The screening process for option-selling watchlists includes fundamental analysis, technical analysis and common-sense screens. The BCI team recently added a new screen, the mean analyst rating (MAR), to replace the Scouter Rating (risk/reward) which we had been using for years. This will add an “institutional” component to our analysis.
What is MAR?
An investment analyst is a financial professional with expertise in evaluating financial and investment information, typically for making buy, sell and hold recommendations for securities. In order to reach an opinion and communicate the value and risk of a covered security, analysts research financial statements, listen in on conference-calls and talk to managers and the customers of a company, in an attempt to determine findings for a research report. Ultimately, the analyst decides whether the stock is a buy, sell or hold.
The Scale of Ratings
The analyst ratings scale is more involved than the traditional classifications of buy, hold and sell. There are now various categories that include multiple terms for each of the ratings (sell is also known as strong sell, buy can be labeled as strong buy), as well as a couple of new terms: underperform and outperform.
Stock recommendation Range
Additionally, not every firm adheres to the same ratings terminology: an outperform for one firm may be a buy for another and a sell for one may be a market perform for another. Thus, when using ratings, it is advisable to use a consensus figure like mean analyst rating.
The basics
Let’s review the traditional ratings of sell, underperform, hold, outperform and buy.
- Buy: Also known as strong buy and on the recommended list. This is a recommendation to purchase a specific security.
- Sell: Also known as strong sell, it’s a recommendation to sell a security
- Hold: A hold recommendation is expected to perform at the same pace as comparable companies or in-line with the market moving forward.
- Underperform: A recommendation that means a stock is expected to do slightly worse than the overall stock market return. Underperform can also be expressed as moderate sell, weak hold and underweight.
- Outperform: Also known as moderate buy, accumulate and overweight. Outperform is an analyst recommendation meaning a stock is expected to do slightly better than the market return.
It is best to view these recommendations as a consensus stat with at least 3 analyst reviews. These consensus stats should then be used in conjunction with other fundamental, technical and common-sense parameters when making our investment decisions.
Sample free site with MAR stats: finviz.com
Locating MAR from Finviz.com
Sample free site with MAR stats: finance.yahoo.com
Location of MAR stats in our Premium Stock reports
MAR Stats in Premium Stock report
The BCI team will eliminate all stocks with MAR Ratings higher than “3” For those securities remaining, we will publish the precise stats to assist our members in making the best investment decisions possible.
Discussion
Analysts’ recommendations are the culmination of analyzing equity research reports and should be used in conjunction with thorough investment methodologies to make investment decisions. Additionally, buy, hold and sell recommendation meanings are not as cut-and-dry as they first appear; a series of terms and differences in meanings exist behind the basic terminology.
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:
Alan,
I’m very excited to come out to The Money Show in Las Vegas next month to meet you and attend your covered call speaking engagement. You are the real deal and I very much admire what you have created with BCI. I believe in it fully and can’t wait to complete my education and employ the BCI system.
Thanks for all you do to foster financial education.
Kind regards,
Patrick M
Upcoming events
FREE WEBINAR THIS WEEK
-May 8th
Alan will be hosting a free webinar for the Options Industry Council (OIC) on generating income from selling options. Those who register will have access to the webinar after the live event. Click here to register for free.
-May 13th
All Stars of Options
Bally’s Hotel, Las Vegas
10 AM – 10:45 AM
How to Select the Best Options in Bull and Bear Markets
Free event
-May 14th
Las Vegas Money Show
Bally’s/ Paris Hotel
12:15 – 3:15
Master class encompassing covered call writing, put-selling and the stock repair strategy
This is a paid event hosted by The Money Show
***Alan will also be doing book-signing event at The Las Vegas Money Show
***********************************************************************************************************************
Market tone data is now located on page 1 of our premium member stock reports.
***********************************************************************************************************************
Alan,
What would you consider a good exit on this one?
Bought KMX at $75.89, sold the 78 for $1.42 (Selling for 1.70 now). Stock is now at $78.50. I can buy it back and sell the 79 for 1.15, 80 for .75 cents or let it get called away in 14 days or wait to see if it drops back down. I was going to wait but ultimately let it get taken away because that is a solid 4.7% in less than 23 days. I will have to pay a 15 dollar fee from TD if I let them take it which I’m okay with.
