Portfolio overwriting is a covered call writing alternative strategy. Our goals include increasing our returns by a modest amount while still retaining ownership of the shares. Deep out-of-the-money strikes are sold with specific annualized returns in mind, let’s say 6% for purposes of this article.

Apple Computer is a widely held stock by many of our members who look to leverage these securities to generate additional income. In January 2020, AAPL had been on a bullish tear with share price rising exponentially:

 

AAPL: 1-Year Chart as of 1/22/2020

 

Portfolio overwriting trade entered 12/24/2019 (1-month return)

  • Buy AAPL at $284.27
  • Sell $315.00 1/24/2020 call at $1.75
  • Goal is an annualized 6% or 0.5% per month return

 

Covered call Writing Calculations with The Ellman Calculator


A 0.6% 1-month time-value return approximates our 0.5% goal with a huge 10.8% upside potential (130% annualized). Selling deep out-of-the-money calls similar to this $315.00 strike will normally have Deltas of <.15, meaning less than a 15% chance of expiring in-the-money. However, as we can see from the chart above, AAPL out-paced even this strike and was trading at $318.60 on expiration Friday (1/24/2020).

 

Trade status 3 PM ET on expiration Friday (1/24/2020)

With AAPL trading at $318.30, the cost-to-close the $315.00 call was $3.50, double the amount we generated from the initial option sale. If we buy-to-close the short call, are we losing money? Heck no!

 

Final trade overview

We maximized our trade as it was initially established with a 0.6% time-value option profit + a 10.8% upside potential for a total 1-month profit of 11.4%. That’s not losing money. Now, if we close, of the $3.50 we pay, $3.30 is intrinsic-value driving the value of our AAPL shares from the $315.00 contract obligation to current market value of $318.30. The actual time-value cost-to-close is $0.20 or 0.06%. We can now write another deep OTM call with a target 0.5% 1-month initial time-value return. On Thursday, AAPL had a favorable earnings release. A critical BCI rule is never to have an option in place that expires after an earnings report. This matter can be circumvented by using Weekly options the month of the report. Avoid the week of the report and then return to Monthlys. If our annualized goal is 6%, our weekly target would be approximately .1%. If AAPL is trading at $400.00, our weekly time-value return goal would be about $0.40. 

 

Discussion

Portfolio overwriting is a covered call writing alternative strategy geared to increasing returns on long-term buy-and hold stocks. Deep out-of-the-money strikes are used with a set target annualized return in mind. Should a strike end up in-the-money as expiration approaches, we can buy-to-close with a miniscule time-value debit.

 

For more information on Portfolio Overwriting

BCI Book

BCI Portfolio Overwriting Calculator

 

Free webinar

I have cancelled all my in-person presentations through the end of the year due to the coronavirus crisis. To keep in touch with our members, we have decided to provide our BCI community with a free webinar in August. Feel free to send in topic ideas and suggestions. Send to: [email protected]

 

FREE WEBINAR JUST ADDED Thursday August 13th

 

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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 share some of these testimonials in our blog articles. We will never use a last name unless given permission:

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Upcoming event

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Covered Call Writing with 4 Practical Applications

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Market tone data is now located on page 1 of our premium member stock reports and page 8 of our mid-week ETF reports.

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