The PCP Strategy, called the “wheel strategy” outside the BCI community, involves selling cash-secured puts and covered calls. One of the ultra low-risk strategies developed by the BCI team involves selling weekly cash-secured puts with Deltas of 10 (-0.10) or less with an annualized return goal range of 10% to 20%. This article will highlight the role of Delta for both the put and call aspects of the trades using ETSY and taken directly from one of my portfolios.
Initial put sale trade on 1/11/2021 for the 1-week 1/15/2021 expiration
- $165.00 strike: Delta = -0.09
- Minimum bid premium: $0.38
- Cash required: $165.00 – $0.38 = $164.62 per-share
- ROO: $0.38/$164.62 = 0.28% per week
- Annualized return = 14.7%
- 91% probability of success (approximate)
Price acceleration during weekly contract
ETSY Price Chart on 1/12/2021
This substantial price increase due to positive news allowed me to roll-up 2 times in the same contract week, first to the $187.50 strike and then to the $205.00 strike. In both cases, I re-sold put options with Deltas under 10. This resulted in an annualized return of 25%.
What happened on Friday?
Profit-taking caused the share price to decline to $204.50 and I decided to “allow” assignment and purchase the shares at $205.00. To continue the PCP strategy along with the ultra low-risk Delta strategy,
What happened the following week?
When ETSY was trading at $213.59, I sold a deep in-the-money 1-week $195.00 covered call for $19.10 with a Delta of 92 (0.92), resulting in a 92% probability of shares being sold at the new strike while still generating a 13.6% annualized return. If the shares are, in fact, sold, the cash will be freed up to secure another ultra low-risk cash-secured put.
Discussion
An ultra low-risk option-selling PCP strategy can be developed by using deep out-of-the-money cash-secured put options with Deltas under 10 and deep in-the-money call options with Deltas above 90.
For more information on the PCP Strategy
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:
Hey Alan,
I read your book, Cashing in on Covered Calls, and loved it. I am reading Exit Strategies now. I have navigated through your website and watched a large portion of your videos. I have had 5 or 6 successful covered call trades. I am starting slow.
Thank you for your help. You are awesome!
Take care,
Marcus
Upcoming events
1. Wealth365 Investor Summit
July 12th at 5 PM ET
Covered Call Writing with Invesco QQQ Trust (Nasdaq: QQQ)
Multiple Applications
Weekly and monthly cash flow can be generated by selling call options against shares of large-cap technology companies. QQQ is an exchange-traded fund consisting of 100 of the largest non-financial companies listed on the Nasdaq exchange and frequently an outstanding security for option-selling.
This presentation will include the basics of covered call writing, spreadsheet calculations and the rationale for entering these trades in various market conditions.
This webinar will also detail how to implement the covered call writing strategy with QQQ in 3 types of market environments:
- Normal-to-bull markets
- Bear or volatile markets
- Low interest-rate environments
VOLQ (30-day implied volatility of the Nasdaq 100 index (NDX) will be introduced and applied with real-life detailed examples.
2. Money Show Virtual Expo
July 15th
2 PM – 4PM
2-hour Money Masters Course (paid event to The Money Show)
4 Practical Applications to Selling Cash-Secured Puts
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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
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Hello Alan,
Can you speak a little detail on PMCC Common Sense Check?
1. What’s the Volume expected for the Call Options?
2. What about Leaps Option? What will about the Leap Option
3. What about CSP? Any expectation on the Volume?
4. What other Common Sense Check do you recommend?
Thanks
Regards
Dennis
Dennis,
The securities we choose for the PMCC strategy, by definition, have LEAPS associated with them. This means that they are liquid as are their associated options, in most cases. Three examples I used in our book, “Covered Call Writing Alternative Strategies” are XLK, MRK and INTC reflect such securities.
The near-the-money short calls will have greater liquidity than the deep ITM LEAPS. Since we are undertaking a long-term obligation in most cases, the open interest on the LEAPS side is less significant. The keys to determining appropriate strikes are the initial returns meeting our initial time-value return goal range and adhering to the initial trade structuring formula:
[(Difference between the 2 strikes) + initial short call premium] > Cost of LEAPS
Other common-sense principles include avoiding earnings reports using Weeklys when available, diversification and cash allocation per-position.
