beginners corner

Rolling Option Considerations: A Real-Life Example with BEAT

Exit Strategies for covered call writing is the third required skill for successful implementation of this strategy (stock selection and option selection are the first two). This is also known as position management. One of the most common situations we face each month is when the strike price we initially sold is expiring in-the-money (stock price is higher than the strike price) and we are considering retaining the underlying security. On August 15, 2017, Jesse contacted me and shared a trade that required analysis for a possible rolling execution. Since the email was 4 days prior to contract expiration, Jesse and I agreed that final management decisions would be reserved for Thursday or Friday of expiration week. However, we also felt that it would be instructive to do an analysis using current stats if expiration was upon us.

 

Jesse’s trade with Biotelemetry Inc. (NASDAQ: BEAT)

  • Buy 100 BEAT at $33.63
  • Sell August $34.00 call at $1.67
  • Current share price is $36.65
  • Cost-to-close the August $34.00 call = $3.10
  • Sell-to-open the September $34.00 call = $3.40 (rolling out)
  • Sell-to-open the September $37.00 call = $1.50 (rolling out-and-up)

These statistics were gleaned from the option chains displayed below slightly favoring the market-maker:

 

covered call writing exit strategies

BEAT Option Chains for August and September 2017

 

Calculations using the Ellman Calculator

Next we enter the option chain information into the “What Now” tab of the Ellman Calculator (blue cells on left side of spreadsheet) and the results will appear in the white cells on the right side as shown here:

BEAT_Rolling_Calc

 

The spreadsheet shows the following initial results:

  • Rolling out to the September $34.00 call results in a 0.88%, 11% annualized (yellow field) 1-month return with 7.20% downside protection of that profit
  • Rolling out-and-up to the September $37.00 call results in an initial return of 3.09% with a possible 4.12% final return if share value moves up to the $37.00 strike by expiration

 

Discussion

As expiration Friday approaches and our strikes are in-the-money, we are faced with 3 possible choices. We can allow assignment and sell our shares at the agreed upon strike price thereby maximizing our near-month covered call trade. The second path is to roll out to the forward month same strike, $34.00 in this case. The third path is to roll out-and-up to the forward month higher strike. Given the calculator results shown in this article, most covered call writers would opt for allowing assignment or rolling out-and-up as rolling out offers too low of a time value return.

 

For more information on position management techniques, check out the exit strategy chapters in both versions of The Complete Encyclopedia for Covered call Writing and our option-selling DVDs.

 

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  • Download PDF book
  • Download Q&A test book used at learning institutions
  • Lifetime access to a 12-part video series based on this best-selling book
  • Total price for entire program $59

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Upcoming speaking event

Orlando Money Show: February 8th –  11th, 2018

Click for information

Thursday, Feb 8, 2018
09:00 AM – 09:45 AM 
All Stars of Options
“How to Select the Best Options for Covered Call Writing in Bull and Bear Markets”

 

Friday, Feb 9, 2018
12:15 PM – 03:15 PM
Premium Master Classes (Paid event to Money Show)
“Basics of Options Trading Using Covered-Call Writing with Pro-Active workshop”

Friday, Feb 9, 2018 06:30 PM – 07:00 PM
Stage presentation
“Covered Call Writing with Dow 30 and S&P 500 Stocks”

 

Market tone

 This week’s economic news of importance:

  • Personal income Dec 0.4% (above expectations)
  • Consumer spending Dec 0.4% (below expectations)
  • Core inflation Dec 0.2% (expected)
  • Consumer confidence Jan 125.4 (above expectations)
  • ADP employment Jan 234,000
  • Pending home sales Dec 0.5%
  • FOMC announcement 1.25% – 1.5%
  • Weekly jobless claims 1/27 230,000 (below expectations)
  • Produtivity Q4 (-) 0.1% (below expectations)
  • ISM manufacturing index Jan 59.1 (above expectations)
  • Construction spending Dec 0.7% (above expectations)
  • Non-farm payrolls Jan 200,000 (above expectations)
  • Unemployment rate Jan 4.1%
  • Consumer sentiment Jan 95.7 (above expectations)
  • Factory orders Dec 1.7% (above expectations)

 