Thanks
Rob
Rob,
First, let me congratulate you on what is currently a successful trade… a 4.7% 23-day return… nice.
The question is do we need an exit strategy at this point? The time-value cost-to-close (BTC) is 1.5% ($1.20/$78.00). The original time-value return on the initial trade was 1.9%. In order for “rolling up” in the same contract month to make sense, the stock price must continue to accelerate to the higher strike. Can we depend on that and risk most of our initial return? I rarely roll up in the same contract month.
If KMX moves up in price early this week making the time-value cost-to-close approach zero, we can execute our “mid-contract unwind” exit strategy. Right now, 1.5% is too expensive given only 2 weeks until expiration.
We also may consider rolling the option to the next contract month as expiration of the near-month contract approaches. It will also allow us to reassess our bullish assumption on KMX. The next earnings report (6/28) will not play a role for the June contracts.
By the way: I hate that assignment fee charged by some brokerages. I would call your broker and let them know that many brokerages charge the lower sales commission fee and try to “negotiate” that down to the lower rate.
Alan
Hi Alan,
my vote goes to the “mid-contract unwind” exit strategy if time-value cost-to-close approaches zero, or wait for expiry if it does not.
Rolling the option to the next contract month as expiration of the near-month contract approaches is also a very good suggestion.
Roni
Rob,
You and Alan confirm your current unrealized return is 4.65%==4.7%.which is a profit of $353 (.0465 x 100 x 75.89) per contract.
As Alan states your cost to close at strike 78 is 1.5% (1.20/78). The end position return loss is 1.58% (1.20 / 75.89).
The $1.20 turns out to be 34% of your current profit (1.20 / 3.53) per contract.
I noticed from the Option table that if KMX just moves up $2 the Mark to close is 0.45 or 0.57% cost to close.
Also, just to put things in perspective with commissions, with your $15 assignment fee, for 1 contract that is a commission loss 0.19%.(.15/78) (2 contracts, 0.1%). In my case, with Fidelity and Etrade the fee is just $4.95 if assigned. With a buy back, the commission can cost as much as $5.60 minimum with Fidelity (4.95 plus $0.60/contract) or $10.40 minimum (2x $4.95 plus $0.50/contract) with Etrade (they charge for each leg),.
Since this is the start of the 3rd week, when I see a gap up, I like to implement immediately a combination order to guarantee a closing loss of only 0.1% ($0.08) (0.001 x $78) (before commission). You never know what happens on the opening bell with a spike in the price and you may see a trade alert that your order was filled. You can then use the cash elsewhere during this cycle or just have it available. While the order is still open you can adjust your credit limit order value to your needs.
To guarantee your closing loss, the equation to follow is equation Credit Limit = Strike – TV, which I have shown before in this blog. Here is the proof:
Credit limit (CL) = Last Price (LP) – Premium (Prm)
CL=LP-Prm
CL=LP-(Intr +TV)
CL=(LP-Intr) -TV
Since LP=Strike +Intr, LP-Intr= Strike
Therefore,
CL = Strike -TV
Notice this is only valid for ITM options. (Does not work with OTM options, where you would use simply LP-TV for the limit.)
Your credit limit combination order is then 78-.08 = 77.92 for a 0.1% loss when order is filled. You can decide to cancel the order for the last week, if you want it to be simply assigned or roll out with a different order.
Good luck.
Mario
Mark and Alan,
Re: “Sell in May and go away”
I am with Alan in that I do not subscribe to that theory. Alan’s answer was succinct and to the point, especially as relates to the BCI methodology.
“Sell in May and go away” originally had to do with bankers, investors and elites leaving London in the summer months to get away from the heat. Because November through April tend to be the strongest months for market returns this old saying has hung around. October is typically the worst month because of window dressing by mutual fund managers: selling losers they don’t expect to recover by years end so that their holding list looks “smarter”. If you want to trade this phenomenon then start buying best performers in September and sell them to the mutual fund managers in October because these are what they want to show how smart they are to own stocks that have performed well that year.
The average investor who doesn’t have the stomach for decision making, and therefore will not participate in BCI methodology, should invest in index funds and stay totally invested as there are usually only a few days of the year that the market really moves up and you don’t want to miss those. Some of those days occur because of economic, political or geopolitical events and no one knows when they will occur.
