beginners corner

Over-Trading Our Option Positions: Good for Brokers, Not Good For Us

Exit strategies for covered call writing are essential for achieving the highest levels of success. In the BCI methodology, we have a series of guidelines that assist us in determining which position management techniques should be instituted and when we should consider them. Not taking appropriate action when responses to changes in our stock and option positions are required will significantly impact our final returns. But so too will over-reacting and executing more position management trades than necessary. In today’s article, I will highlight a real-life classic example of over-trading shared with me by a premium member. Let’s call him Alan (I like the name).


Alan’s trades:

  • 7/11/2016: Buy AAPL at $96.67
  • 7/11/2016: Sell the 8/12/16 $102.00 call for $0.76 (slightly less than a 1%, 1-month return with plenty of upside)
  • 7/28/2016: AAPL is trading above $104 and Alan is concerned about early exercise
  • 7/28/2016: Buy-to-close the $102.00 call for $2.49
  • 7/28/2016: Roll out and up to the 9/16/2016 $105 call to generate $2.08
  • 8/3/2016: AAPL was trading above $105.00  and an ex-dividend date due on 8/6/2016
  • 8/3/2016: Alan is again concerned about early exercise
  • 8/3/2016: Buy-to-close the $105.00 call for $2.73
  • 8/3/2016: Roll out-and-up to the 10/21/2016 $110.00 call for $1.93
  • 8/3/2016: Total trading commissions to date = $18.38


What’s going on here?

Alan’s goal is to generate cash flow by selling out-of-the-money call options but his main priority is not to have shares sold. Defensive trade executions occurred when the strike moved in-the-money and when there was an ex-dividend date approaching. These trades have resulted in a net debit on the option side and an extension of the option obligation two months out from the last trade.


What is the profit and loss to date?

These trades have not resulted in a financial disaster by any means. On the option side, there is a net debit of $45.00 per contract. On the stock side, there is an unrealized credit of $833.00 ($105.00 – $96.67) per contract. After deducting commissions, there is a 3-month unrealized profit of 8%, 32% annualized.


Exploring the details to better manage these trades

This series of trades was initiated on 7/21/2016, five days prior to an earnings report which was responsible for the “surprise” bump in price as shown in  the screenshot below:

exit strategies for covered call writing

AAPL Price Bump after Earnings Release


Alan’s ex-dividend date is valid but not a huge concern since the expiration date of the current option at the time (9/16/2016) was not close to the ex-date (8/4/2016). Early exercise in these scenarios are super-rare.

Concern for early exercise every time a strike dips in-the-money is also not a major concern until we closely approach 4 PM ET on expiration Friday. This is because the option holder generates intrinsic value only and leaves the time value component of the option premium “on the table”. Stated differently, the option holder would make more money selling the option prior to expiration.


How can we better manage trades like these?

We can break the answers into three categories:

Avoid earnings reports

Buy the stock after the report or if we want to own the stock long-term, write the call after the report passes. This will allow us to benefit from a positive report and then an out-of-the-money call more appropriate for the post-report market price.

Avoid ex-dividend dates

Write the call the day after the ex-date or write a 2-month call moving expiration much further away from the ex-date.

Master rolling strategies

We must have a firm understanding when and why early exercise may occur. It is extremely rare. Rolling is mainly for in-the-money strikes near expiration Friday and certainly not every time a strike moves in-the-money.



I’ve certainly done my share of over-trading. I’ve never viewed these micro-management exercises as mistakes but rather as learning experiences that made me a better trader. The good news for Alan is that he has learned valuable lessons while still making a profit. I’ll bet that next time, Alan’s profits will be even higher than they are now.


For more information on exit strategies for covered call writing

Complete Encyclopedia for Covered Call Writing- Classic version: Pages 245 – 302

Complete Encyclopedia for Covered Call Writing- Volume 2: Pages 243 – 272



Top 100 Stock Blogs and Websites for Stock Traders

The BCI team is proud and humbled to announce that The Blue Collar Investor was recently selected by Feedspot as one of the top 100 stock blogs on the internet.