THE WEEK AHEAD

Mon Feb 5th

  • Markit services PMI Jan
  • ISM manufacturing Jan

Tue Feb 6th

  • Foreign trade deficit
  • Job openings

Wed Feb 7th

  • Consumer credit

Thu Feb 8th

  • Weekly jobless claims for week ending 1/27/18

Fri Feb 9th

  • Wholesale trade

 

For the week, the S&P 500 declined by 3.85% for a year-to-date return of 3.31%

Summary

IBD: Uptrend under pressure

GMI: 6/6- Buy signal since market close of August 31, 2017 (as of Friday afternoon)

BCI: The increase in market volatility is moving my new positions to a neutral bias, selling an equal number of in-the-money and out-of-the-money strikes. I view this as a short-term bump-in-the-road as our economy as well as the global economy remain strong.

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US

The 6-month charts point to a neutral-to-slightly bearish outlook. In the past six months, the S&P 500 was up 11% while the VIX (17.16) moved up by 70%.

Wishing you much success,

Alan and the BCI team

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

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46 Responses to “Rolling Option Considerations: A Real-Life Example with BEAT”

  1. Lee February 3, 2018 11:06 am #

    Most of my stocks hit the 20% rule and I bought back the options. Now what? I am underwater on the stocks. I could roll down but that’s locking in a loss. If I sell I lose money too.

    • Jay February 3, 2018 6:33 pm #

      Lee,

      If there is a silver lining to last week it is that you are better off than a non-covered call writer holding your exact same stocks! Over writing can be a speed bump in good times but helps when the train jumps the tracks :).

      In my view your decision now is no different than before you started selling options and were just owning stock. The sold option is never the problem, the stock is. If you think this is an isolated blip give your stocks a chance to bounce back then over write again.

      Similarly, on a further dip you can also sell some OTM cash secured puts on tickers you think have been unduly punished to get an even lower potential buy point or a nice income trade to leverage the now higher put premiums.

      There are always opportunities. We never quit seeking them :)! – Jay

      • spindr0 February 6, 2018 12:17 pm #

        Hi Jay,

        There’s an old expression in the market about covered calls: “Most of the time you eat like a bird and occasionally, you sh*t like an elephant.” Unfortunately, for many, the latter is what’s going on now.

        In recent months, I often recommended that people consider collaring their long positions to limit risk. Alan has several articles explaining this:

        https://www.thebluecollarinvestor.com/protective-puts-the-collar-strategy/

        People who have never known anything other than the bull market of the past 9 years tend to dismiss risk averse strategies. Old dogs like us who have seen 1987, 2000, etc. are less dismissive… or maybe more cautious.

        FWIW, I cashed out of a large, nicely appreciated variable annuity two weeks ago at the top because I decided that it was time to lock in the gains. I moved 1/2 of it it into a different one with a more risk defined spectrum (not a collar but in that vein).

        Good luck to all of you. I hope that the market rebounds so that you can be whole again while I partake in the volatility. Win-win?

        Spin

        • Jay February 6, 2018 4:19 pm #

          Thanks Spin and congrats on your recent smart moves!

          Do you have any insight into what is going on with SVXY and XIV?

          I only have 100 shares of SVXY and it has been a consistent winner for years but now appears to be wiped out for no apparent reason. Thanks, – Jay

          • spindr0 February 7, 2018 1:06 pm
            #

            Jay,

            When dabbling with volatility plays, I stick to earnings announcements for equities. I have no experience and minimal awareness of the VIX and related securities. About the only thing that I know is that with the VIX, you have long periods of boredom and short periods of sheer panic.

          • spindr0 February 11, 2018 8:39 pm
            #

            Jay,

            I don’t know if you’ll see this since everyone has moved onto the next week’s blog. As I said, I don’t follow VIX and SVXY but in looking at the collapse of SVXY in hindsight, this could have been a huge winner for someone long who was collaring it and using an ITM call as proxy for the underlying. Woulda, coulda, shoulda but it’s an example of how controlling risk can occasionally be a big winner.

            Spin

    • roni February 4, 2018 1:20 pm #

      Lee,

      I have the same problem, and worries.

      I agree with Jay, and hope the market will rebound next week, or at least before my tickers report earnings.

