When screening for eligible securities for covered call writing and selling cash-secured puts, we must establish how much risk we are willing to incur. There is no right or wrong here as the appropriate amount will vary from investor-to-investor. To determine security risk, we can look up implied volatility (IV) stats but that will simply give us a number, not how that stat integrates into our strategy goals and personal risk-tolerance. Therefore, before entering our option-selling trades, we must establish our initial time-value return goal range which will incorporate both the returns we are seeking while also factoring in the risk we are willing to take.
Option time-value premiums and implied volatility
The amount of time-value our premiums will generate is directly related to the IV of the underlying security. The greater the IV, the greater the premium but also the more risk we are incurring. My sweet spot for my initial time-value return goal range is 2% – 4% for 1-month near-the-money strikes. It is 1% – 2% for my mother’s more conservative portfolio. I’ll go as high as 6% in strong bull markets but never higher. That is right for me but not necessarily for everyone. Let’s next compare the IV stats taken from one of our premium member ETF Reports (3/10/2021) and show how these figures align with our premium time-value returns.
Premium ETF report from 3/10/2021 showing conservative, bullish and extremely bullish IV positions
I selected 3 diverse IVs from this report from conservative (VYN- 17.54%) to bullish (XOP- 52.17%) to extremely bullish (BLOK- 94.13%). I next went to the option-chains for these securities and selected strikes 2 levels above and below each ETF current market value. These figures were then fed into the multiple tab of the BCI Calculators. These stats represented 7-week returns and I will will convert to both annualized and monthly returns in this article.
Covered call writing calculations for BLOK, VYM and XOP
- The yellow cells represent the 7-week initial time-value returns
- The brown cells represent the upside potential for the out-of-the-money strikes
- The purple cells represent the downside protection of the initial time-value returns for the in-the-money strikes
Annualized and monthly returns
- BLOK: 68.3%/5.7%
- VYM: 9.7% /0.80%
- XOP: 41.6%/3.5%
For me, XOP would be the best choice based on return goal/risk analysis. In strong bull markets, I would consider BLOK. VYM would be an appropriate choice for my mother’s portfolio.
Implied volatility is critical to our option-selling success. It will define our premium returns as well as measure our position risk. Before entering any trades, we must establish an initial time-value return goal range for a specified time-frame to assist in strike price selection. Because IV is directly related to time-value premium, it is not necessary to look up IV stats as option-chain analysis will suffice.
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 share some of these testimonials in our blog articles. We will never use a last name unless given permission:
We wanted to reach out and thank you for all the support you have given to OIC events. You have always been a great partner who delivers such high quality education and hope to work more closely with you in the future.
The Investor Education Team at the Options Industry Council
1- BCI-Only Webinar: Free Webinar Covered Call Writing and Selling Cash-Secured Puts
Covered Call Writing and Selling Cash-Secured Puts: 2 New Strategies Developed by BCI
The VOLQ-covered call strategy and Weekly 10-Delta Put-Selling strategy
August 19, 2021 (Thursday)
8 PM – 9:30 PM ET
- Here is the link to login on August 19th just prior to 8 PM ET:
- No pre-registration needed
- Our platform allows the first 500 attendees to access the webinar
To join our mailing list and receive our free newsletter go to our blog page
2- Mad Hedge Traders and Investors Summit: Free webinar
September 14- 16, 2021
Information and registration link to follow.
Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
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 08/06/21.
Also, 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:
On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.
Since we are now in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
Barry and The Blue Collar Investor Team
Alan and Barry,
the STEP early ER announcement is a big surprise.
I am concerned and have a hard time deciding about the best strategy for tomorrow and Tuesday, as it was trading at an all-time high on Friday.
I placed my trade on 07/26/21, bought 500 shares at 45.23, and sold 5 08/20/2021 45.00 calls for 2.08.
If it stays at current prices I will probably liquidate with a reasonable gain of approx. 2.5% as my risk tolerance is quite low.
What would you do?
Basically, you’re in a good position. While I can’t give you specific financial advice, I can give you another idea to consider.
What we know:
– According to IBD and other sources of financial data, the stock appears to be a “good” stock
– You bought the stock at $45.23
– You sold the Aug. $45.00 call at $2.08
– Your current ROO is 4.1%
– ER later this week on 08/11/21
You’re concerned about a negative ER report this week and the impact on the stock price. You might consider the following:
– Turn your Covered Call trade into a Collar trade
– You could buy the Aug. 20 $45.00 put for $0.75 (Bid is $0.70 and Ask is $0.80 as of Sunday night at 8:25 PM EDT…this will change in the AM)
– This would turn your trade into a “no loss” trade
– Your cost basis becomes $43.90
– Your ROO would be 2.4% if the price stays above $45.00
– If the earnings report is really bad and the stock drops below $45.00, you can sell your stock for $45.00 (as per your rights under your purchased put contract) and have a final profit of $1.10 ($45.00 – $43.90) per share.
So your choice is to exit the trade as you discussed or turn the trade into a collar…a lot depends on the pricing when the market opens tomorrow morning.
I hope this helps you with your decision.
this morning I bought 5 STEP 08/20/2021 45.00 P @ 0.60 to protect my trade against ER risk.
It is now converted into a collar trade, reducing my ROO to 2.76% if the stock ends above 45.00 by the expiration, which is still an excellent gain. 🙂
I just remembered that by converting this trade into a collar trade, it becomes a “no loss” trade as you mentioned above, and therefore if the CC is not assigned to me at 45.00, the put will be exercised at 45.00 at expiration.