Upcoming live events

1- January 26, 2017


Blue Hour webinar #4

“The Poor Man’s Covered Call”

A flow chart summarizing the entire strategy is currently available in the “resources/downloads” section of the member site (scroll down to “P”). I suggest you download the chart and use it as reference when viewing the webinar.

Free to premium members

We will analyze the use of LEAPS options instead of buying stocks to enter a covered call trade at a much lower capital outlay

This is a must-see presentation

General members register here

Premium members login to the member site and register here:


2- February 27, 2017

Stock Trader’s Expo

Marriott Marquis Hotel, NYC

1:30 PM ET

Exhibit Hall Booth 208 (February 26th – 28th) … come say hi to the BCI team

3- March 21st and 22nd, 2017

Two live Florida events (Fort Lauderdale and Delray Beach)

More information to follow

4- Just added

April 12, 2017

Income Generation Webinar for The Options Industry Council



Market tone   

Global stocks extended gains this week as US corporations started the 4th quarter earning season with positive results. West Texas Intermediate crude dropped to $53 a barrel from $53.90 a week ago. The Chicago Board Options Exchange Volatility Index (VIX) was steady at 11.28. This week’s reports and international news of importance:

  • US retail sales rose 0.6% in December, but were flat when excluding automobile and gasoline sales
  • Exports from China fell for a second year amid continued weakness in global trade. The possibility of disagreements with the United States over trade does not brighten the outlook for
  • The National Federation of Independent Businesses termed the jump in its small business optimism indicator “stratospheric” as the number of business owners who expect better business conditions jumped 38 points. The index rose to 105.8, its highest level since 2004
  • The World Bank expects global growth to expand at a 2.7% rate in 2017, up from 2.3% in 2016, a post-crisis low
  • President-elect Donald Trump held a press conference this week but did not lay out a clear framework for the tax cuts and regulatory reforms he campaigned on. Markets are growing concerned that stimulus could come later than expected or be smaller in size than first envisioned. Trump did say that the Affordable Care Act would be repealed and replaced “essentially simultaneously.” The president-elect said that he would place his business interests in a trust and transfer control of his company to his two adult sons
  • The German economy expanded 1.9% in 2016, the fastest pace in five years, up from 2015’s 1.7% pace
  • Bank of England governor Mark Carney said this week that Brexit is no longer the biggest single risk to financial stability in the United Kingdom




US financial markets are closed for Martin Luther King Jr.


Consumer price index

Core CPI

Industrial production

Home builder’s index

Beige book


Weekly jobless claims

Housing starts

Building permits

Philly Fed


Inauguration day

For the first week in 2017, the S&P 500 dipped by  by 0.10% for a year-to-date return of 1.60%. 


IBD: Market in confirmed uptrend

GMI: 5/6- Buy signal since market close of November 10, 2016

BCI: I am currently fully invested and have an equal number of in-the-money and out-of-the-money strikes. I remain cautious as we enter another earnings season.


The 6-month charts point to a moderately bullish outlook. In the past six months, the S&P 500 was up 6% while the VIX (11.28) declined by 15%.


Wishing you the best in investing,

Alan ([email protected]) 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.

22 Responses to “Over-Trading Our Option Positions: Good for Brokers, Not Good For Us”

  1. Jim January 14, 2017 8:07 am #


    My shares in ELNK have floundered for too long, I’d like to write a CC to recoup some of the decline seen.

    It looks as if I were to write an OTM CC now with a bid of $.05 on an $8 strike with only six days to expire, I would not have enough premium to even pay Scottrade’s commission and fee?

    I’d really like to make lemonade with such a position.

    Thanks for your input


    • Alan Ellman January 14, 2017 8:32 am #


      In the near-term you may have to settle for another drink of choice. With only 1 week remaining until expiration of the January contracts, there is no significant time value remaining in the premiums as you pointed out. ELNK is scheduled to report earnings on February 14th so if you adhere to the BCI earnings report rule, the February contracts cannot be considered. Furthermore, the current liquidity in the February contracts is inadequate. That moves us out to the March contracts and I don’t know if you want to remain loyal to this security for another 2 months.

