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Managing Winning Trades for High Implied Volatility Stocks

Covered call writing and cash-secured put-selling are conservative strategies geared to retail investors who have capital preservative as a key strategy requirement. When we use high implied volatility underlying securities the strategy will have a broader range of risk-reward exposure. This article was inspired by Randy P. who had outstanding results using Applied Optoelectronics Inc. (NASDAQ: AAOI) as the underlying. The trade and management choices will be evaluated and explained.


Randy’s trade as of 7/13/2017


managing covered call trades

AAOI Chart

  • 5/5/2017: 600 shares of AAOI were purchased at $48.00 per share(green arrow)
  • 5/5/2017: Sell 2 contracts of the 7/28/2017 $66.00 calls
  • 5/5/2017: Sell 4 contracts of the 9/15/2017 $75.00 calls
  • 7/13/2017: AAOI trading at $75.75 (red arrow)
  • 7/25/2017 (Screenshot created and article written): AAOI trading at 96.62 (blue arrow at top of chart)
  • 8/2/2017: Upcoming earnings report


Implied volatilities on 7/13/2017

The huge risk and high returns are easily defined by the following implied volatility stats (using a Greek calculator):

  • S&P 500: 9%
  • 7/28 $66.00 call: 50%
  • 9/15 $75.00 call: 70%


Time value cost-to-close

When share value moves well above the strike sold, we check to see the time value cost-to-close. This is the amount of the option premium above intrinsic value. Although it will cost us significant cash to buy back deep in-the-money calls, the intrinsic value “buys up” share value from the strike sold to current market value so our main focus is on the time value component. After checking options chains and using mid-points of the spreads (slightly favoring market-maker prices), we learn that the time value costs-to-close are $4.00 (7/28 calls) and $9.00 (9/15 calls), both very expensive due to the high implied volatilities.


8/2/2017 earnings release

The 7/28 contracts expire prior to the report and the 9/15 calls are well after the report.


Position management considerations

7/28 calls

The percentile cost-to-close based on current share value ($66.00 due to option obligation) is 6.1% ($4.00/$66.00). Although we have the advantage of the huge price appreciation after this date, generally we would not spend that amount to roll the option and instead “allow assignment” The more aggressive and riskier plan would have been to buy back the option, hope for a positive earnings report and sell the next call after the report passes. The latter would have resulted in the best results but would not meet the capital preservation requirements of most conservative investors.


9/15 calls

The percentile cost-to-close on current share value ($75.00 due to option obligation) is 12% ($9.00/$75.00). Since the contract expiration is well after the 8/2/2017 earnings release date a decision must be made whether we want to spend 12% to protect against a negative report. The trade has already made huge profits so one may speculate that closing isn’t such a bad idea but given the 6 weeks remaining until contract expiration, taking no action and re-evaluating prior to the report is a viable approach. 



The type of securities we use as our underlyings for option-selling will depend on personal risk-tolerance. AAOI is a high risk/high reward stock. This may be appropriate for some and not for others. My personal preference (applies to me but certainly not to everyone) is to target 2-4% 1-month initial time value returns when setting up my trades and up to 6% in bull market environments. I rarely go above these parameters. There is no right or wrong here as one size does not fit all.

Many thanks to Randy for sharing this trade with us and inspiring this article.

For more information on position management of our covered call trades, see the exit strategy chapters of these books:


Upcoming speaking event

Orlando Money Show: February 8th – 11th, 2018

Click for information

Thursday, Feb 8, 2018
09:00 AM – 09:45 AM
All Stars of Options
“How to Select the Best Options for Covered Call Writing in Bull and Bear Markets”

Friday, Feb 9, 2018
12:15 PM – 03:15 PM
Premium Master Classes (Paid event to Money Show)
“Basics of Options Trading Using Covered-Call Writing with Pro-Active workshop”

Friday, Feb 9, 2018 06:30 PM – 07:00 PM
Stage presentation
“Covered Call Writing with Dow 30 and S&P 500 Stocks”

Market tone

This week’s economic news of importance:

