Portfolio overwriting is a covered call writing-like strategy seeking to both generate cash flow and retain the underlying shares. Share retention may be motivated by our bullish long-term assessment of the security and/or concern for negative capital gain tax consequences, if exercised and shares are sold.
Strategy implementation
- Sell weekly (other expirations can be used) deep out-of-the-money (OTM) call options with a goal of initial annualized returns between 10% and 20%
- Since deep OTM call strikes are used, there will be significant upside potential to our trades
- Select the strike based on implied volatility, resulting in an approximate 84% probability of the strike not expiring in-the-money (ITM), or with intrinsic-value and subject to exercise
- After entering the trade, set 10% buy-to-close, good until cancelled (BTC/GTC) limit orders for rolling-down or “hitting a double” opportunities
Real-life example with Chipotle Mexican Grill, Inc. (NYSE: CMG)– Post 50-for-1 stock split
- 7/8/2024: CMG trading at $62.77: 500 shares owned
- 7/8/2024: Turn to the BCI Expected Price Movement Calculator to determine the upper end of the 5-day trading range, with an approximate 84% probability of accuracy
- 7/8/2024: Sell-to-open 5 covered calls at the bid or negotiated price
- 7/8/2024: Set 10% BTC/GTC limit orders on the 5 contracts
- The at-the-money (ATM) implied volatility is 26%
BCI Expected Price Movement Calculator
Based on the spreadsheet calculations, an OTM strike of $65.00 is selected for this 5-day trade.
CMG option-chain on 7/8/2024
The $65.00 OTM weekly strike shows a bid price of $0.20. Let’s use the BCI Trade Management Calculator (TMC) to generate our initial weekly returns.
CMG: Initial trade calculations with the TMC
- Note that I used an expiration date of 7/14/2024 (red arrow), not the actual 7/12/2024. I did this because, with weekly options, we do not trade on weekends and making it a 7-day trade, rather than a 5-day trade, will more accurately generate our annualized returns
- The 7-day initial time-value return is 0.32%, 16.61% annualized (brown cells), aligning with our goal of 10% – 20% annualized
- There is an additional 3.55% of upside potential (purple cell), if share price accelerates from current market value up to or beyond the OTM $65.00 strike
- For the 5 contracts, $100.00 cash is generated into our broker account (pink cell). This translates to > $5,000.00 per year
- After the trade is executed, a BTC/GTC limit order is placed at $0.02 (10% of $0.20)
Discussion
Portfolio overwriting securities we want to retain for the long-term can be accomplished by utilizing implied volatility and the BCI Expected Price Movement Calculator. This will result in an approximate 84% probability that the strike will not expire ITM. If it does, we can always roll the option to a later date.
Covered Call Writing: A Streamlined Approach
How to consistently beat the market using our CEO Strategy
Combining Exchange-Traded Funds with Stock Options
For more information, click here.
This book Is written for investors seeking a low-risk approach to generating cash flow in a user-friendly and time efficient manner. It utilizes covered call writing and then tailors the strategy to achieve the following goals:
- Sell options to lower our cost-basis
- Generate weekly or monthly cash flow with reduced but still significant initial percent returns
- Reduce the database of underlying securities available from 8500 to 11
- Reduce the number of exit strategy considerations from 14 to 4
- Beat the market on a consistent basis
- Reduce portfolio volatility
This book provides a roadmap as how to accomplish these objectives. The “how”, the “why” and the “when” is addressed for every aspect of each trade. Chapters 9 through 20, show every trade the author executed for each monthly contract in 2022. Screenshots taken from the Scwab.com platform are archived in each chapter.
Here’s what you will not find in this book:
- A stock called “XYZ”
- Hypothetical trades
- Computer generated trades
- Unrealistic promises
- Only winning trades
Join us in this 1-year journey using our CEO Strategy, a streamlined approach to covered call writing.
For more information, click here.
Premium Membership Price Increase Notification: No Rate Increase for Current Members
On September 1, 2024, BCI will be raising membership rates for new members only. This will not apply to current members. It has been 3 years since we had a rate increase. In that period, we have added dozens of training videos, additional downloads and resources and more quality data to our stock and ETF reports. We are fortunate to have such a robust and expanding membership and strive to provide the best high-quality information and tools at the lowest industry prices.
This price increase will not apply to current active members as you are grandfathered into the current rate for life or as long as your membership remains active. This is our loyalty pledge to you.
The increase for new members will go into effect on September 1, 2024, as follows:
Monthly: $19.95 for the first (trial) month and $69.00 each 30-days thereafter (currently $57.95).
Annual: $778.95 for the first 13 months (includes a reduced first month and a free last month) and then $828.00 every 13 months thereafter (includes 1 free month). Currently $657.40 and $695.40.
All new members who subscribe between now and 8/31/2024 will be grandfathered into the current rate and will see no price increase on 9/1/2021.
Thanks to all our loyal members for your support over the past 17 years and for putting BCI on the financial map.
Click here for member benefits video.
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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:
Barry,
Love dealing with you guys. Quality educational material, great service.
