An important BCI rule is never to write a covered call or sell a cash-secured put if there is an upcoming earnings report … too risky if the report disappoints and we don’t want to cap the upside if the report is favorable. There are (rare) scenarios when we hold the stock through the report and then write the call after the report passes. We consider this approach when we have confidence (based on past history) that the report will be a positive one.
This article will address a situation where share price declined dramatically due to an earnings “miss” and how we can lower our breakeven price point without adding additional cash to the trade, using the BCI Stock Repair Calculator.
What is the stock repair strategy?
This is a methodology where we buy 1 at-the-money (ATM) call strike after share price decline and fund it by selling 2 out-of-the-money (OTM) call strikes between current market value and the original purchase price of the shares. This is known as a 1 x 2 ratio call spread.
Real-life example with Datalog, Inc. (Nasdaq: DDOG)
- Blue arrow: DDOG purchased on 1/22/2024 at $132.53
- Green arrow: Price acceleration from 1/22/2024 – 2/14/2024
- Red arrow: Price deceleration from 2/14/2024 – 3/5/2024
- Yellow field: Price consolidation from 3/5/2024 – 5/6/2024
- Purple arrow: Price decline from $127.08 to $113.86, after a disappointing ER
DDOG: Stock Repair Calculator entries & calculations
- 1 x ATM $114.00 call is purchased at $5.50
- 2 x OTM $120.00 calls are sold at $2.90 to fund the long call
- Green arrow: Breakeven price point ($132.53) based on initial share purchase price
- Purple arrow: Breakeven price point ($123.12) after executing the stock repair strategy
- Averaging-down would have resulted in adding significant cash to this losing trade
- In this case, the stock repair strategy resulted in lowering the BE price point by $9.41 per-share, with an additional $0-.30 per-share net option credit
Discussion
The stock repair strategy will allow us to lower our breakeven price points without adding significant cash to the trades and perhaps even generating an option credit. As with all strategies, there are pros & cons that must be mastered before implementing this exit strategy.
Alan Ellman’s Complete Encyclopedia For Covered Call Writing- Classic Edition (softcover)
It took me four years to complete but here is the book you have been asking for. My goal when I started this project was to create the most comprehensive book ever written on the subject of covered call writing and gear it to the average retail investor, The Blue Collar Investor. I hope you feel that I have achieved my mission.
This book contains SOME of the information found in my first two books, updated information (like the new options symbology) and subjects taken from over 100 journal articles published since 2007. It contains all the basic and advanced material you need to know to truly master this great strategy. It also addresses the questions you have sent to me over the years on subjects peripherally related to covered call writing like the use of cash-secured puts, for example.
- Over 500 pages packed with solid information, no useless filler material
- 151 charts and graphs, most of which are in color for better visualization
- Chapter outlines to summarize the material located in each chapter
- Questions and answers at the conclusion of each chapter to highlight the key points
- 14 appendixes to supplement the information found in the 20 chapters
- 4 flow charts that summarize the stock selection and exit strategy processes
Click here for more 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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:
Hi Alan,
I have been doing amazing with the BCI method. 1 – 4% every month. Mostly gains. Always profitable.
I’m retiring this year and plan to trade covered calls for the rest of my days. It is a no stress work environment. My medical situation requires a no to low stress situation.
Looking forward to staying in touch.
Clare
Upcoming events
1. American Association of Individual Investors/ Los Angeles Chapter
November 9, 2024
12 PM ET – 1:30 PM ET
Private webinar for members of this AAII investment club
2. Young Investors Club: University of Central Florida
Wednesday November 13, 2024
Private investment club
3. BCI-Only Webinar
Zoom
Thursday November 21, 2024
8 PM ET – (:30 PM ET
Covered Call Writing Dividend Stocks
Details & registration link to follow.
4. Long Island Stock Investor Group Part I
Zoom
February 13, 2025
7:30 – 9:00 ET
Details to follow.
