Covered call writing is a popular and potentially highly rewarding strategy geared to retail investors. But most blue collar investors work 9-5 jobs and managing investment positions can be challenging if no common sense plan is in place. The purpose of this article is to discuss ways that we can keep track of our positions and generate cash flow of passive income (investments) while still generating active income (going to work). Let’s first breakdown the 4 stages of covered call writing:
- Stock selection
- Option selection
- Trade execution
- Position management
This aspect of our strategy can be accomplished in the evenings or on weekends. For those of you who are or will become premium members, the BCI team will do the screening for you and save you a significant amount of time. Here is a view of the ‘running list” which is the watch list we provide to our members as located in the mid-portion of our stock reports:
All stocks located in the “white cells” are eligible candidates for consideration. Our typical running list has between 40-60 eligible stocks for covered call writing in addition to our 15-20 exchange-traded funds candidates which we provide to our members in a separate report.
Once our watch list has been established, we can check the calculations by accessing the options chain and using the multiple tab of the Ellman Calculator. 90% of this work can also be accomplished in evenings and weekends but will need to be re-checked prior to trade execution during hours when US markets are open (9:30 AM to 4:00 PM ET, Monday through Friday).
Here is where we need to find a small time slot mid-week once or twice a month. Most of our trading will take place just prior to expiration of our contracts (the 3rd Friday of the month) or the beginning of the following week. All the preparation can be done in advance but market pricing changes so all orders need to be re-checked prior to execution. As you master the strategy this will not take a lot of our time. I like to enter my covered call trades between 11AM and 3PM ET when the market volatility is at a minimum. How about during a lunch hour? Again, it’s only once or twice a month as you set the tables in the evenings or on weekends.
Here is where we must become creative. In my books and DVDs, I detail the 20/10% guidelines which dictate when and if to buy back an option. Once our trades are entered, we immediately enter limit orders to buy back the options @ 20% in the first half of the contract and 10% during the second half. In essence, we are instructing our broker to close our short options positions if the price of the option we originally sold declines to 20/10% of its original value or less. If the price does not reach that level, the trade is never executed. However, it does, the option will automatically be bought back and an email sent to us notifying us of the trade. We can then make a decision that night or over the weekend what path to follow now that our option obligation no longer exists. Once again, position management techniques are highlighted with examples in my books and DVDs. Follow-up exit strategy trades may require a small number of lunchtime sessions of 5-10 minutes. The chart below shows what a trade execution form may look like after entering a covered call position and setting up a limit order to buy back that option (buy-to-close). In this hypothetical, we buy EDU @ $28 and sell the $30 call @ $1 (sell to open). We then set a limit order (that amount or cheaper) @ 20% or $0.20:
Using this technique means we don’t have to constantly watch our positions and by placing a “good until cancelled” order, it remains in effect until executed or we change it (also done after hours). Now, mid-way through the contract we change to 20% to 10% (evenings or weekends), in this case the limit order will be @ $0.10 and also “good until cancelled”
Covered call writing does require us to be available during market hours for an hour or two a month. By educating ourselves and mapping out a non-emotional common sense plan based on sound fundamental, technical and common sense principles, the time required during these hours can be minimized and made manageable while still working a full-time blue collar job.
Next live seminar:
Long Island Stock Traders Investment Group
Monday, March 10th
6:45 PM – 9:30 PM
999 Old Country Rd, Plainview, NY
Despite the extreme weather conditions, the economic reports continued to show an improving economy:
- According to the Labor Department, 175,000 jobs were created in February, more than the 150,000 predicted
- Despite this increase, the unemployment rate ticked up to 6.7% from 6.6%
- Consumer spending rose by 0.4%, more than the 0.1% expected
- Construction spending rose by 0.1% while analysts were predicting a decline of 0.3% New residential construction rose by 1.1% while non-residential construction declined by 0.2%
- According to the US Department of Commerce, factory orders declined by 0.7% (0.5% was anticipated) due to slow growth in construction and decreased demand for cars and semiconductors
- The US trade deficit widened by 0.3% in January, in line with expectations
- Personal income increased by 0.3% in January after being flat in December, mostly due to the impact of Affordable Care Act provisions
- According to the Institute of Supply Management (ISM) the manufacturing sector rose to 53.2 (showing expansion) in February, more than the 51.6 stat expected
- The ISM non-manufacturing index came in at 51.6 in February, below the 53.5 predicted
For the week, the S&P 500 rose by 1.0%, for a year-to-date return of 2%, including dividends.
IBD: Confirmed uptrend
BCI: This site remains cautiously bullish, favoring out-of-the-money strikes 3-to-2
Thanks for all your support.
My best to all,
Alan ([email protected])