  • Weekly jobless claims: 261,000 (above expectations)
  • Producer price index Dec: (-)0.1% (0.2% expected)
  • Consumer price index Dec: 0.1% (as expected)
  • Retail sales Dec: 0.4% (o.5% expected)


Mon Jan 15th

  • None: Martin Luther King Jr. Day

Tue Jan 16th

  • Empire state tax

Wed Jan 17th

  • Industrial production
  • Homebuilders Index
  • Beige Book

Thu Jan 18th

  • Weekly jobless claims for week ending 1/13/18
  • Housing starts
  • Building permits
  • Philly Fed

Fri Jan 19th

  • Consumer sentiment

For the week, the S&P 500 rose by 1.57% for a year-to-date return of 4.21%


IBD: Market in confirmed uptrend

GMI: 6/6- Buy signal since market close of August 31, 2017

BCI: I have a short-term bullish approach to the market, selling 2 out-of-the-money strikes for every 1 in-the-money strike. 


The 6-month charts point to a bullish outlook. In the past six months, the S&P 500 was up 17% while the VIX (10.16) moved slightly up by 2%.

Wishing you much success,

Alan and the BCI team



About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

29 Responses to “Managing Winning Trades for High Implied Volatility Stocks”

  1. Marsha January 13, 2018 8:57 am


    Can we use the beta figures from our stock reports to measure risk rather then use the greek calculator?

    Thanks for all your help.


    • Alan Ellman January 14, 2018 8:13 am


      Beta stats are secondary considerations with IV more significant in my view. The reason is that Beta is based on past statistics over a specific time frame compared to a particular benchmark. We use 1 year and the S&P 500 but other vendors may use different time frame or benchmarks.

      Implied volatility is forward looking and more important to our short-term option-selling positions. IV is important but has limitations when looking up IV stats because they are usually based on 1 year and 1 standard deviation. This means that the figures are accurate 2/3 of the time…good but not perfect. They are also based on 1-year volatility expectations, not necessarily the time frame of the specific options we are looking at. Some vendors may provide IV for each option.

      That said, we can control our risk by looking at the time value returns of our options because the main factor that determines our initial time value returns for these short-term options is the volatility of the underlying security. Here’s what I do:

      I set my initial time value return goals to 2-4%/month and up to 6% in bull markets. I never go higher. In my mother’s (more conservative account), I use a 1-2% range. Using this approach, investors can set up a portfolio with a risk factor based on personal risk tolerance and return goals.

      If deciding between a few stocks or ETFs that appear equivalent in all other screens, beta can be used as a “tie-breaker”


  2. roni January 13, 2018 9:47 am

    Randy gambled, and had one very lucky trade.

    • spindr0 January 13, 2018 12:24 pm

      Yes Roni, Randy gambled. If you’re going to gamble, it should be in a situation where there’s a chance of a big payoff with much more moderate loss potential. Here’s an example:

      AAOI traded much higher that week but let’s go with: Sell the 600 shares (bought on 5/05 for $48) on 7/25 for $96.62 before the ER, booking a $48.62 gain per 100 shares.

      Buy 6 of the nearest OTM call, creating a pair of bearish call spreads. Like the other calls discussed in the article, this OTM call will be expensive because of the pending ER.

      If AAOI shoots up, you lose the distance to strike plus the cost of this call. OTOH, if AAOI plops, you recover some of the ITM amount from the $66 and $75 short calls which are $30+ and $21+ points ITM, turning more of that $48.62 gain into profit.

      As it turns out, AAOI got clobbered after the ER and closed under $65 the next day with both of those short calls being OTM.

      I can’t reconstruct the trade (no historical quotes available) but the gain would have been $48+ on the stock and most of the call premium initially received from the sale of the $66 and $75 calls, less the cost of the OTM calls bought when AAOI was $96.62. Not too shabby.

      Trades like this should not be done unless under the supervision of an adult :->)


      • roni January 14, 2018 2:34 pm


        very well explained.

        Also I agree with you about the high level of experience needed to execute such a high risk trade (not my case).