For selling CSPs or even traditional covered call writing, the BCI guidelines for option liquidity is 100 contracts or more of open-interest and/or a bid-ask spread of $0.30 or less.
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 07/09/21.
Also, 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:
http://www.youtube.com/user/BlueCollarInvestor
On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.
Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan,
I thought I knew all about covered call writing until I read your book the Complete Encyclopedia for Covered Calls. I learned so much. Now I’m reading your book on cash secured puts. My question is do you you screen for puts the same way you screen for covered calls? Any difference at all?
Thanks for all the information you provide to us retail investors.
Joyce
Hi Joyce,
We use the exact same process for screening for CSPs as we do for Covered Calls. As a matter of fact, you can use our screening results for other strategies such as:
– PCP (the “Wheel”)
– Collars
– Bull Put Spreads
– PMCC (Poor Man’s Covered Call)
If you use the stocks that failed or were removed from the list, you can use:
– Bear Call Spreads
– Iron Condors
Best,
Barry
Hi Alan,
I have already taken up too much of your time! If you are too busy, feel free to ignore this email.
I am trying to learn as much as I can from a trade. Here are the details:
7-6-2021 Buy 100 RVLV @ $73.04
7-6-2021 Sell July 16 $70 call @ 3.90
The stock declines 4.3% that day and closes at $69.90. The next day the stock declines another 5.8% to $65.87. This is 9.8% from the buy price. The 10% guideline has not been met. The next day, 7-8-2021, RVLV opens at $63.16, 13.5% below the buy price. After reading your email about the 20%/10% Guideline, I decided to roll down even thought the 10% guideline has still not been met. I did not see any news about RVLV causing the decline.
7-8-2021 BTC @ .50
7-8-2021 Sell 1 July 16 $66 call @ 1.35
RVLV went up the next day and is now at $70.91.
My questions are:
What are your thoughts on my actions? Could I make any improvements?
If you decide to roll down, how do you select the roll down strike price?
RVLV is not on this week’s list. Does that mean I should take assignment rather than try to recuperate some of the loss (if assigned I will lose $230.55 total) by using an exit strategy?
Thanks so much!
Hope you are having a great week!
Best regards,
William
William,
Let’s break this down.
If your shares are sold at $66.00, there will be a loss of $704.00 on the stock side and a gain of $475.00 on the option side for a net loss of $229.00.
The initial trade setup was a 10-day trade with a time-value return of 1.23%, 44.8% annualized which implies the market anticipation of some volatility. Your setup was fine as you protected against volatility by using an ITM call strike… nice going.
There was an aberration aspect to this trade as there was significant price movement in both directions with no apparent news to explain these events. The fact that the 10% guideline was not reached but perhaps close indicates that rolling-down to an OTM strike is also appropriate… nice going again. Strike selection when rolling-down should be based on both generating additional time-value profit and yet still allowing for share price recovery. You did that.
Today, with the stock trading at $70.91 we probably are thinking that we wish that $66.00 call wasn’t in place… I know. However, given the volatility of this security and the unknown etiology of that price movement, the current status is protected by $4.91.
The final outcome is yet to be determined we always appear brilliant when looking back at a trade and projecting what we should have done (I stopped doing that years ago). The truth of the matter is that we can make the right move today based on current information and it will look like the wrong move tomorrow.
You managed this trade properly. The key takeaway is that not all our trades will be winning ones. For both winning and losing trades, we should take advantage of exit strategy opportunities when they arise.
Alan
Alan,
Great synopsis.
Your reply should be printed out by everyone and posted where it can be seen and read at anytime when things are not going as they were planned.
The goal is to be mechanical at what we do. The odds are in our favor if we just keep the mechanics.
Looking back is ok to see if we made a mistake by not following our mechanics. But looking back to second guess ourselves because we now have new information is a fool’s errand.
Hindsight is, or ought to be, 20/20 vision.
Stay the course with the BCI mechanics and the probabilities will pay off in the long run.
Keep up the good work.
Let me repeat the first paragraph.
Your reply should be printed out by everyone and posted where it can be seen and read at anytime when things are not going as they were planned.
Hoyt
Hoyt,
I agree 100%
Roni
Roni,
Thanks.
Hoyt
Hoyt and Roni,
Much appreciated… Alan
Dear Allan
Hope you are well. I was reading some of your articles in your Blog. I was thinking of this idea, which I would like to check your thoughts if it is possible for you. The goal is capital preservation with volatile stocks with IV between 35%-45% (no more than 45%).
