trading volume etc.)
In my books and DVDs I encourage all option-sellers to consider other screens that meet their personal risk-tolerance and trading style. Recently, a few members have inquired about using stocks selected by Jim Cramer for his charitable trust portfolio. This gave me an idea that it would be both an enjoyable and an educational experience to set up a hypothetical portfolio derived from this resource. We must keep in mind that whatever process Cramer uses to select these stocks, they are intended for a longer-term buy-and-hold portfolio, certainly a much longer time frame than our one-month option trades. That said, it is apparent that many feel that there is a high-quality feel to his selections so why not see how we can apply our covered call writing skills to a percentage of these securities? The statistics used for this article were generated on 2/3/2016.
Stocks in the charitable trust on 2/3/2016 and calculations
There were 28 stocks on the list and because the overall market was down about 9% over the past three months, most technical charts of these stocks showed bearish trend and momentum indicators. I selected the eight stocks with the most favorable chart patterns to use in a hypothetical portfolio funded with $100,000 cash. Here are the selected securities (left column):
The following steps were used to determine the number of shares to be purchased in 100 share increments:
- Assign $12,000.00 per position understanding that some cash must be remaining for possible exit strategy execution
- Divide the price-per-share into $12,00.00 and round to the nearest 100
- Calculate the total cost of purchasing the shares and adjust a position if necessary
- Check the options chain for premiums generated for near-the-money strikes (I used out-of-the-money)
- Calculate the total premiums generated from selling the call options and percentage returns
$2165.00 in premiums were generated on a cost basis of $94,992.00 resulting in a 1-month initial return of 2.3%, annualized to 27.3%. $5008.00 remains in our brokerage cash account if needed for exit strategy execution. Some of the total cash ($7173.00) from premium plus amount not used to buy shares can be used to buy additional shares and sell call options on those newly acquired shares as long as at least $2000.00 remains in the cash account if position management opportunities arise.
What does the Ellman Calculator tell us?
Purple field- The breakeven column subtracts the total option premium from current market value and shows the point below which we may start losing money
Brown field– This column shows the time value initial return for each position. As a whole, these returns calculate to a portfolio initial return of 2.3% for the one month.
Yellow column– Since we sold out-of-the-money strikes we have the potential for additional profits from share appreciation of between 1% – 2% as shown in the chart above.
There are many resources that can be used to locate stocks for option-selling based on personal risk tolerance and trading style. In my view, the BCI methodology is one of the elite ways to locate option-selling stocks but it certainly isn’t the only resource where success can be achieved. In this article we investigated stocks from Jim Cramer’s charitable trust and demonstrated that these securities do offer significant initial returns. Of course, no matter where a stock is located, once a position is entered we must be prepared with our exit strategy arsenal as position management is just as important as stock and option selection.
Coming in July
The Blue Hour
The blue hour is the period of twilight during dawn each morning and dusk each evening when the sun is a significant distance below the horizon and the residual, indirect sunlight takes on a predominantly blue hue (typically 40 minutes in length).
The BCI team will use this theme to provide additional educational content to our members in the form of webinars, Q&A, interviews with experts and much more. Our initial 30 – 40-minute trial run will be held on July 28th at 9 PM ET in the form of a webinar with Q&A and additional comments. I will be hosting the webinar and Barry Bergman, the BCI Director of Research will be responding to your questions simultaneously. This event will be free to the first 50 premium members who sign up and will be recorded and available on the premium member site and free to all our premium members. We will be providing a series of these educational events to our premium members throughout the year. Our team is in the process of developing a landing and signup page for The Blue Hour and once ready we will open up registration. Ultimately, the development and format of The Blue Hour will depend on your suggestions and feedback.
Next live event
June 11, 2016
American Association of Individual Investors
Research Triangle Chapter
Raleigh/Durham, North Carolina
10 AM – 12 PM
- Minutes of the April Federal Open Market Committee meeting demonstrated that the Fed would like to raise rates at either its June or July meeting, conditions permitting
- 2nd quarter US growth looks stronger while the April US employment report was slightly weaker than forecast two weeks ago as several recent data points show an increase in both economic activity and inflation
- US industrial production rose 0.7% in April
- The Consumer Price Index rose 0.4%, the strongest monthly reading in more than three years
- Housing starts rose at a stronger-than-expected rate of 6.6% in April
- Building permits rose 3.6% from the previous month
- Japan reported a robust 1.7% annualized rate of growth in gross domestic product in the first quarter of the year
- Tentative deal to relieve the Puerto Rico debt crisis reached The US Department of the Treasury and Republicans in the US of Representatives House have reached a tentative deal to set up a financial control board to take charge of Puerto Rico’s debt crisis No US federal funds are being committed as part of the package.
- Saudi credit rating cut by Moody’s Moody’s Investors Service cut its rating on Saudi Arabia’s debt to A1 from Aa3 However, recently announced economic reforms could lead to a higher rating over time, the agency said.
- China reported somewhat weaker than expected economic data this week
- The European Central Bank’s bond buying program is beginning to run up against purchase caps in government bonds issued by some of its member countries
- Philippines dislodges China as Asia’s fastest-growing economy as economic growth in the Philippines expanded at 6.9% in the first quarter, the fastest pace in that country since the 1970s
- China’s growth slipped to a 6.7% annual rate in the same quarter
THE WEEK AHEAD
- A meeting of G7 finance ministers and central bankers concludes Saturday, May 21st in Japan
- Japan releases trade data on Monday, May 23rd
- Flash purchasing managers’ indices are released globally on Monday, May 23rd
- Germany’s Ifo releases its business climate survey on Wednesday, May 25th
- Q1 UK gross domestic product is reported on Wednesday, May 25th
- Revised Q1 US GDP data are released on Friday, May 27th
IBD: Uptrend under pressure
GMI: 0/6- Sell signal since market close of May 4th
BCI: Neutral selling an equal number of in-the-money and out-of-the-money strikes.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US