5. Las Vegas Money Show
February 17 – 19, 2025
details to follow.
6. Long Island Stock Investor Group Part II
March 13, 2025
7:30 – 9:00 ET
Details to follow.
Alan,
Have you guys done any research on MSTY or AMZY and others from Yieldmax covered call strategies?
Any thoughts?
Regards
Neville
Neville,
These are managed securities that use some form of covered call writing on MSTR and AMZN. Buyers of these ETFs must pay fees to the management team, as opposed to doing it ourselves.
I also firmly believe that nobody can achieve the levels of returns as we do, using the BCI methodology.
That said, I created a 1-year comparison chart using the S&P 500 (dark blue line), MSTR (Orange), MSTY (Purple), AMZN (Light Blue) and AMZY (Red).
Note that both AMZN AND MSTR outperformed the associated funds.
MSTR had a great year and both the stock, and the ETF outperformed the S&P 500. Both have huge implied volatilities, appropriate only for those with high risk-tolerance.
Bottom line: Based on the data presented, we’d generate higher returns just owning the stocks or writing the covered calls ourselves, where we’d have an opportunity to outperform the stock gains/losses.
***MSTR: IV about 80%
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Alan,
MSTY gave off ~80% dividend/covered call income YTD. They pay this monthly.
Should you not take that into consideration?
Regards
Neville
Neville,
Yes, definitely. However, share price will decline on the ex-date by the projected dividend distribution (other factors will determine the net price change that day, but the decline due to the dividend amount is 1 of the factors). This is one of the reasons the ETF under-performs the underlying stock.
We must also factor in that if we owned the shares of MSTR, we would be receiving the option premiums which, along with the better price performance will make this a better approach than MSTY, if there is adequate cash available.
MSTY and AMZY are relatively new securities and don’t have adequate historical data to make informed trading decisions.
We can say, however, that covered call writing ETFs will not out-perform the potential results using the BCI methodology.
Alan
In Alan’s book Selling Cash-Secured Puts: Investing to Generate Monthly Cash Flow, he talks about StockScouter Ratings and how it was removed. I believe I have found that service here in case anybody wants to use it:
https://quotes.freerealtime.com/stock-scouter
For those that don’t like clicking on links, you can find it by Googling “free real time stock quotes” (see image). It was the first result that came up in my search. Once you get to the site, there is a tab called STOCKSCOUTER near the top of the page. Enter the ticker symbol in the “Find StockScouter ratings for” search box and click “Get Report” (see image).
Hello Alan,
I’m coming back to you to make sure I understood correctly a process that you described and that I’m about to carry out for the 1st time, namely the stock repair strategy.
Fifteen days ago, I sold one cash-secured put on a share recommended in your weekly list (PDD), which has unfortunately plummeted since then. Having been hospitalised, I was unable to monitor the stock sufficiently to exit my trade and the shares were assigned to me on Friday by my broker.
The strike on the initial put was $142 for a premium of $3.05, giving a breakeven price of $139, and last friday PDD’s share price was down to $124.6.
If I understood your strategy properly, in order to hope to get my money back, I need to buy an NTM call at around $125 (cost 9.90$) and sell 2 OTM calls at around $132 (gain 9.30$). However, I didn’t see any indication of the expiry date to choose for the calls in the stock repair calculator, given that PDD’s earnings date is Nov, 25th. Could you please advise me and confirm my understanding is fine ?
Best regards,
JC
JC,
First and foremost, I hope you are recovering well.
When monitoring CSP trades, we rely on our 3% guideline, which is where the trade would have been exited,
But here we are today.
The Stock Repair strategy allows us to lower the breakeven price without adding significant cash or no cash at all to the trade. Sometimes, we can accomplish this with an option credit.
You are correct, 1 NTM call is purchased and 2 OTM calls (between current market value and BE price point) are sold.
In the prices you alluded to, there is a $0.60 debit, but with a huge caveat.
