I am a big believer in setting yourself up for success. This is accomplished through education, motivation, commitment and organization. Investors reading this article and others are definitely seeking education, and are motivated and committed. However, without organization the process will become difficult and perhaps unmanageable. As we create a watchlist of the greatest performing stocks in the greatest performing industries and then buy certain equities and sell their associated options, it becomes essential to set up organized lists of accurate information. Enter portfolio management.
Definition: The art and science of making decisions about investment mix and rules, as we coordinate investments to our goals, asset allocation and balancing risk versus returns. The lists required include:
- Stocks on our watchlist
- Stocks selected and purchased for our portfolio that month
- Options sold in a given contract cycle
- Spreadsheet of options sold showing profits (losses)
Having these organized lists will allow us to do the following in a time efficient and accurate manner:
- Select the most appropriate covered call candidates
- Prepare for potential exit strategy executions
- Monitor our stock and option positions
Watchlist of the greatest performing stocks and stocks selected and purchased:
The figure below demonstrates an organized list of stocks and their current prices, both highlighted in yellow. You can also enter the original transaction price if these were also the actual list of stocks purchased for a particular contract cycle.
Watch List of Stocks
Watchlist of the options sold in a particular contract cycle:
Watch List of Options Sold
The option symbols and current market values are highlighted in yellow. Transaction prices can also be included. When option values drop, we may want to initiate an exit strategy to generate additional income or reduce losses.
Spreadsheet of options sold with profits (losses):
Monthly Returns
The spreadsheet of options sold with profits (losses) show the following:
A- Stock ticker
B- Purchase price of stock (includes intrinsic value of option)
C- Option ticker (original or previous format shown in this example))
D- # contracts sold
E- Premium per contract minus intrinsic value of option
F- Strike price of option sold
G- Breakeven (stop loss price to some)
H- Profit generated by original option sale
I- B-T-C cost for exit strategies
The Premium Report:
Premium members of the Blue Collar Investor Corp receive a report each week where my team screens stocks looking for the best 1-month covered call write candidates. Stocks are screened both fundamentally and technically and a watchlist, called the running list, is generated. This will reduce the time and effort required although all final decisions and management of positions is still essential. The figure below will show you the first page of the screening process. The “Weekly Stock Screen” portion of the report faithfully follows the Blue Collar Investor stock selection process. Note the thick blue area towards the top categorizes the screens discussed in my books and DVDs:
Premium Report- Stock Screen
The end of the report generates your watchlist of the greatest performing stocks in the greatest performing industries. We call it the running list because it is constantly being re-screened and updated to provide the most recent information. The figure below is one such running list:
Premium Report- Running List
You will note that additional information such as earnings report dates, industry segment analysis and beta are also included on this list.
Conclusion:
Having organized lists of stocks, options and a spreadsheet of options sold, will allow us to become both time efficient and increase our opportunities of achieving the very highest of returns. We are setting ourselves up for success. These lists will facilitate stock selection, prepare us for potential exit strategy opportunities and help us track our returns.
Market tone:
The economic reports this past week were predominantly negative which explains the market volatility and decline. The trade deficit in June widened by $8B as the Fed admitted that the pace of economic recovery has slowed in the past few months. There is concern of deflation which is the simultaneous decrease in prices and rise in unemployment. This has rattled the market. On a mildly positive note, consumer spending rose slightly in July mainly due to auto and gas sales. The real silver lining has been the large percentage of companies that reported positive earnings surprises.
Summary:
IBD: Uptrend under pressure.
BCI: Cautiously bullish. Fully invested selling mainly I-T-M strikes. I received dozens of emails asking why I-T-M strikes. It is this market volatility that guides me in that direction. I constructed a chart explaining IBDs position (my view of it anyway) and an interesting volume trend:
6-Month Chart of the S&P 500
Note the following:
- The red arrow shows the uptrend that IBD is referencing and the ensuing pressue this past week
- The blue arrows show the recent market declines
- The green ovals show a declining level of volume with each succeeding downturn
- Decline #1 lasted longer than decline #2. Will the current downturn be the shortest of the three?
Thank you:
Thanks to all those in the NY area who attended my seminar this past Thursday and for the gratifying feedback you took the time to send to me. Thanks also to Barry Bergman for his outstanding presentation on the Premium Report.
My best to all,
Alan ([email protected])
Alan,
On the spreadsheet of options sold, jdas options were sold twice. Was this an example of hitting a double (same strike)?
Thanks,
Amy
Amy,
The answer to your question is yes. Column I heading is “BTC loss” (Bought To Close) and the second trade says “resold” in column I.
I find the page a bit misleading. As a CPA I am not inclined to count my “profits” until the option period expires, or the option position is closed, but that’s just my perspective. Robert Kiyosaki claims your home is not an asset (because it does not make you money, it costs you money). Toe-may-toe, toe-mah-toe.