      If this correction continues, we will have to sell our stocks soon and swallow our losses before they turn much worse.

      We can sell NTM calls, as you say, to mitigate the losses, but I believe this would not help much, because there are only 2 weeks left in this month options cycle, and it would make our decision to sell much harder.

      The first loss is the best loss.

      Roni

      • Jay February 4, 2018 5:49 pm #

        Hey Roni,

        Thanks for the kind mention in your note to Lee. I am not jumping off any bridges yet since it is just one profit taking week. A rebound this week will not surprise me one bit.

        I will take my own advice and sell OTM CSP’s if the market keeps going down and VIX keeps going up. – Jay

        • roni February 5, 2018 9:03 am #

          Jay,

          as Alan says, “this is probably a road bump, since the US economy and the global economy is strong”.

          I agree with both of you, and hope we are right.

          Roni

          • Jay February 5, 2018 11:43 am
            #

            Good morning Roni.

            I hope the road bump does not turn into a pothole or sinkhole as the sell off is accelerating as I type this. Fortunately I have a fair amount of dry powder and will not use it yet….- Jay

          • roni February 6, 2018 7:52 am
            #

            Jay,

            the road bump has capsized my boat.

            Huge paper losses in almost all of my positions.

            I guess I’m not alone.

            Roni

          • Jay February 6, 2018 10:46 am
            #

            No Roni,

            You are far from alone. In January I had enough paper gain to pay for retirement expenses for all of 2019. Now I am down for the year.

            I learned in 2009 not to capitulate sell and to remember my time horizons on my invested funds. Since I was 40% cash going into this mess and I like the fundamentals of the things I hold I will ride out this storm. – Jay

            But I sure wish I had sold more calls for February :)! – Jay

          • roni February 6, 2018 4:15 pm
            #

            Jay,

            your decision to ride out the storm turned out well today.

            I did the same, and recovered half of my losses by holdin fast, and buying back several calls following the 20/10 rule.

            Let’s see what happens tomorrow.

            Never a dull moment – Roni

          • Jay February 6, 2018 4:45 pm
            #

            Well, Roni, we all know the old market expression: it “takes the stairs up and the elevator down”.

            Today was a spirited and much appreciated hike up the stairs but I doubt the elevator rides are over.

            At least from a US perspective Trump is too unstable, our economic recovery too fragile segmented to the richer few and company earnings too scatter shot to support any big market advance any time soon. Just my opinion. – Jay

          • roni February 7, 2018 10:14 am
            #

            Jay,

            from the distance, it appears to me that Trump is very polemic, but at the same time, I must admit that he has maintained all his campaign promisses, and tried to implement all the measures that the Americans who elected him wanted to be implemented.

            Time will show if this is good or bad.

            As for the stock market, I still believe there is no reason for a big correction or crash.
            Trump’s measures are all favorable for the American economy, and the global economy is also growing.

            Roni

          • Jay February 7, 2018 3:19 pm
            #

            Thanks Roni,

            This is a market comment board, not a political one and I apologize if I intermingle the two every now and then.

            I am with you. I suspect this will be a far more volatile year than we have grown accustomed to but not a source of panic or fear of crash. – Jsy

  2. Joel February 3, 2018 11:30 am #

    Hi alan how u doing today?

    I had a couple questions on cover call writing I currently use td America and think or swim platform and to cover calls writing in mine r way different in yours .

    if I signed up with the premium member is more training how to do covercall writing ? I’m just a beginner at this and I need some more help or information on writing cover calls ….. how do u know what position ur getting in to when writing a covercall (otm),(atm),(itm) ?

    Thanks for ur time,
    Joel

    • Barry B February 3, 2018 9:37 pm #

      Hello Joel,

      A few things to consider:

      > The Blue Collar Investor (BCI) methodology is independent of the platform that you use. You can execute the system on any broker platform. As it turns out, Think or Swim (TOS) is probably the most advanced platform that is available to the retail investor/trader.

      > There are a number of ways you can get training at no cost in the BCI methodology. The first place you should look is the “Beginner’s Corner” videos. There are eight videos each on Covered Calls and Cash Secured Puts. After that, read (and search) the weekly blog. There are almost 400 blog articles covering every aspect of the BCI approach. Also, review the “Ask Alan” videos on the website.