Hugs,
Charlie
Upcoming events
1. Investment Masters Symposium (live, in person event)
August 1, 2024
Presentation #1: 8:45 AM – 10:45 AM (2hour option class)
Presentation #2: 5:45 PM – 6:30 PM (All Stars of Options panel discussion)
Paris Hotel, Las Vegas
Covered Call Writing & Selling Cash-Secured Puts to Generate Consistent Cash Flow
Basic & advanced principles for trading low-risk stock options with capital preservation in mind
This presentation will detail stock selection, option selection and position management, the 3 required skills to become elite covered call writers and put sellers. It will also include ultra-conservative approaches to these strategies using Delta and implied volatility to create statistically beneficial trades. Rules and guidelines will be discussed to take the emotions out of our trades resulting in high-probability positive outcomes.
Detailed analysis will be provided regarding how to craft our trades to the current market environment, personal risk-tolerance and strategy return goals.
A multi-tiered option-selling strategy which combines both covered call writing and selling cash-secured puts will also be examined. It is known as the PCP (put-call-put) or “wheel strategy.”
Attendees will be introduced to a one-of-a-kind trade management tool, the Trade Management Calculator, which is used to enter, manage and generate final realized and unrealized trade results.
The course is structured to benefit both beginner and advanced option traders, using real-life examples to enhance the learning process.
Presentation #2: All Stars of Option Trading Event
2. Mad Hedge Investor Summit
September 10, 2024
11 AM ET – 12 PM ET
Zoom webinar.
Tuesday September 10, 2024
11 AM ET – 12 PM ET
How to Generate Greater than Maximum Covered Call Writing Returns Using Exit Strategies
Incorporating the mid-contract unwind (MCU) exit strategy into a 12-day trade
More information & registration link to follow.
3. Stock Traders Expo- live event in Orlando Florida
October 17 -20
Details to follow.
4. American Association of Individual Investors/ Los Angeles Chapter
November 9, 2024
12 PM ET – 1:30 PM ET
Private webinar for members of this AAII investment club
5. Long Island Stock Investor Group Part I
Zoom
February 13, 2025
7:30 – 9:00 ET
Details to follow.
6. Long Island Stock Investor group Part II
March 13, 2025
7:30 – 9:00 ET
Details to follow.
Hello Alan,
I am a premium member of BCI and have purchased and renewed the CEO Total Package.
Great Webinar on Thursday. it brought a lot of things together for me in understanding.
I am still in the early learning stages so humbly and respectfully would like to ask this question:
The show or fill rule in your TMUS Limit Order example –
as originally presented Bid – Ask $ 2.91 – $ 6.10
place STO limit order at $ 4.00 (to negotiate the Bid)
added profit $ 109. ( $ 2.91- $ 4.00 = $ 1.09 @ 1 contract)
if rejected why isn’t the new he new spread $ 4.00 – $ 6.10 the example shows $ 2.91 – $ 4.00
Again Thank You
Steven
Steven,
Let’s look at this from 2 perspectives:
1. The original $2.91 represents the price at which there is currently a buyer at that price. If we want to sell that option, we know the order can be executed at $2.91. The $6.10 represents the price at which there is currently a seller of that option, so we know we can buy the option at $6.10. When we enter a STO limit order at $4.00, we are now that seller at $4.00. Much to the chagrin of the market-maker, the spread has to be changed to $2.91 – $4.00.
2. If the bid-ask spread was changed to $4.00 – $6.10, then our order would have been executed at $4.00.
Good question … this is a bit tricky but negotiating with the market-maker (leveraging the “Show or Fill Rule”) is a valuable tool in a retail investor’s arsenal.
One final point: Many brokerages will automatically assist with these “negotiations”, but to be certain, I always use the process I detailed in the webinar.
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 07/19/24.
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,
If we are selling cash secured puts, do we need to worry about ex dividend dates because we don’t own the shares?
As always, thanks.
Gary
Gary,
Ex-dividend dates are of most concern when we are writing covered calls against securities we do not want to sell. Ex-dates are the main reason for early exercise of our covered calls.
If it is critical to avoid sale of our shares (perhaps for tax reasons), we simply avoid ex-dates.
For cash-secured puts, ex-dates are not quite as significant, since we do not own the shares.
However, there is 1 minor factor we should understand. On the ex-date, share value will decline by the future dividend amount. There is a myriad of other factors that will impact share price that day, but a reduction by the dividend amount is one of them.
From this perspective, we may opt to sell a slightly deeper OTM put to compensate for this share depreciation. This is a minor consideration for puts.
One final note: Early exercise of our covered calls is extremely rare, even with the ex-date.
Alan
Alan,
Do you still avoid earning reports when selling cash secured puts even though we don’t own the stocks?
Thank you.
Elliot
Elliot,
Yes.
Some option traders are enticed by the higher premiums that may exist due to the earnings release, but we must be aware of the potential risk.
If we sell a cash-secured put with an expiration date after the ER date, a disappointing report can cause share price decline well below the put strike, resulting in a potential significant trade loss.
Avoid ERs!
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
NOT A PREMIUM MEMBER? Check out this link:
https://www.thebluecollarinvestor.com/membership.shtml
Alan and the BCI team