        • spindr0 January 14, 2018 9:12 pm


          Well, not so well explained on my part. I lost sight of the fact that two of the short calls expired on 7/28 so they can be ignored since they would have been assigned before the ER. My bad.

          So a recap on the other 400 shares bought at $48. Let’s say that the Sep 15th $75 calls were sold initially for $3 ea. As per the article, at $96, they cost $9 of time premium to buy back ($30). So per 100 shares, the gain is $21 (- $48 + $3 + $96 – $30) if the entire position is closed.

          If one did nothing and rode out the ER, for ease of calculation, let’s assume that after the ER when AAOI dropped to $66, the short call is again worth $3 (two months of time decay has offset the appreciation in the call). The total profit is only $18 now (-$48 + $3 – $3 + $66). Since there’s over a month until expiry, the profit would be even less if my guess of $3 is too low.

          Now let’s consider the bear spread. If one can buy the OTM call for a maximum additional loss of $9, the bearish put spread cannot lose more (distance to strike plus cost of call) than closing the position would have. Let’s make it easy. Say that the $96 call costs $9 to create the spread. If OTM, it would have cost less and would have been more profitable. Sell the stock for $96 and create the spread. At $66, the profit is $39 (-$48 + $3 + $96 – $9 – $3).

          So which is the high risk trade? In these 3 scenarios, the worst result was doing nothing.

          I sure hope that I got the numbers right. :->)

          And yes, the level of experience to do such trades is higher… but in the end, it’s just crunching the numbers of the various trades.


          • roni January 15, 2018 10:12 am


            Thanks,I see what you mean, but crunching the numbers must be used with lots of Stock Market experience to make the risk affordable.


      • MarioG January 17, 2018 6:13 am

        Thanks again for your real time delta neutral hedging analysis last week.

        Your comments here are a good mental exercise. For those mature in this realm it may be a piece of cake or duck soup. Interesting how financial situations can be managed and evaluated.


  3. Barry B January 13, 2018 10:07 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 01/12/18.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    Since we are about to start 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

    [email protected]

  4. Jake January 14, 2018 8:12 am


    I have a question regarding your weekly report where you state:

    “BCI: I have a short-term bullish approach to the market, selling 2 out-of-the-money strikes for every 1 in-the-money strike”

    I am not sure how this information is to be applied. If you could give me a reference to review, that would be great. I have just obtained your classic book, but not read it, however have read your book on Put Selling.

    I am looking forward to learning with you.


    • Alan Ellman January 14, 2018 11:00 am


      In our BCI methodology, we favor out-of-the-money strikes in bullish market conditions and in-the-money strikes in bear market environments. In our latest stock report, I note that I’m favoring OTM strikes 2-to-1. For example, if I sell 90 contracts this month, 60 will be OTM and 30 ITM.

      See pages 108 – 124 of the classic edition of “The Complete Encyclopedia for Covered Call Writing” for more detailed examples of strike selection with real-life examples (most taken from my own portfolios).


  5. Carol January 14, 2018 1:10 pm


    I looked at the AAOI example below but I do not see a call option available in June 2017 as of 5/5/17, or for 7/28/17. Am I missing something or is there a typo?

    Thanks, Carol

    • Alan Ellman January 15, 2018 7:59 am


      Since this is a management article, the initial premium option chains were not highlighted. As far the option chain premiums on 7/25, we can calculate the actual premiums from the stock price ($96.62), strike price and time value (TV) premiums which are all known factors:

      $66.00 call ($4.00 time value): $30.62 IV + $4.00 TV = $34.62

      $75.00 call ($9.00 TV): $21.62 IV + $9.00 TV = $30.62


  6. Hoy T January 14, 2018 4:00 pm

    I, too, used AAOI for covered Call writing. Worked well for a while. I used weekly options.
    I use a screen for Calls with Highest Time Value (TV%).
    These are very risky and are not my main way of making money with options but can with further analysis ie, avoiding ERs and late phase trials, have interesting opportunities. On balance I’ve made money with this approach but it is one that I use less and less.
    As always one should maintain a meticulous journal so you can learn what is more likely to work.