      > Once you got through the material on the website, I would suggest that you purchase and read Alan’s best-selling book, “Alan Ellman’s Complete Encyclopedia for Covered Call Writing”. The book is available on the website and on Amazon (both hard copy and Kindle editions). After you review the material in the book, there are other books by Alan to help you expand your knowledge. Currently, there are six books with a seventh coming in about two months.

      > After that, I would suggest that you purchase Alan’s DVD programs. These are available on the website as physical DVDs or as streaming video. These will give you the most complete understanding of covered calls and cash secured puts available.

      > For even deeper learning, we have one-on-one coaching and mentoring available.

      > Underlying all of this is the Premium Membership. This gives you access to our weekly reports where we screen both stocks and ETFs for candidates that meet our rigorous process for stocks and ETFs that meet our requirements. With this service, you get two reports per week (an ETF report mid-week and a stock report on the weekend), a monthly Blue Chip report, and a quarterly High Dividend Yield report. With the Premium Membership, you get access to our Premium Member resource section. Here, you will find many tools, calculators, and resources to help you with your trading.

      As for your question (re: ITM, ATM, or OTM strikes), check out the “Beginner’s Corner” videos. You should find what you are looking for.

      I hope this helps. If you have more questions, feel free to email me at…barry@thebluecollarinvestor.com.

      Best,

      Barry

  3. Barry B February 3, 2018 9:05 pm #

    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 02/02/18.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    http://www.youtube.com/user/BlueCollarInvestor

    Since we are in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:

    https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

    Best,

    Barry and The Blue Collar Investor Team

    barry@thebluecollarinvestor.com

  4. Barry B February 4, 2018 10:26 pm #

    The Philadelphia Eagles– Yes…Yes…Yes…

    • Jay February 5, 2018 8:58 am #

      Barry,

      No disrespect to Pat’s fans but it saved N.E. the trouble of re-painting the tail fin on their airliner :). – Jay

  5. Kevin February 5, 2018 8:34 am #

    Alan,

    Hope you are doing well. Thanks again for your previous guidance. While I wasn’t able to profit on GRUB, I was fortunate to enhance some profits on a TOL mid-contract unwind into OLLI for Dec-Jan Contract period.

    On a separate note, I was wondering if you offer 1:1 skype sessions? If so, could I ask how much these sessions are?

    Thanks Alan,
    Kevin

    • Alan Ellman February 5, 2018 8:40 am #

      Kevin,

      Yes, we do have a 1-on-1 online mentoring program (we use Zoom) run by Barry Bergman. There is no charge for the initial call which will guide us in setting up a program based on your needs and trading style. Here is a link for more information:

      https://www.thebluecollarinvestor.com/investment-coach/

      Alan

  6. Duminda February 5, 2018 9:01 am #

    Hi Alan,

    I have a few questions about the exit strategies in the first half of the contract period.

    The details for the covered call trade are as follows:

    22/01/18 bought WLH at $32.13 and sold the 16 Feb $30 ITM call option at $2.48

    01/02/18 Share price fell and bought back the option at $0.40 per share as per the 20% guideline

    1. I researched online to find out the reason for this fall in share price of WLH but could not find a valid reason for me to sell the shares. How do I go about finding reason for a substantial fall (or rise) in share price of any company in the Premium Report?
    What website or websites do you use?

    2. I/22. I considered the following strategies:

    1. In the absence of a valid reason for me to sell the shares, I first looked at the possibility of selling an OTM option at a lower strike price. However, the premiums available at the time did not meet our profit objective of 2-4% on ROO. Therefore, I decided to hold onto the shares with the aim of hitting a double. a) Is my approach correct here? b) How do I decide how long to wait for the market to reverse or, if doesn’t, what other actions to take?

    2. What if the share price moves sideways and stays around the new price level, which is about $29, over the next few weeks. Do I sell the shares at a loss and move the funds to another trade? This will result in a substantial loss. Moreover, it will take a few profitable covered call trades to recoup that loss. How do I make a non-emotional decision here?
    I look forward to receiving your reply.

    Many thanks.