      Keep in mind that it’s the cash, not the stock, that is important to us. So where is the cash currently invested in ELNK best placed? If you assessment is that it is best placed in another security then you can move on and sell the February calls for the replacement stock (as long as it meets system criteria). If you are bullish on this stock then writing calls for the March contracts after the earnings report passes should be considered.

      Lemonade isn’t the only drink in town!


  2. Barry B January 14, 2017 9:49 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 01/13/17.

    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 entering 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 BCI Team

  3. Barry B January 15, 2017 9:03 pm #

    Premium Subscribers,

    The Weekly Report has been updated and uploaded to the Premium Member site. Look for the report “Weekly Stock Screen And Watch List 01/13/17-RevA”. The changes were to “The Week Ahead” section and did not impact any stock screening outcome.



  4. Ian January 16, 2017 1:04 am #

    Happy New Year Alan,

    I continue to build my net worth and incorporate covered calls on at least some positions on a monthly basis.
    2015 income $2250
    2016 income $8600. I assure you the account size has not quadrupled, just the returns.
    Thank you as your mentorship for this Canuck has been instrumental.

    I have just finished reading you January 14, 2017 blog post on over trading. great information as usual.
    As you occasional correspondent from Canada, I noticed you recorded the transaction costs for 6 trades at just over $18.
    In Canada, at a discounted online broker it would have been just over $70(they all differ but not to a material amount).The second thing is there is a much smaller market of optionable securities and not as much liquidity.

    the last business day Jan 13. the highest volume option on the Montreal Exchange (Canada’s CBOE) was 917 contracts on Canadian National Railways. The 10th most active was 150 on Bombardier.

    It is a different world up here but using your principles, it can be very worthwhile.
    Just in case you are interested is a pretty good resource on option trading in the Canadian market and is run by the exchange.

    I was hoping to write about 8 contracts this month but the vast majority of companies have earnings reports in February. I will probably wait for those before sticking my head out of the trench.

    Best regards,

    Ian in Hamilton, ON

    • Alan Ellman January 16, 2017 4:25 am #


      “Alan” didn’t specify the broker he was using but some online discount brokers (like “Interactive Brokers”) charge extremely low trading commissions for accounts that meet certain criteria. Check our broker file by clicking the “free resources” link on the top black bar of this page.

      Also, check into trading on US exchanges where the liquidity and opportunities may better meet your needs. Many of the online discount brokers on that list allow international clients to trade on US exchanges.

      I wish you continued success.


  5. Martin January 16, 2017 2:53 am #


    Hope this finds you well, happy new year! Your thoughts on this please. I recently, by mistake, placed a stop sell order on a stock on which I had already sold a call. I think I bought the stock initially then sold the call a day or two after. Firstly I’m surprised that I was allowed to place the stop sell order at all.

    Now I’m thinking that if I am allowed to do so, this would be great as I could prevent any heavy losses, but if the stock price were to appreciate quickly again, I could buy back the stock in order to cover my naked call, I may even be able to buy back the stock a little cheaper than I had done initially. Would this be a better strategy than rolling down?

    Do you think this comes down to whether or not your broker allows you to hold naked calls? I’m with Interactive Brokers,


    • Alan Ellman January 16, 2017 4:52 am #


      No and no…in my humble opinion.

      The reason you were permitted to enter and execute stop loss orders on the stock can be explained as 2 possibilities:

      1- Someone at IA made a mistake.

      2- Most likely though, you have a higher level of trading approval (naked options) than would be permitted for most retail investors. This is usually determined by client request, historical sophistication and trading experience as well as portfolio and personal net worth.

      For most retail investors (not specifically you), this is not a good idea. If share price moves down to the limit threshold executing a stock sale and then moves significantly higher, we may have to meet our now naked option obligation by buying high and selling low.

      For most of us (retail investors), closing the short call should come first before considering selling the long stock position.

      Just a final word on naked options trading. There is nothing wrong with this if our goals are to achieve much higher returns in exchange for the higher risk of capital depreciation. As an analogy and this is a bit of an exaggeration, but if the investment risk range runs from Treasuries to lottery tickets, covered call writing is closer to Treasuries and naked options trading is closer to lottery tickets. One size doesn’t fit all.