Amy, sorry, but my answer above was a bit incomplete. It really isn’t an example of “hitting a double” because the first postion was sold at a loss and the second generated the larger option permium.
A true “double” is where you sell a covered call, the stock drops, you close the call, the stock bounces back up enough for you to sell another call with the same month’s expiration. Basically, you make a profit on both trades. In this case the profit is larger by taking the loss on the first trade and reselling the same call at a higher price.
Alan obviously had faith in the stock. Many of you should just take the original $266 and wait it out, because you can second guess yourself all month and turn a nice profit into a loss very easily.
Amy,
“Hitting a double” is a phrase I coined. It is not found in other covered call literature. As Owen accurately states this is NOT an accounting term. It is a Blue Collar common sense term. In my books and DVDs it is defined as creating a second income stream in the SAME contract cycle with the SAME underlying security and the SAME strike price. I use this strategy in the early part of the contract cycle and usually in a bullish market environment. If I buy back my option premium @ 20% or less than the original option sale, I may wait to see if the stock bounces back before rolling down or selling the stock. In essence, it opens the door to possibly generating additional income. In this case it did. It created an additonal income of $383 ($480 – $97). The original option sale generated an initial profit of $266. Had I not bought back the options, I would not have been in a position to resell them at this substantial profit.
Alan
The Weekly Stock Screen And Watch List for the week ending 08/13/10 has been uploaded to the premium site.
Barry
VRX:
Check out the price chart of this stock. Note specifically how the 20-d ema has been serving as reliable support for the price. Although the confirming indicators have broken down as a result of last week’s volatility, the price is still above this moving average. Because the share value has become so predictable, option premium is decent but not outstanding. We will be adding this stock to our premium watch list at its next publication.
Alan
just a reminder, this Friday, August 21 is expiration Friday for the August options. You should be planning your wish list for next Monday. Why not this Friday? Well, first, some companies, and some government agencies, love to announce bad news Friday afternoon between 4:00 PM and 5:00 PM. Second, i like the weekend to go over the Barrons newspaper and the Wall Street journal to see if there is any bad news on my wish list. Barron’s prints a very hand “reference” list. If a company is mentioned in the issue the page reference is listed in the table.
Looking forward to another profitable month. Happy trading, everyone.
The chart for AKAM looked just like VRX until the last earnings report when it took a dive. It has since worked its way back up and may be a good stock to look at.
Good luck.
Dennis
In response to Owen’s post on planning for a wish list on Monday-the 1st day of a new option cycle, I would point out that in my experience the prices of the options are lower than they will be on Tues. The majority of the market participants are buyers/sellers of options on Monday, and the price tends to be lower than on Tues or Weds.
This is not to discourage someone from selling options on Monday if the returns meet their criteria, but it is to help people avoid feeling like they have missed out if they have not sold options against their poritions on Monday.
Sorry for the fat fingers– “poritions” should read “positions”
Great commentary by Owen, Dennis and Brian. Dennis is not the only one following AKAM. It is highlighted on this week’s watchlist and has significant open interest on calls ranging in price from $38 to $50. You will note that the option returns are quite high indicating that the market is anticipating substantial price movement. Much of that volatility is historical as reflected in the beta of 1.39 which means that it moves almost 40% more than the overall market (in either direction).
Alan
Rolling out and up:
Here is an off-site email question I received that I thought I’d share with you as we approach expiration Friday:
Hi Alan!
I have been following your strategy since early in the New Year. I am a BCI member and have been actively trading covered calls since May. The results thus far have been very impressive and I hope it has not been just fluke on my part. Thanks so much for having the vision and taking the time to put together such a wonderful program.
I have one question. What is the advantage of purchasing back a call and rolling out and up compared to just allowing the call to be exercised and then buying back the same stock the following Monday and selling a call for the next month at the same strike price I would have rolled up to?
My response:
1- The time value of the option premium generated from next months strike is offset by the small amount of time value you are paying to close your near-term option. In other words, if you are paying $0.10 in time value to close your current position, it will be paid for with a similar amount of time value in next months strike. You will generally get $0.10 more selling the next strike on Friday rather than Monday or Tuesday. Also, the intrinsic value of the option premium is offset because you would pay that much more to buy the stock the following week. If the stock is @ $52 and you sold the $50 strike, the cost to B-T-C could be $2.10. If you allow assignment, you could lose $0.10 in time value the following week and pay $2 more for the stock.
2- One less commission to pay: When rolling you close one option position and open a new one. If you allow assignment, you pay to sell the stock, buy the stock, and then sell the option.
3- If the “deal” is there, take it. Numbers can change over the weekend.