1. Start with a deep ITM CC of an elite stock which has been in the BCI reports for several weeks (more than 5 weeks and with constant good fundamentals) but it is volatile with IV of 35%-45%. I will have a lower return (probably 0.5%) in exchange for the reduction of the cost basis.
2. At the end of the contract period, assuming that the stock goes up, I will roll out and up. I may select the ATM or OTM (in bull market) strike to collect more ROO for the second month. I will need to fund the cost to buy back the call to roll out (sustancial amount and maybe the downside of the idea) but I will catch up the appreciation of the stock.
3. The third month and subsequent ones, I may select OTM considering that I have reduced the cost basis.
4. I will sell the stock based on the exit strategies when it is needed, such as roll down or convert dead money etc.
I was also thinking of applying the above with blue ships of the BCI report even though blue chips are not as volatile as grown stocks. The first month start with deep ITM CC and then, implement portfolio overwriting favoring OTM CC with ROO of 6%-8%. Again, the downside is thatI will need to fund the cost to buy back the call to roll out.
Best regards,
Alex from Mexico
Alex,
You have some good ideas (selling deep ITM calls for high IV stocks) in your strategy but let me present some thoughts that may improve the approach:
1. Strike selection should be based on overall market assessment, chart technicals and personal risk-tolerance rather than the month we enter a trade. It allows us to be aggressive or defensive multiple months in a row, when appropriate.
2. We should avoid earnings reports.
3. Another (Selling ITM calls a great approach too) way to enter a covered call trade defensively is to start by selling an OTM cash-secured put. In our BCI methodology, we refer to this as the PCP (put-call-put) strategy.
Alan
Hi Alan,
I don’t get when it is ok to enter a CC.
When I look at your list of candidates, most are already kind of extended. So, I get nervous to enter.
Can you direct me to some visuals of charts examples of technical entries?
Please and Tu,
Rob
Rob,
Below is a screenshot on how BCI sets up technical charts. Feel free to use your own favorite parameters, if desired.
Here are links to 2 of the dozens of articles I have published on technical analysis. There are also robust sections on technical analysis in my books and online video programs:
https://www.thebluecollarinvestor.com/how-to-use-technical-analysis-and-market-assessment-for-strike-selection-guidance/
https://www.thebluecollarinvestor.com/technical-analysis-indicators-for-long-and-short-term-portfolios-webinar-registration/
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Alan
Good morning
Quick ? if a stock has a special dividend (SHEN) of 18.75 will the option strike price that you bought (august)
be reduced by that amount on ex dividend day
Thanks,
Greg
Greg,
Yes, this is generally how the OCC adjusts the contracts. Here is a link to an article I previously published on this topic:
https://www.thebluecollarinvestor.com/special-1-time-cash-dividends-and-strike-prices-of-american-depository-receipts-adrs/
Alan
Alan,
Your webinar yesterday on QQQs was really very, very good.
I have a non-related question.
As you know, I am totally focused on monthly CC trades and have followed the BCI methodology almost religiously.
Last week 4 of my buyback orders were filled at 10%, and it is too late to roll down for mitigation; All 4 have ERs in the next 3 weeks, and no weeklies available. This is a recurring situation.
My question is: Would you sell the stocks immediately?
Roni
Roni,
Check to see if you can sell an ITM strike that will afford additional downside protection with a bit of time-premium. If not, selling between now and Monday depends on market movement. We had a slightly down today today so perhaps a rebound day tomorrow?
No right or wrong here.
Alan
Thank you, Alan.
I will check for ITM strikes for some more mitigation and protection and will watch out for a better price to sell two of the stocks that have earnings scheduled for late July.
The total losses are not terrible, and I believe this cycle will end with a nice profit.
I asked this question because it bugs me each time when it happens before ERs are due.
Good night – Roni
Premium members:
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The mid-week market tone is located on page 1 of the report.
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Alan and the BCI team
Hi Alan,
Enjoyed your Wealth365 presentation yesterday immensely! Thank you for sharing your expertise! I have been pretty successful with your method in general and selling options on the Qs in particular, and this webinar deepened my skills.