    Duminda

    • Alan Ellman February 5, 2018 9:59 am #

      Duminda,

      A reliable free site for stock news:

      http://www.finviz.com

      Recently, share price declines have been related to overall market interest rate and inflation concerns and perhaps a weakening in market resilience from unusual US political events.

      The 2-4% initial time value targets are based on personal goals and risk-tolerance (I use lower goals in my mother’s portfolio). These targets need to be lowered later in the contract as Theta is degrading the time value components of our option premiums. Rolling down to (now) out-of-the-money strikes is an excellent approach in the current market environment but looking to achieve 2-4% is unrealistic even with an increase in overall market volatility.

      I favor “hitting a double” earlier in the contract and roiling down in the latter half of a contract.

      In your example, the breakeven is $29.65. If share price hovers around $29 and we are in the second half of the contract, no action may be most appropriate. As I type, I see that WLH has declined to $26 so rolling down to a lower (now OTM) strike would be a strong consideration.

      Alan

  7. Jay February 5, 2018 2:15 pm #

    Anyone remember this one from “Animal House”?

    https://www.google.com/search?q=thank+you+sir+may+i+have+another&oq=thank+you+sir&aqs=chrome.2.69i57j0l5.13050j0j8&sourceid=chrome&ie=UTF-8

    I feel like the young Kevin Bacon a lot these days :)! – Jay

  8. Barry B February 5, 2018 3:33 pm #

    Premium Members,

    In the light of today’s stock market drop, please download Alan’s “Emergency Management Report” from the Resource Section of the Premium Member Site for some ideas on how to manage this type of market movement.

    Best,

    Barry

  9. Alan Ellman February 6, 2018 8:42 am #

    Stock market:

    In the past week, the market has been down 7% and down 1% year-to-date. For members who have never experienced such a decline, it is difficult but critical not to allow emotions into our trading decisions. Emotions need to be factored out.

    Although no one person can accurately predict the short-term movement of the market, there are certain factors that are encouraging. In the current earnings season, corporate sales growth is up 8% and earnings growth up an impressive 15%. The global economy is still strong and the new tax laws favor positive guidance moving forward.

    An unknown (for me) has been the resilience of the market given the unusual political environment. Will the market continue to ignore some of the unprecedented events we are experiencing on a daily basis? Historically, the earnings and sales growth supersedes politics so I am remaining fully invested and managing my (down) positions based on exit strategy opportunities as they arise. That said, we should each trade within our own comfort levels as long as decisions are based on sound fundamental, technical and common sense principles and not based on emotions.

    Our overall success is based on our trading skills in both bull and bear market scenarios.

    Alan

  10. Alan Ellman February 6, 2018 1:16 pm #

    New webinar now available:

    Premium and video members,

    Blue Hour 8: Covered Call Writing with Dow 30 and S&P 500 Stocks

    Now available as part of your membership benefits.

    Alan

  11. Alan Ellman February 6, 2018 6:03 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

    New members check out the video user guide located above the recent reports.

    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

  12. Barry B February 6, 2018 11:37 pm #

    Premium Members,

    The Weekly Report for 02/09/18 will be available by early Monday afternoon. Alan and I will be presenting at the World Money Show in Orlando this weekend. We’ll do our best to get it out to you earlier.

    Best,

    Barry

  13. MarioG February 7, 2018 8:43 am #

    For the benefit of all members following this week’s blog, I am copy/pasting two blog posts from last week initiated on Friday 2/2 (Last week’s last day of trading) and the reply that Alan made on 2/5 regarding what to do after closing a leg after a 20% or 10% filled order.

    I really thought my comments would be lost since I made the post the last day of the week as a follow up reply. I congratulate Alan for catching my reply and question and following up with an excellent response and advice.

    I liked his last paragraph where he mentions to seriously consider “rolling down” opportunities and mitigating losses. That is a mental hurdle for me (as well others as mentioned in the blog) since it locks down a loss and misses a recovering price gain.

