When NVIDIA Corp. (Nasdaq: NVDA) split 10-for-1 in June 2024, more retail investors had the opportunity to leverage this stock to sell options. Many already owned NVDA, but now owned 10x the number of shares at 1/10 the price. Writing covered calls against this security created an opportunity for a cash flow on a superior-performing stock (at that point in time). This article will analyze one way to write covered calls using NVDA and implied volatility to both generate income and create a high probability of avoiding exercise of the options and subsequent sale of the shares. This approach to covered call writing is known as portfolio overwriting.
What is portfolio overwriting?
This is a covered call writing-like strategy where deep out-of-the-money (OTM) calls are written to both generate cash-flow and create a low probability of exercise.
What is implied volatility (IV)?
IV is a forecast of the underlying stock’s volatility as implied by the option’s price in the marketplace. Implied volatility stats are based on annualized price movement and 1 standard deviation (expected to fall into the price movement range approximately 68% of the time). To make IV specific to the contract we are considering, we must use a conversion formula to calculate the expected trading range. The BCI Expected Price Movement Calculator will accomplish this for us, using an at-the-money (ATM) IV for the contract in consideration. The conversion formula is inherent in the spreadsheet. Of the remaining 32%, 16% is expected to fall under and 16% above the range. Our concern when portfolio overwriting is the high end. If share price moves above the deep OTM call strike, our shares are subject to exercise (sale).
Determining the ATM IV for NVDA ($124.42) for the 7/26/2024 expiration
The near-the-money $124.00 shows an IV of 51%.
Calculating the expected trading range with an emphasis on the high end to avoid exercise
We will check an option-chain for the deep OTM $142.00 strike which will give us an (approximately) 84% probability of not falling outside the projected range.
NVDA deep OTM option-chain
The $142.00 deep OTM strike shows a bid price of $2.56. Let’s calculate using the BCI Trade Management Calculator (TMC).
NVDA initial calculations
- Yellow cell: The BE price is $121.86
- Brown cells: The initial 30-day return is 2.06%, 25.03% annualized
- Purple cell: There is an upside potential opportunity of 14.13%
Discussion
When seeking to generate cash-flow while, at the same time, looking to avoid exercise, using IV and the BCI Expected Price Movement Calculator can create 84% probability-of -success trades. Even if share price does move beyond the deep OTM call strike selected, we can always buy back or roll that option prior to expiration.
The Poor Man’s Covered Call Online Video Course with Downloadable Workbook
Covered call writing is a cash-generating strategy that lowers our cost basis thereby improving our opportunities for successful investments. It involves a long stock position (we buy the stock) and a short option position (we sell the call option). The PMCC strategy replaces the long stock positions with long call positions, typically deep in-the-money long-term expiration options known as LEAPS. Because long options cost less than stocks, we are investing less money and the return on our capital increases. As with all strategies, there are pros and cons that must be mastered to determine if this is a proper strategy for our personal risk-tolerance and return goals. This program will highlight in great detail:
- PMCC definition
- Pros and Cons
- Risk/reward profile
- Best stocks and ETFs to consider
- How to construct a PMCC trade
- Hypothetical example
- Multiple real-life examples
- The BCI PMCC Calculator
- Option Greeks
- Position management
- Rolling LEAPS
Alan’s recent interview at Quasar market Live:
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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:
Upcoming events
1. BCI-only Webinar
1/16/2025
8 PM ET – 9:30 PM ET
The Collar Strategy: Covered Call Writing with Protective Puts
Protecting covered call trades from catastrophic share loss
This is the strategy Bernie Madoff pretended to use. He called it the split strike conversion strategy, but it was simply a collar. The covered call sets a ceiling on the trade and the protective put guarantees a floor on the trade.
Topics discussed
- What is the collar strategy?
- Uses for the collar
- Entering a collar trade
- Option basics for calls
- Option basics for puts
- Real-life example with NVDA
- What is an option-chain?