  6. Scott January 16, 2017 9:45 am #


    I have a question about a somewhat-unique portfolio management question, which might even make for an interesting Ask Alan topic.

    I own a substantial stake in a stock which is over $100 share but for which my cost basis per share is in the single digits. Thus, any sale would come with a substantial tax bill.
    Given the size of my holdings, I’ve started selling covered calls against it in order to generate some income, and while doing so I’ve run into a challenge: how best to protect against the shares being assigned when the stock value rises? Let’s say the shares are at $100 and I sell a $105 call for $1. Over the course of the next couple of weeks, the shares rise to $106. Since I can’t afford to risk assignment, I’m forced to buy back the options at a loss. Yes, I can roll up and sell new call options which have a higher strike, but the sales proceeds of the first and now second option still add up to less than the cost to buy back the first option. I understand that there is an unrealized gain in the stock, but I can’t access that gain because I’m not planning to sell the stock any time soon, and it could in the coming weeks drop back down to $100.

    The only strategy I’ve come up with to combat this is to sell calls which are even farther out of the money, and accept the lower return as the price I pay for lower risk. Are there other strategies which are not too complex which I’m missing?


    • Alan Ellman January 16, 2017 10:53 am #


      I agree. Good topic for an Ask Alan video or blog article.

      There is no magical solution to this issue other than managing our options to give ourselves the best chance of achieving our return goals while avoiding exercise. There are no guarantees but we can sure minimize the possibility of assignment.

      “Specific assignment”

      We can buy additional shares of the stock and ask our broker to release the newly-acquired shares if exercise occurs…however, here we are not taking advantage of our existing portfolio holdings.

      The math

      Stock price = $100
      Sell $105 call for $1
      Share price is $106 at expiration
      Max profit we accept for this position is $1 + $5 = $6/$100 = 6% (if stock is $105 or greater)
      If stock price is $106 at expiration, the cost-to-close is $1 + minimal time value. Let’s say $0.10 + $1 = $1.10
      Once the short call is closed, the stock is worth $106 and we can sell an appropriate strike for that new cost basis. If we roll out, the new strike will generate $1 of intrinsic value + a time value component, say a total of $3. We can also roll out and up to allow for additional share appreciation in the next contract month. Use the “What Now” tab of the Ellman Calculator for calculations.

      To sum up: We can increase our position with higher cost basis securities or manage appropriately to dramatically reduce the possibility of exercise. Watch earnings dates and ex-dividend dates.


  7. Scott January 17, 2017 4:21 am #


    Implicit in your scenario of early exercise appears to be the idea that having one’s shares assigned is not much of a risk until close to expiration. However, I recently had shares of an ETF assigned two weeks prior to expiration, quite to my surprise, so I think I need to consider scenarios which don’t assume time value is near zero.

    With the above timing in mind, I’ve pulled actual numbers, using AAPL, by looking at the current options chains. Here’s how the scenario would play out:

    — Share price $119
    — Sell Feb. 10 $125 calls for $0.72
    — Over the course of two weeks, shares move up to $125
    — Call is now worth $1.36 (using Jan. 27 $119 call as a proxy), for a loss of $0.64 if I buy to close
    — Rolling out and up would mean realizing that loss, and selling the new calls for probably $0.70 again
    — This would mean I’m still in the black, but barely, as far as realized gains are concerned.

    Looking at the above, is it fair to say that I need to pull the trigger quickly on the buy-to-close, to avoid paying a lot of intrinsic value that I may never recover? If I let the shares rise to $126 instead of $125, buying the calls back would cost perhaps $1.93 (using Jan. 27 $118 call as a proxy) instead of $1.36.


    • Alan Ellman January 17, 2017 7:25 am #


      Let me know which ETF was exercised 2 weeks early. I’m curious why that occurred. It could always be an uninformed retail investor making a mistake and you ended up with the random assignment. Could be a dividend issue.