As I have said before, we are little fish in a big pond. To be successful as an active investor, in my humble opinion, one needs experience, research and a “feel” for the market. If one wants to be a conservative investor BCI offers the research and “feel” and can make the experience less painful.
In Real Estate the are three important factors: Location, Location, Location. In active investing there are also three factors: Discipline, Discipline, Discipline.:)
I have yet to master these three factors.
Hoyt
Hi Hoyt,
I agree with you. October seems to have become the “bad boy” in the last 10 years.
Btw, I feel more comfortable with my cash always invested and working for me, except during very special events, as Alan describes in his books and posts (Brexit, Elections, and so forth).
As for trading the “phenomenons”, I really do not have the expertise and or the stomatch for that.
Roni
Hey Roni and Hoyt,
Happy Sunday and a fine new trading week to all.
Well, I agree with the decision at the Derby but it was sad the complaint came from the riders. The Stewards did not get it right. Felt like my Saints all over again :)!
Thanks for the discussion of seasonal weakness. I find a reasonable way to dampen volatility without capping upside is own stocks and LEAPS uncovered with an equal amount in their index over written. That is only if bullish. If bearish over write everything! – Jay
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 05/03/19.
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:
http://www.youtube.com/user/BlueCollarInvestor
Since we are in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:
https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/
Best,
Barry and The Blue Collar Investor Team
I show here how the Alan’s BCI Elite Calculator can be used as
a simple calculator, percent calculator between two values, and
as a tool to calculate a positions percent return using the
Breakeven point and Gain method calculated at any point in a
trades history.
As a Simple Calculator:
** Enter the formula into the Option $ column. For example, if
the cost of a buyback trade is $0.50 and the Breakeven point is
$90, then the new Breakeven is $90+0.50. In the Option $
column, enter =90+0.50. The correct answer is in the same
cell.
As a Percent Calculator of 2 values:
** Enter the numerator in the Option $ column, Enter the
denominator in BOTH the Stock$ and Strike$ columns. For
example, if the Gain of a postion is $5 and the Return cost
basis is $100, enter 5 in Option $ and 100 in Stock$ and Strike
$. The correct answer is shown in the ROO column.
The Breakeven column should be ignored. It is only valid for
the initial covered call trade.
The attached image of the Elite calculator covers the Covered
call trade in last week’s 4/27/19 the Blog “Combining Covered
Call Writing and the Stock Repair Strategy”. It includes the
buyback, the ROO% after the buyback, and the ROO% after
the rise of the underlying just before the Repair Strategy trades
are opened.
Time1 – Initial Trade (7/23/18:
The price of the underlying is at 259.77
L1a shows the initial covered call trade and results of the
calculator. This is a normal initial trade entry.
L1b – confirms calculation of the Breakeven using the Option$
column.
L1c – confirms calculation of the current gain using the Option$
column
L1d – confirms calculation of the %ROO Return using the
Income received and Return Cost Basis of the stock (259.77),
which is equal to the the current price of an OTM covered call.
For an ITM covered call, you would calculate the time value as
the “gain” and use Strike of the call as as the Return Cost
Basis of the trade. Note the Stock$ and Strike$ columns are
set up to be the same values, which eliminates errors in the
results.
Time2 – Buyback (7/30/18):
The price of the underlying is at 242.32.
L2a – calculates the new Breakeven (254.64) by adding the cost
it to the breakeven before the buyback.
L2b – calculates the gain after the buyback using the new
breakeven. Notice it is a loss of -12.32.
L2c – calculates the current return of the position as -4.7%
when the position has a gain of -12.32. This is the return with
the price at 242.32. This differs from the second calculation
presented in the blog which is the return if the price of the
underlying returned to the original initial price.
L2d – This line in the calculator show how much the underlying
has dropped from the initial stock price at the time of the
buyback. The value is -6.7% This underlying loss usually
varies from 4% to 8%.
Time3 – 8/8/18 Underlying recovers to 253.83
Line 3a – Calculates the Gain
Line 3b – Calculates the ROO% position return of -0.3%.
Line 3c.
– Calculates the Underlying loss at this point, -5.94.