Thanks for your generous remarks.
Best regards,
Alan
AIXG
For the last 12 months this stock has been finding support at the $25 range…
When its close to support and showing some bullish signs its worth considering…
An ATM call would give us a solid 5% for the month…
Anyway, gotta run… My little girl just woke up…
Dave
Alan:
Ref your wonderfully enlightening #12 – do you believe this rationale also applies to simply rolling out, as opposed to out & up?
And do you believe this rationale to be factual no matter what day this week one does the BTC?
Wonderful site!! Many thanx.
Don B
Don,
Yes this applies to rolling out as well as out and up. It also applies to the days leading up to expiration Friday although I prefer to wait as close to Friday as possible to ensure that I DO in fact want to utilize this stock for next months portfolio. If I am going out of town for a long weekend, it is not unusual for me to roll my positions on Wednesday or Thursday.
Alan
Reminder, when rolling out (buying the current month to close and selling the next month to open) be sure to check if next month is an earnings report month.
Also, for those of you with a little less trading experience, and/or a little less confidence, you might consider rescreening the stock to make sure it still meets the BCI “Best Of The Best” test. (Hey Alan, trademark possiblity there?)
MED
This stock has great fundementals at the moment…
Its also close to a fairly solid support level which sits at about $28…
In addition the last trading day suggested that the stock is at support. Of course there are not any garauntees, just the odds in our favour…
If we sold an ITM CALL at strike of $28 we can make a nice 5.5% for the month…
If we purchased the stock now at $28.43 and sold the 28 CALL, our breakeven (cost basis) would be at $26.33…
This looks like a potentially awesome trade!
Dave
AAP:
A stock on our premium watch list recently hit a multi-year high after its 4th consecutive positive ER on August 12th. The Board of Directors also allocated an additional $300M to its share buy-back program. Despite the runup in price this equity trades at a reasonable 14x forward earnings compared to an industry average of 16x.
Alan
I am a fairly new premium member and I have really enjoyed the blog expertise. I read one of Alan’s past comments somewhere about the return on a premium being to good to be true. As a seasoned investor but new to covered calls, what is the alarm that should go off if a return on a premium is in the 6-7% range? Specifically in regard to MED, Dave D #17 post.
Bill
Crazy after hours price altering…
Now at 4.00 when the trading closed for the day, I watched the price of BCSI go from 18.95 all the way down to 17.00… It bounced between these 2 figures around 20 times (all in after hours trading) before settling on 18.00…
Now this is just crazy! The whole days trading which was mildly bullish turned completly on its head AFTER the final bell went…
Thats like a fighter knocking an opponent out after the bell has rang. Or a baseballer making hitting a homerun well after the crowds gone home.
Whats going on? Has the market gone mad? Have I gone mad? Someone please explain the legalities of such price movement in after hours trading…
Dave
Re: Bill #19
Bill, see jeff Arnold’s question #3 on the “holding-a-stock-through-an-earnings-report” thread, and Alan’s and my responses. Jeff asked about an option quote he saw that looked too good to be true, and it was. Sometimes somebody’s computer will retain a “ghost” quote that is not real. It sometimes doesn’t update until a trade goes through.
In the case of VVUS they had a drug turned down by the FDA and the stock tanked. Since all of the activity took place after hours, the options prices were confused in the morning. It looked like you could sell a $10 call for a decent price. The truth was the call was $0.05 and nothing was trading.
It’s not so much that an alarm should go off, as much as you need to be sure of the information you are using. It’s easy to calculate a 6% return. If I sell a $22.50 call for $1.00, on a $21 stock, I am anticipating the stock will get called. If it does, I will make $2.50 ($1.50 upside and $1 premium) on a $21 investment. That’s 11.9% for the month. However, if the option should be $0.10, instead of $1, and the stock will probably not rise because the FDA just shot them down, then my return is calculated on unreal, or unrealistic, numbers.
Bill, Owen (#s 19 and 21),
One more word about initial option returns. A return of 6-7% for 1-month is high but not ridiculous. It tells us that either the historical volatility of the stock (its performance compared to the market) is high or the implied volatility of the option (what the market is anticipating at this point in time) is high or both. High option returns come with the risk of volatile price movement in the equity. In bullish markets these type of stocks can generate huge and consistent returns for us. In volatile and mildly bearish markets we can get hurt. A lot also depends on your particular risk tolerance. Conservative investors will avoid these stocks or sell I-T-M strikes for extra protection. Once a return exceeds 8%, it is beyond my comfort level. Checking the chart technicals and assessing the market tone along with evaluating your risk tolerance will dictate the type of returns you should be seeking.
Alan
Dave (#20),
BCSI reported earnings after the bell. It was a good report but didn’t meet all market expectations. The same thing happened 3 months ago at the last report. As you know, ERs can be your best friend or your worst enemy.