I checked the option chain and there is likely an opportunity to “negotiate” better prices on both ends. You can re-check tomorrow during market hours.
Here are links to articles I published on these topics:
https://www.thebluecollarinvestor.com/lowering-our-breakeven-price-points-after-disappointing-earniungs-reports-the-bci-stock-repair-calculator/
https://www.thebluecollarinvestor.com/how-to-negotiate-better-option-prices-using-the-show-or-fill-rule-30-rebate-expiring/
Alan
Hi Alan,
Many thanks for confirming my understanding.
I knew about the 3% guideline but being in hospital, I was not able to exit my trade. Tastytrade’s app on a mobile is not up to the level of the one on a laptop.
Any rule for the expiry date: 30 days ? More / Less ?
Best regards,
JC
JC,
30-days is a reasonable time frame for the stock repair strategy.
Alan
Hi Alan,
I entered a covered call trade on stock AEM. Bought the stock at $84.12 on 23 Sep ’24 and sold a call at a strike price of 85 on the same day. The stock closed at expiry on 18 Oct ’24 at a price of $86.17 and should have been called away. However, I still see it in my account.
Why does this happen?
Thank you.
Jaya
Jaya,
Very unusual, but I’ve seen it before.
First, you may yet get exercised if the trade hasn’t yet been posted to your account.
Let’s say you do not get exercised. First, congratulations on generating an additional (unrealized) $1.17 per-share.
Aside from human error, the main reason this may occur, is if some negative news came out after hours, causing market-makers to avoid owning the shares on Monday morning.
I checked and didn’t see any, but the professionals who run the market know more than we do (except when it comes to covered call writing!).
At this point, I’d be hoping for no exercise.
Let us know.
Alan
Hello Alan
A question regarding pmcc, how should dividends be treated when using the above strategy, in terms of the margin between leaps and the covered call.
For example: I want to purchase leaps on the TLT ETF and write call.
The ETF pays dividends once a month and I want to avoid a situation that would require me to purchase the ETF.
thanks
Garoda
Garoda,
TLT has weekly options. Use these and avoid the week of the ex-dividend date. If the next ex-date for TLT is 11/1/2024, do not place a short call for the week 10/28/2024 – 11/1/2024.
This means that weekly short calls will be placed 40 times a year, not 52.
Alan
Thank you Alan. There was no exercise and I am happy with the additional gain achieved.
Jaya
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 10/18/24.
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
Alan,
One question I did have…
On months like this one where there are so many companies reporting earnings:
1) Would you purchase stocks and sell options on stocks whose earnings are reported toward the end (but before) expiration Friday with the knowledge you would have to act on it prior to expiration?
2) Or do you primarily look for opportunities from either companies who don’t report at all or just wait to make a play on ones that report early in the monthly cycle?
Thanks again!
Scott
Scott,
Earnings season is challenging, but there are always solutions.
We can use weekly options (when applicable) and circumvent the week of earnings. We can also use any of the eligible ETFs as they do not report earnings.
As you mentioned, using monthly on stocks the report in the first week of the contract is also a viable approach, or any stocks after the report passes.
This year’s November contracts have an additional factor that may be of concern to some investors … the presidential election. My plan is to avoid that week as well.
Alan
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
Dear Alan and Barry
This month is loaded with earnings and I wanted to know your feelings on how long to wait after they are announced to use them for covered calls.
There are several companies on your list which have earnings this week. I was wondering what your feelings are on investing in companies after the earnings have been announced. I know each company and situation are different but what is your philosophy on how long to wait based on your experience.
By the way last month was my second month paper trading and was my second month generating a nice paper profit. One more paper trading month and then I go live.
BR,
Joe
Joe,
Glad to learn that you are progressing well.
After the earnings report passes, there may be some price volatility as a result of a “miss” or “beat”. If we are interested in that security, I wait for the volatility to subside (1 -2 days) and then the security is eligible.
You will notice a decrease in the volatility of the stock after the report passes.
Alan