      BTC: For traditional covered call writing, selling shares is not an issue but in the case of portfolio overwriting where we want to retain shares, assignment is a risk. We are in 2 positions (long and short) and ideally we are looking to generate income from both positions. 99% of the time, assignment will occur after contract expiration although ex-dividend dates are the main exceptions and still rare at that. If a strike moves in-the-money our share value is capped at the strike. Any intrinsic value we pay to close the short call is made up for in the additional (unrealized) share appreciation up to the new strike or current market value whichever is less. So from a calculation perspective, it is the time value we are paying to close. The later we wait to close the short call for the near month, the less time value we pay while the later month time value will be impacted to a lesser extent because of the logarithmic nature of time value erosion (greater as expiration approaches). As price increases, you will pay more total premium but less and less time value.

      Also, AAPL is projected to report earnings on 1/31, so I would strongly ask you to consider avoiding this report before selling covered calls with a later date. You can use Weeklys that expire prior to 1/31 (very little premium) or wait for the report to pass and then make your move. Assignment risk is inherent in the strategy. We can dramatically reduce it but we can’t eliminate it.


      • Roni January 17, 2017 10:03 am #

        Hi Alan,

        Scott seems to be a very smart investor, and lucky too.
        This is a sweet problem.

        My question is :
        Is there a tactic for him to slowly replace his older shares by paying the taxes as he goes, and buying them back for $100.00 or less on market pullback days ?


        • Alan Ellman January 17, 2017 3:51 pm #


          Yes, certainly this is one choice if we are willing to incur minor tax consequences over time and increase our cost basis. Trading in sheltered accounts eliminates this concern but we can’t always trade in ideal circumstances. One minor benefit of exercise on long-held securities is that the option premiums will be incorporated into the stock sale and therefore be taxed as long-term capital gains.

          Whenever we pay capital gains tax it implies that we made some money. Frequently we can sell “losers” to mitigate the gains. I once heard a very smart CPA/investor say that he wishes one day he could pay $1 million in taxes…


          • Roni January 18, 2017 1:54 pm

            Thanks Alan,

            That’s great wish for next Christmas hohoho. 🙂

      • Scott January 17, 2017 3:34 pm #


        The ETF was QQQ which was assigned early.

        I agree with everything you’ve said, and no, I’m not planning to trade across AAPL’s earnings date. My struggle is that I’m not able to capture unrealized share appreciation because I’m not planning to sell the shares any time soon, and the share price could subsequently decline and erase the unrealized gains. Meanwhile, I’ve realized actual losses in the option trades.


  8. Steve January 17, 2017 5:12 am #


    I received the weekly report and it looks like the vast majority have earnings in this trading cycle

    Am I to assume that none of these should be traded?
    Also are premiums unusually low these days because what I read in your book and see on the various videos it seems that they tend to be higher. Or am I just not looking at the right ones?

    Thx for clarification
    looking forward to the upcoming webinar

    • Alan Ellman January 17, 2017 7:43 am #


      EARNINGS SEASON: Represents a challenge but nothing we can’t overcome. Check out this article I published last year:

      PREMIUMS: We are in a low volatility environment but we can still generate significant option returns particularly when we compare to other investment opportunities. Check out the screenshot below that shows 1-month returns for a few eligible candidates (not necessarily recommendations).

      WEBINAR: I’m looking forward to this event as well. I’ve put a lot of time into this presentation…lots of new information not out there right now.



      • Steve January 17, 2017 8:40 am #


        I read the article and that makes sense

        In the 3 examples that you showed the otm strikes are very near the money. in my head i guess it feels like its likely that the price would go through that strike . Should i fear getting assigned? seems counter intuitive i’m sure i have to develop a proper mindset!


        • Alan Ellman January 18, 2017 5:30 pm #


          Early assignment (mid-contract) is rare for many reasons but the main one is that the option holder will make more money selling the option. If the strike is in-the-money near expiration and we don’t want your shares sold, we look to rolling the option. Check out our information on ex-dividend dates as well regarding early assignment.


          • Barry B January 18, 2017 8:51 pm


            I was hit with lightening twice this options cycle with EDU. First, when I entered the trade, the ER date was outside of this option month…EDU subsequently announced earlier than originally expected. Then, I was exercised early. “Stuff” happens! However, I can’t really complain, my return was 4.8% for three weeks in the trade.



  9. Alan Ellman January 18, 2017 5:26 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.

    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

Leave a Reply

Optionally add an image (JPEG only)