After hours trading does not necessarily represent what will transpire tomorrow. For example, yesterday NTAP reported after hours and was down $2 per share in after hours trading. Today it finished up 3.5% in an awful market day. Trading after hours is on extremely light volume and shouldn’t be taken too seriously. The problem here is that on first glance it appears that the report disappointed.
Alan
Rolling Out:
A few weeks ago I wrote an article where I highlighted RVBD a stock I “hit a double”, held through its ER and then sold a higher strike ($35) after the ER. Today I will use an expiration Friday exit strategy and roll out to the next month $35 call. Here’s the “deal”:
Current price = $35.35
buy-to-close the current short call = $0.50
sell-to-open next month’s $35 call = $1.85
net initial 1-month profit = $135/$3500 = 3.9%
All stocks trading above the strike prices on or near expiration Friday should be evaluated for possible rolling strategies. Here is a link to that article:
http://www.thebluecollarinvestor.com/blog/holding-a-stock-through-an-earnings-report/
Alan
Dennis’ AKAM suggestion (#8 above) seems like it might be a good idea. The stock is up $2.43 at 11:40 today. It has gotten caught up in the takeover speculation after Intel’s announcement of buying McAfee. I would consider the possibility that the speculation will subside and maybe sell an in the money call.
Now, for those of you who are still a bit fearful of selling covered calls, here is one trade I recently put on for my conservative pool of money.
On August 2 I bought 100 DuPont (DD) for $41.65. I sold the Jan 2011 $45 call for $1.31. If it gets called away I will make $466 ($131 premium + $335 upside) on a $4,165 investment, 11.2% for 5.5 months. Not 3% for one month, but in some years 11.2% for the whole year would be a nice return. Oh, and I get a $41 dividend in November.
Now, what happens if it doesn’t clear $45? I don’t care. I like DuPont. I buy DuPont products. So do you (I’ll send everyone a thank you note). The premium itself gives me a 3.1% return for 5.5 months and the $0.41 quarterly dividend gives me an annual yield of 3.93%.
Today the Jan $42 call will give you a 10% return and the Jan $40 call will give you a 7.6% return if the stock is called. You will also get a $41 dividend in November.
Just a thought, in case AKAM, BCSI, DECK, BIDU and such, make you a little too nervous.
Happy trading everyone.
Re Owen’s #25 above – I am unsure of how the statements relate to BCSI. Yep, it sure is making me nervous – as I have owned it -underwater -for awhile.
Sure would appreciate your elaborating on it. Thanx.
Don B
Don, some of the newer people to our little world of covered call writing are scared. BCSI was just one of the symbols of, shall we say, less than household name stocks. Some of the newer people are certainly familiar with DuPont, but probably not Akamai or Blue Coat Systems.
Alan has said that he doesn’t care what the company does. If it passes the screens and can make him some money on CC writing it’s in. Some people are still very nervous about getting into this. I figured that my DuPont trade example would sort of be the shallow end of the pool for them. They can wade in before they jump into the deep end.
I’m not even sure if any of the stocks I referred to above pass all of the screens. They were just examples for the newbies. I know BCSI took another slide this morning after last nights less than stellar news.
By the way, I did not run DD through the screens we use. It’s just a stock I like, with a dividend I like, with option premiums I like.
What are the factors that determine the value of our option premiums and how can we use this information to maximize our cash profits? Check out my next journal article to be published later this weekend.
Alan
PREMIUM MEMBERS:
This week’s list of top-performing ETFs has been uploaded to your premium site. There are several new candidates. These securities have been up in price between 10-17% over the past 3 months while the S&P 500 has been down by 2%. Look in the resource/download section for Top-Performing ETFs dated 8-19-10.
Alan
Alan, Could you review how you do your end of month/contract period accounting on the spreadsheet where we track our profit. In particular since I am selling ITM calls and are having losses on the stock equity losses. Maybe Owen in his spare time could create another tab for the calculator which works so great to do this for us. Thanks to both of you for the great work.
Mark,
This tab has already been developed and is part of the Elite Calculator, specifically in the Schedulae D.
The Schedule D calculation is a good schedule of results. If the call expires, your gain is shown. If you buy the call back, your gain, or loss, is shown. If the stock gets called away the total gain, or loss, on the transaction is shown in one transaction.
Here is a link to an article that explains the expanded version of the Ellman Calculator:
http://www.thebluecollarinvestor.com/blog/the-elite-calculator/
Scroll down to the section relating to the Schedule D.
Premium members can get a FREE copy of the Elite Calculator in the “download/resource” section of the premium site. It is also available for purchase in the Blue Collar store:
http://www.thebluecollarinvestor.com/store.shtml
Alan