Just a quick question to see if I am thinking correctly. I am holding the SIVR (ETF) that I purchased several months ago at $26.60 and the current price as of the close on Friday was $23.45. Since I am underwater on this equity (I know I should have put a stop loss but that will be another discussion for another day), if I was to sell the Sept 17 Call $22 strike price at a premium of $4.50 am I thinking correctly that I would receive the premium of $4.50 and if I net that against what I originally purchased I would only loose $0.10 ($26.60 less $22 strike = $4.60 less the $4.50 premium) per share if the option was exercised? If the option isn’t exercised then I could just pocket the $4.50?
Am I doing the math correctly? I am looking for a way to get out of the security and yet do it in such a way that I don’t take a big hit.
Your math is accurate. If SIVR remains above the $22.00, the option will be exercised. At that point, you are -$4.60 on the stock side and +$4.50 on the option side.
Be sure to have your 20%/10% BTC limit orders in place to protect against significant share price decline.
thank you barry for this clear explanation and safe alternative.
I am now waiting for the market to open and will be ready to act accordingly.
Appreciated – Roni
In your video on Lesson 7 you have a Stock for $100 with 3% premium and the stock rose to $108.64 and you talk about buying back the Option for $109 for a loss of 36c.
In that example do you still keep the $3 premium from the first sale?
And when you do this, are you simple buying back that stock (whoever the owner is) or are you actually buying back the Option from the actual person/company that bought your option in the first place? It appears to be the first…
I’ve done my first Stock buy and Option on HZO and I purchased at $53.35 and its now $52.30 so I am watching your videos again to make sure I am doing this correctly and exiting any strategy if required before Friday week. I received $1.30 (2.4% premium) for a $55 strike price, which I am happy with except the stock has dropped 95c – eroding my actual profit. And I saw today HZO fell off your preferred stock list this week.
It’s been a very interesting learning curve as I came from a property related background but love learning new things.
Yes, we keep the $3.00 initial premium. The net cost-to-close is $0.36 per-share and we can then use the cash generated from the sale of the stock to enter a new covered call trade with a different security. This results in 2 income streams in the same contract month with the same cash investment.
The Options Clearing Corporation (OCC) matches up buyers and sellers of options when trades are executed. There is no specific individual to whom we sold or bought back the options.
Keep in mind the beginner’s tutorials are overviews. There is much more detailed information in our books and comprehensive online video courses.
I’m a BCI member. Currently paper trading, getting the feel for all the steps. All good so far. Except I’m a bit confused about “buying the Call back” (Buy to Close) to end the trade. example; if I’m stopped out of the Stock (& I’m using your full Excel sheet that automatically shows us the 20% Option, 10% Option, & 7% Stock Exits. Very nice form!) ..do I buy the Option back before the close of business the same day? or next day? If I “buy back” the Option, doesn’t this eat up my Premium that was just put into my account? A wash? Or is my mind fighting me here? Sorry. I’m having a mental hang up here, & a bit confused. Please advise.
I’m using TD AmeriTrade web based platform. Easy for me to understand.
When share price declines, so will the value of the option. Now, we keep the entire premium generated when we sold the option. That is step #1.
If the 20%/10% thresholds are reached, the BTC will be triggered as long as we entered a BTC limit order immediately after entering a covered call trade.
Example: We buy a stock at $48.00 and sell the 1-month $50.00 call option for $1.50. $150.00 per-contract is generated into our cash account. The price declines to $44.00 dropping the value of the $50.00 call to $0.30 (20% of $1.50). The BTC limit order will be executed at the moment the threshold ($0.30) is reached. This means that we will have retained 80% or 90% of the original premium. Now, we are simply share owners and can plan next steps based on our exit strategy arsenal. When entering our BTC limit orders, do so as a good-til-cancel order (GTC).
Thank you Allan, this helped greatly. Got it.
Huge thanks, Ken
This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.
For your convenience, here is the link to login to the premium site:
NOT A PREMIUM MEMBER? Check out this link:
Alan and the BCI team
my STEP collar trade is my first collar trade ever.
It was a very wise strategy as STEP dropped 6% after the earnings report yesterday.
Today, the stock recovered a bit and is trading at 45.00, which is exactly my CC strike.
The put I bought for 0.60 is trading at 0.95 as I write, and I am considering selling it now that the ER risk is gone.
Also, I have a question for you:
If the put ended up ITM by expiration on Friday 08/20, would my broker Schwab exercise it automatically?
Schwab will automatically execute the Protective Put if it goes $0.01 In The Money. As of about 1:40 PM EDT, it appears that the protective put will keep you out of trouble.
I did sell the protective put at 0.95, and now it is trading at 1.30, and STEP is down to 44.00. 🙁
Should have waited for your response, but I am confident that the trade will end well, as the ER was a strong beat, and my BEP now is 42.80.
Cheers – Roni
Since you mentioned that you have a low-risk tolerance, you might consider the “Collar” as a primary trade going forward. We have a lot of information on this trade in our past Blog articles as well as a book that covers the Collar in-depth…” Covered Call Writing Alternative Strategies”.
Actually, my risk tolerance is not quite that low, but I will consider the collar trade for special occasions like this one.
Normally, I never place trades that have less than 2% ROO, and when I feel concerned about an underlying stock, I prefer the ITM alternative.
I will consider the collar trade for stocks that are at all-time highs, which always makes me nervous.
Thank you again for your help and dedication – Roni