- Real-life example using the BCI Trade Management Calculator (TMC)
- Strategy pros & cons
- Educational products & discount coupon
- Q&A
2. Long Island Stock Investor Group Part I
Zoom
February 13, 2025
7:30 – 9:00 ET
Private investment club
Covered Call Writing Dividend Stocks
3. Las Vegas Money Show
February 17 – 18, 2025
- Ultra Low-Risk Approaches to Covered Call Writing and Selling Cash-Secured Puts
- Covered Call Writing Technology Stocks
4. Long Island Stock Investor Group Part II
March 13, 2025
7:30 – 9:00 ET
Private investment club
Cash-Secured Puts: 2 Outcomes
5. MoneyShow Masters Symposium Miami 2025
Thursday May 15, 2025
Details to follow.
Alan,
At the start of your recent webinar, you said that covered call writing is less risky than buying stock. Can you explain the reasoning behind this?
Thanks a lot for your time.
Keith
Keith,
When we write covered calls or cash-secured puts, we are lowering our cost-basis or breakeven price points.
For example, if we buy a stock for $50.00 and sell the $55.00 call for $2.00, our breakeven price is $48.00. Without the covered call, it is $50.00.
Now, we are capping the upside, and that is why we must be proficient at strike selection based on overall market assessment, personal risk-tolerance and chart technical parameters.
Lowering our cost basis by selling stock options puts us in a position to potentially beat the market on a consistent basis and many years substantially.
Add to this our exit strategy arsenal and we are in a position to become elite, successful investors.
Below is a screenshot of the slide you alluded to.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
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 12/13/24.
Be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:
https://www.youtube.com/user/BlueCollarInvestor
Reminder: Premium Member’s pricing is locked into your current rate and you will never see a rate increase as long as the membership remains active.
Barry and The Blue Collar Investor Team
Alan,
I sell mainly weekly options.
I am a bit concerned about the Fed announcement on Wednesday if there is no rate cut.
Should i just skip this week?
Thanks for any advice.
Sid
Sid,
I can’t give specific financial advice in this venue, but I’m happy to share how I manage Fed announcements.
Since there is a minimum of 8 Fed announcements per calendar year, avoiding them would have a major negative impact on our annualized returns. I don’t avoid them.
However, if there is a specific report that I feel may impact the market negatively in a significant way, I will opt for defensive approaches to my option trades.
For example, I may sell a deep OTM cash-secured put to enter a covered call trade (PCP or “wheel” strategy).
We can also sell ITM covered calls and take advantage of the intrinsic-value components to lower the breakeven price points.
For those who are more concerned over these Fed announcements than I am, taking the week off should be a consideration.
Alan
Hello Alan.
Reviewing the article on NVDA overwriting I did some calculations and it appears to me that if I just use deltas between .16 and .22 I get approximately the same results.
Although I like the price movement calculator, I wonder what the advantage over just using delta?
Thanks
Bob
Bob,
Both Delta and IV are reliable tools we can use to determine the approximate probability of expiring in-the-money (with intrinsic-value) and selecting an appropriate strike price. I will frequently use one to confirm the other.
A few years ago, I did a comparative study of > 100 stocks to see if there was a difference between strikes determined by 16% Deltas and IV conversions. The strikes were similar, but not always precisely the same.
Using the BCI Expected Price Movement Calculator, we also get a low end of the range which we can use when writing deep out-of-the-money cash-secured puts or deep in-the-money covered calls. This can actually also be accomplished by using high Deltas (84%, as an example).
Let’s keep both in our management toolbox.
Alan
New Blue Chip Report for the January 2025 contracts:
Premium members,
The Blue Chip (Dow 30) Report for the best-performing Dow 30 stocks has been uploaded to your member site.
Look on the right side of the member page (“Resources/downloads”) and scroll down to “B”.
Alan & the BCI team
Today’s market:
Today, the Fed cut interest rates 25 basis points as expected. However, it signaled only 2 rate cuts in 2025, a disappointment to the market. It appears that Wednesday’s market decline was an overreaction to the Fed statement and press conference and, hopefully, we’ll see a recovery leading into the end of the year. As uncomfortable as a day like today is, there is no reason to panic when analyzing the overall market health.
Alan
Premium members:
This week’s 4-page report of top-performing ETFs, along with our sample trade of the week, has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.
We have also included a sample trade taken from one of our BCI watchlists.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
For your convenience, here is the link to login to the premium site:
https://www.thebluecollarinvestor.com/member/login.php
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Alan and the BCI team