Line 3d – Calculates the %Loss for the underlying, -2.3%
At this point the Stock Repair Strategy begins in the blog.
Mario
Isn’t it true that any analyst is a mean analyst if they downgrade stocks that you own?
Joanna,
Very good… always room for a little levity particularly when there is a temporary glitch in market performance.
Alan
Joanna,
You are officially a market Pro! That now makes you a Market pundit!
Hoyt
Joanna,
lol, ha ha ha, can’t stop laughing……
Roni
Trading Experiences … 5/6 XBI again,,
Hit a double for 3rd straight month yesterday 5/6/19 at 3:35 pm with XBI at 87.81 after a buyback on 5/1/19. Total Return is now 7.2% for 100 shares purchased on 4/17/19.
5/6 – Day Range for XBI was 84.02 to 87.87. I had changed the order recently to bring up to date the Time Decay of the option.
Here is the trade history. (==Price after commission)
*4/17/19 Buy 100 @ 84.88 == 84.9295 Breakeven BEP = 84.9295 Return Cost Basis (RCB) = 84.9295
* Buy / Wait for XBI to recover to a higher price after a market gap down.
* 4/23/19 Overwrite STO 1Cn 88Ca Exp 5/17 @2.24 == 2.1835 BEP 82.746 Underlying (U) = 87.32
* 5/1/19 32% Rule buy-back BTC 1Cn 88Ca Exp 5/17 @0.65 == 0.6999 U= 84.48
* 5/6/19 Hit Double STO 1Cn 88Ca Exp 5/17 @1.80 == 1.7435 BEP = 81.703 U=87.81
Total Return is now 7.20% (87.81-81.703)/84.9295).
Since this is the first day of the 3rd week for this cycle, I have placed open order for the 10% rule on 2 accounts I have the same trade as follows:
BTC 1Cn 88Ca Exp 5/17 @0.17. Good till cancelled. Will Cancel this order on Friday if not filled. so I can finish the cycle as is.
Mario
Mario,
you are the champ 🙂
Roni
Hi BCI members
I would like to hear from you what is your opinion about the USA-Chine trade tension.
How and if it is impacting on your trades, for instance if you are trading defensively (buying some put or some inverse etf) or you are selling puts to gain higher premiums.
i m thinking about a bull put on MSFT or INTC
thanks
Federico
Federico,
today was a very scary day.
I have 9 positions, all with monthly CC expiry 05/17.
6 positions are still ITM.
My worst case is FIVE, which is losing 1.3% now.
Also ADSK is losing 1%.
And PANW is losing 0.5%
My personal pull the plug loss limit is 2% for any specific position.
Some times, when I am not watching closely I end up losing a bit more., but my finger is always on the trigger.
Roni
Roni,
So you don’t hold the position to buyback levels, when typical loss of the underlying is 4-8% at that point? How has that worked out? – Mario
Mario,
It is working very well.
After the loss is realized, I try to place the freed-up cash immediately in a new and hopefully better trade.
But I am still using the 20/10 guideline when the trade is still within my 2% loss limit, which happens usually only with OTM trades with very favorable premiums received at the inicial buy/write ocasion.
Roni
Yesterday, I sold 3 CSPs….MSFT, AXP, and HSY. (I love these companies!) In the next few days, I plan on selling one on DIS and a few others each time the market slams down. Talk about getting your fave companies for cheap-o!
Joanna,
In my opinion, you should never love any specific stock.
Our objective is to make money. Any stock is just an underlying for your trade. A soldier working for you, as Alan always says.
But you can love the game. Nothing wrong with that.
Roni
Next “Ask Alan” video tomorrow:
Profit-Taking Versus Rolling Options”
Hi Alan,
A quick question. I bought a stock for $5 and sold a 750 strike call if on expiration it’s at 7:51 will I be automatically called away and if it’s at 7 80 before expiration will It get called early. How far over the strike price for early assignment?
Thank you Vincent
Vincent,
The standard threshold is one penny or $7.51 in this case. Some brokerages may specify to the Option Clearing Corporation a slightly different threshold but most use $0.01.
Early exercise is extremely rare so, if exercise does occur, it will be the day after contract expiration when the strike expires in-the-money.
In those rare occasions when we see early exercise, it is generally associated with a dividend distribution (ex-dividend date).
Alan