  7. Hoyt T January 14, 2018 6:21 pm

    The Blue Collar Investor approach is the most structured and conservative way to trade in options I have ever come across.
    I am 75 and have been a trader for 40+ years. I forbid my children and grandchildren to trade. They are all in Vanguard Index funds which I have selected and helped fund.
    I am addicted to the market and can’t wait for the weekend to be over so I can start back trading. But it is not for everyone.
    I find options to be much less risky than equities. Like anything worthwhile trading options requires immersing oneself in all the knowledge one can acquire. I read somewhere that it took 10,000 hours of intense training to master any skill.
    Fortunately in some skill sets we can learn from others. Sometimes we can be like the little fishes that swim with the sharks. We don’t have to kill the shark’s prey it order to feed off it. I believe BCI is the shark. The watch lists and methodology are the prey. Let’s eat!

    • Alan Ellman January 15, 2018 8:06 am


      I appreciate your generous feedback.

      Thanks for sharing your experiences and trading ideas. This is what the BCI site looks to promote…sharing ideas and learning from each other.


    • Jay January 15, 2018 3:33 pm

      Hi Hoyt,

      Congrats on your decades trading the market! I can appreciate your advice to your kids and grandkids about index investing and not trading.

      I am retired but while working I was too busy to trade. So I plowed every penny I could save into mutual funds, index funds and company stock. I only looked at the statements once a year. I had some good years and bad years. I latched onto a saying long time ago that you make money from “time in the market” not from “timing the market”.

      These days I share your love of trading. It Is a hobby I endeavor to improve upon all the time. I am glad I started my “Retirement Trading Career” with covered calls because that does not even feel like trading to me now, just an upgrade on simple investing.

      Options spreads and call/put speculation does. I do those with defined risk, clear targets up front and small positions to enjoy the challenge and the “fun money” when I get it right. And I did my homework first. – Jay

      • Hoyt T January 17, 2018 4:27 pm

        Thanks Jay,

        I understand exactly.

        I have been a lifetime member of AAII for probably 35+ years. Would go to chapter meetings and listen to guys telling how awesome their portfolios had done. All seemed to be beating me by miles. I told the chapter leader that I wouldn’t be back as I found too depressing to be so bad at stock picking. He said, “Hoyt, these guys are talking about “paper” portfolios.” I said, “What in the hell are “paper” portfolios?” After he told me and how they were too risk averse to use real money I felt better.

        I have never been able to learn from paper trading except for the mechanicals of making a trade. I need to have skin in the game. Those were the days of high commissions and larger spreads.

        AAII is 100% opposed to options, always has been.

        I did enjoy a subgroup called Computerized Investing. Had an old guy, now dead, who taught me technical analysis like a Jedi.
        Will never forget him.

        Nowadays we have it so good; info out the wazoo, low spreads and low commissions. I agree with Alan, soon there will be no commissions, only spreads.

        Keep up the good fight.

    • spindr0 January 16, 2018 12:54 pm


      I too used to trade the high IV issues (earnings announcements, clinical trials, etc.) but I have gotten away from high risk/reward positions as I have mellowed. During my decades of investing and trading, it never occurred to me to get out of the way of earnings announcements (as Alan recommends) when selling short term covered calls and short puts (one week to two months). In hindsight, it seems so obvious but the light bulb never went on until I stumbled on to this blog.

      Like you, I look forward to Monday and trading and really don’t care for three day weekends.


      • Hoyt T January 17, 2018 4:39 pm


        Ain’t it funny how so many of us were on parallel tracks. I spent a lot of time in the high IV area, especially Biopharm. You would have thought we would figured that out. I was lucky that I did figure out that the higher cap issues were less prone to 50% drops but still go up 25-50%. Didn’t figure out how to find out about proper timing of clinical trials. Still got blindsided by some of those.

        Looking forward to discussing things with people who understand where I am coming from. Most of my friend’s eyes glaze over, or roll, if I mention options.

        Thank God BCI brought us together.