2 questions related to above:
What do you think of the deep in the money short option method using VOLQ in the context of the Poor Mans Covered Call, ie long a 90 delta QQQ LEAPS instead of QQQ stock?
Lastly, isnt the risk reward profile of the deep in the money short option using VOLQ very similar to an out of the money cash secured put when you use similar time value goals?
thanks
Clyde
Clyde,
The BCI guideline for the long LEAPS position is for a Delta > 75, so 90 is even better as long as the initial trade-structuring formula is adhered to and initial time-value return aligns with our goals.
Certainly, selling deep OTM puts gives us substantial protection to the downside. This is why we favor OTM puts when we favor put-selling over covered call writing or using the PCP (put-call-put) strategy. In this case, we base our strike selection on our initial time-value return goal range.
In the case of VOLQ covered call writing, we are seeking to achieve 2 goals:
1. Our initial covered call time-value return goal range
2. Decreasing the breakeven price point to the low end of the anticipated trading range based on VOLQ.
To use put-selling and associate VOLQ, we can establish that low-end of the range and sell a cash-secured put strike at that low-end price point. Once again, the time-value must align with our strategy goals.
You are correct… lots of flexibility with VOLQ.
Alan
And we are ok using deep ITM short call with poor mans covered call approach instead of slightly OTM short call as is usually taught?
Thanks so much for your awesome program.
Clyde,
Certainly ITM strikes are available and will work. However, we generally use OTM calls to allow for share appreciation and, therefore, widening the spread between the 2 strikes. Also, the PMCC is considered a long-term strategy so OTM strikes are less likely going to need exit strategy manipulation.
ITM strikes will work best when the market is declining and they end up OTM by expiration… pros and cons but generally we favor OTM short calls.
Alan
You are such a great teacher. I understand the answer completely and it makes sense to me!
Thanks so much.
Clyde
i listened to the presentation Alan gave on the summit365 site yesterday and Alan talked of a different strategy using QQQ and the sq root of 365 Divided by # of days to expiration to evaluate the trade.
Sounds like a conservative strategy i might be interested in using but would like further info if available. If this is available on the website i can’t find it but maybe more insight is else where on your site. please tell me more or let me know where i can find more info,
Thank you,
Rick
Rick,
Keep an eye out for an upcoming BCI-only webinar where I plan to cover this and other BCI-developed strategies. In the interim, here are links to articles I published on the BCI site and on the Nasdaq.com site on this topic:
https://www.thebluecollarinvestor.com/using-the-nasdaq-100-volatility-index-volq-in-covered-call-writing-decisions-a-real-life-example-with-invesco-qqq-trust-nasdaq-qqq/
https://www.nasdaq.com/articles/using-the-nasdaq-100-volatility-index-volq-in-covered-call-writing-decisions-2020-10-26
Alan
Alan,
I saw your presentation at the Wealth365 Summit Monday Let me first say you packed a lot of information in to a short presentation. Thank you!
I had a question about your Scenario III – Low Interest Rate environment.
What are your exit strategies? Since you are selling a deep ITM strike, assuming it’s still in the money on expiration Friday are you just allowing the option to be assigned and then repurchase the underlying ETF again next month?
Thanks,
Frank
Frank,
On expiration Friday, if the option is still in-the-money (likely), we have 2 choices:
1. Check VOLQ to determine an appropriate strike for the new contract month and then determine if rolling the option meets our initial time-value return goal range. If yes, roll. I like this approach especially when expiration Friday is a “down day” in the market.
2. Allow assignment and start over again on Monday. I will take this approach if expiration Friday is an especially strong day for the market.
Both approaches are perfectly fine and will work in the long-run.
Alan
Premium members,
The Blue Chip (Dow 30) Report for the August 2021 contracts has been uploaded to your member site. Look in the “resources/downloads” section on the right side of the member site.
Alan & the BCI team
Upcoming event
BCI-Only Webinar: Free Webinar Covered Call Writing and Selling Cash-Secured Puts
Covered Call Writing and Selling Cash-Secured Puts: 2 New Strategies Developed by BCI
The VOLQ-covered call strategy and Weekly 10-Delta Put-Selling strategy
August 19, 2021 (Thursday)
8 PM – 9:30 PM ET
A link will be posted on the BCI site and emailed to all those on our mailing list as the event approaches
No pre-registration needed
Our platform allows the first 500 attendees to access the webinar