        Happy trading,

  8. Barry B January 16, 2018 4:07 pm

    Premium Members,

    The Weekly Report for 01/12/18 has been revised and uploaded to the Premium Member website. The revision was due to an updated risk/reward list dated 01/15/18. There was one stock that went from pass to fail…Extreme Networks, EXTR.


    Barry and The Blue Collar Investor Team

    [email protected]

  9. Alan Ellman January 17, 2018 5:04 pm

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

    New members check out the video user guide located above the recent reports.

    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

  10. Karl January 18, 2018 6:37 am


    I have an issue I feel I am over thinking and analyzing covered calls. I find ones on your list with a ROO that meets my requirements, but I don’t pull the trigger as it may be range up or I am worried it is going to fall as there is a DOJI at the high. BTW all your technicals are met – stochastic, MACD + I also like to. Checks the OBV against it’s moving indicator as a volume indicator and they all line up.

    What would you recommend I do for covered calls, shall I place the trade if it meets my requirements or wait for confirmation in the morning as I do – but then I never place it as I need to place my orders the night before or over the weekend as the day runs away.

    Thanks for a great system.


    • Alan Ellman January 18, 2018 7:48 am


      Once we locate a stock and option combination that meets our requirements, it is best to place the trade when market is open, if possible. My preference is between 11 AM ET and 3 PM ET to circumvent possible early morning and late afternoon volatility from computerized institutional trading.

      If that is not possible, make sure your broker has buy-write combination forms:

      This way, we can make sure that the relationship between stock and option price will remain within the framework of our requirements.

      Once the trade is entered, we can automate the 20/10% guidelines. For example, if we sold the option for $2, we can immediately place a buy-to-close order at $0.40 in the first half of the contract and change to $0.20 in the latter part of the contract.


  11. Carl January 18, 2018 3:32 pm


    Today, Jan 18, TTWO is at $117.00 and the $115 January option strike on the ASK is $3.30, $1.30 being time value. Even the bid is at $2.80 which is still $.80 time value. I sold the option for $2.12 in December. What gives on why the time value has not decreased more?

    Fortunately, I am using Interactive brokers which has ZERO charge for option execution and really low commissions. So it looks like I should NOT roll the option because I loose to much premium ($80 to $130 per option). In this case, I should just let it expire and buy back the stock if I want it. IS THIS OFTEN THE CASE? IS THIS BECAUSE OF HIGH IMPLIED OR ACTUAL VOLATILITY?

    How does the BCI strategy deal with this unforseen cost at the time of the ORIGINAL SALE of the option? Or should the TV not going to zero be expected?

    Note that TTWO is a carryover from the BCI and my own screening from before.


    • Alan Ellman January 18, 2018 4:00 pm


      The time value component of the option premium relates to the implied volatility of TTWO. The market is still anticipating significant price movement prior to contract expiration tomorrow. As 4 PM ET approaches tomorrow, the time value will dissipate but we will almost always have to spend some small amount of time value to buy back the option.

      When considering rolling options, it is best to measure the current cost-to-close to the next month option premium rather than the previous premium generated. This is because the time value in the remaining days of the current contract is incorporated into the time value of the next month’s option. Use the “What Now” tab of the Ellman Calculator for these calculations.

      If you have access to your computer tomorrow afternoon, check the time value cost-to-close versus the time value generated from the next month’s option and see if the time value credit meets your monthly initial time value return goal. Based on current information, it appears that rolling out will still generate close to a 4% time value credit with some downside protection.


      • Carl January 19, 2018 10:36 am


        Oops on my part. Part of what I may be seeing is the time delay between the stock price quote versus the option pricing quote. Stated differently, when looking at the option quote, the actual stock price quoted delayed and therefore not showing me the true stock price at that time.


    • MarioG January 18, 2018 7:43 pm

      Following up on Alan’s answer to do a performance evaluation of the BTC of the current option with the STO of the next months Strike (Rout and and Rout and Up).

      As mentioned the “What Now” tab (Page 131+) of the Ellman calculator can be used for the evaluation.

      This rollout and rollout and up is also covered covered in the Classic Encyclopedia Pages 402-405 (Using Covered call to increase stock value), Page 280+ (Rolling out), and Page 289+ (Rolling out and Up).

      I myself do the calculations manually since it is more convenient for me. I usually calculate the number for both an ITM Rollout if the Last price is near the original Entry strike and my feeling on the future for the stock and current market tone or to a higher up strike (if the Last price has increased), which could be an ITM or an OTM strike.

      For the rollout and up, It is quite interesting how you can end up with a net positive gain or profit either with (a) a net debit (rollout and up case) if the stock has gapped up and the BTC costs more than the STO, or (b) with a net credit (rollout case) when the BTC is less than the STO premium. The share appreciation in the numbers compensates for the debit case.

      I spent lots of time trying to understand the methodology and the reasoning behind the numbers and calculations. It is not instantly obvious, at least for me. I think it was worthwhile to make that effort. It keeps you busy on Expiration Friday if you have more than position to evaluate. One you determine the Credit Limit or Debit limit, then I play the spread to get most out of trade.

      Good luck with your trading.


  12. MarioG January 19, 2018 9:33 am

    Trading Experiences Expiration Friday 1/19/18 before opening bell:

    Performed my Expiration Friday calculations and performance calculations to date after this January interesting month.

    Positions that are all ITM and I will let be assigned because of Earning Reports:
    LGIH (1 of 2 positions), TSS, DAN, CTRL, ORBK (E/R 2/14)

    Positions that are ITM that need to Rollout (have no earning reports due):
    ** FIVE (Strike 65 to 65) – Had good sales but below expectations for Dec. Sales still had growth and Revenue is up per my research (Motley Fool article, Barchart – Weak Buy, Fidelity-Bullish) so will keep at same strike. Gain for next cycle: BTC (1/19) -1.95, Share Appreciation = 0, STO (2/16 cycle) +3.50, Total: +1.55. Net Gain for next period: 2.38% (1.55 / 64.92). 64.92 if my fixed return cost basis from my initial trade.

    ETF – Trust Account:
    ** ETF KBE, ITM, Last 50.05 Rollout, Up 48 to 50 ITM: 1.98%; Rollout-Up 58 to 51 OTM: 1.15%, 3.05% with upside potential, need to decide.

    ** ETF KRE, ITM, Last 62.04, Rollout,Up 60 to 62 ITM: 1.37%; Rollout, Up 60 to 62.5 OTM: 1.03%, 1.73% with upside potential, Need to decide

    ** ETF XHB, ITM, Last 46.07, Rollout, Up 44.5 to 46 ITM: 1.69%; Rollout,Up 44.5 to 47 OTM: 0.79%,2.80% with upside potential; need to decide

    Positions OTM Expiring Worthless on 1/19 Expiration:
    LGIH (2 of 2 positions): Strike 80, Last: 71.72, Breakeven 75.363, Earning 2/6, Will hold and sell on Peak before Earnings. Barchart Hold, Fidelity Bullish. Probably temporary fall back will recover as it has done before.

    ETF Trust Account:
    TAN Last 25.98 Strike 26. (Pinned OTM) Rollout 26 to 26: BTC 1/19 -0.23, Share Appreciation 0, STO 2/16 0.60 Net Gain .37 ROO 1.4% (.37/25.955). If I let it expire worthless, I can Cover it and get 0.60/25.99 or 2.3%. If it goes ITM and assigned, I can invest cash in new or same position. Not worth buying it back and rolling, particularly since this is a zero commission account with 2 year Fidelity new cash agreement. Since this is a 500 share trade, the commission effect if commission was charged would be negligible anyway ($8.00 / 500 = $0.02 / share).


    Did my Monthly gains for the 5 accounts for the January Cycle to end of day 1/18/18:
    4 accounts group:
    3.22% (IRA-I adjusted by adding back for RMD withdrawal to get actual performance)
    3.09% (IRA- RMD withdrawal adjusted)

    ETF Account: January performance: 5.15%, YTD 8.4%, Annualized (9/12 months have passed for this account) 11.23%. Finally getting some profit out of this account.