    I keep thinking also of all the advice from many of us to resist being greedy should also be in our minds. After all if your account is up 17% and 24%, respectively, in the last two years, maybe it would be a wise decision to roll down selective equities at this time and use the new cash elsewhere at the proper time. My group of 4 accounts as of market close of 2/6 is down 4.9% from my account high on 1/26… MarioG

    ***********
    From MarioG on 2/2/18 (last week) 5:41am (reply to Alan comments on 20%/10% Rule):

    Alan,

    Let’s go to the next step. After a 20% or 10% rule execution, the stock then hopefully rises back to near one’s original premium Sell To Open price for a “hit the double” award.

    Immediate STO or Write Strategy: After the BTC for a 20% or 10% rule is executed, one could immediately create a Sell to Open (STO) GTC order for 90% of the original Entry STO premium you received. I say 90% because you can never get the original premium again for the same underlying price because of the Theta time decay factor.

    One could then re-adjust or fine tune later to a more realistic STO limit value taking into account the current Delta and Gamma of the underlying equity (Classic Encyclopedia 435-436).

    Wait then Write STO Strategy: You can also wait till a later time when you see the Stock price increasing for a possible “hit a double”. The risk here here is you may to timely place the order or miss a positive spike in the price at market open (which happens often) which then quickly decays in price, missing a fill.

    Note:The GTC Sell to Open option leg order does not affect the cash balance of an account since it is a Credit Limit. (The BTC did.)

    How do you implement the STO order?

    Mario

    **********
    From Alan Ellman on 2/5/18 9:10 am:

    Mario,

    You did an excellent job of describing the choices after utilizing the 20/10% guidelines. I use the latter approach which is a product of the fact that for much of the day I am in front of my computer writing articles, producing videos and responding to comments and questions like this one. This allows me to monitor my positions on a daily basis. In the past (my life as a dentist, working full time outside the BCI community), I would set GTC limit orders based on time left in the contract. 90% might be appropriate early to mid-contract. When I travel, as I recently returned from Hawaii, I will use the former (GTC STO limit orders and adjust as needed).

    With the market downturn, we should also factor in our “rolling down” post BTC considerations in the second half of the contracts. Mitigating losses is equally as important as enhancing gains.

    Alan

  14. roni February 7, 2018 4:42 pm #

    Hello Mario,

    we are all having a hard moment this week, except for Justin and Spin, who remained in cash. Very smart.

    Rolling down, or selling the underlying at a loss are very tough decisions, especially during ernings season.

    All my positions are in the red, so I must take a different approach to each specific case, and try to minimize my total loss.

    Good luck – Roni

    • MarioG February 8, 2018 2:53 am #

      2/7/18 -Roni,

      Good points. I am waiting for the Volatility to settle or a positive trend appears before making any decisions. I do realize if I do not trade to roll down this week, next week the Time Values will decay quickly to lower possible gains from rolling down.

      I checked my ER’s and the only holdings that have an Earnings Report next cycle and would consider unwinding are:

      CRM (Salesforce) Covered Call OTM Strike 114, LPrice 110.05 ER 2/26 BEP 111.38 RCB, (Return cost basis) 113.55. Gain -1.2% loss (110.05 – 111.38)/113.55),

      ROST (ROSS) Long Pos., ER 3/6 LPrice 77.99, RCB 84.85, BEP 83.41 Gain = -6.39%. If I roll down from old strike 85 to 80 with premium 0.70, my new BEP will be 82.71 and gain -5.6%. No much improvement. Best to wait.

      CPRT (Compart) Long Pos., ER 2/20 LPrice 41.74, RCB 44.92, BEP 44.25, Gain = -5.59%)

      *****
      FIVE (Five Below) Long, LPrice 64.25 ER 3/1 RCB 64.92, BEP 62.17 Gain today =+1.32%.

      Rolled out 2 cycles so BEP is low and position is still profitable. Last Expiration Friday I rolled out and up (Strike 65 to 70) on 1/19 when underlying was 67.64 when I had a gain of 6.61% plus possible upside potential.

      This is an interesting position. I have two choices. A – Roll down to 65 and take advantage it is Near ATM, B – Stay long.

      A: If I roll down now to Strike 65, STO OTM with TV of 1.225, the new BEP is 62.17. If price stays at 64.25, my Gain is +3.2%; if price rises above the strike of 65, my Gain including the upside potential is 4.38%. Good improvements over the current 1.32%

      B. If I stay long, the price of the stock would have to rise above 66.51 to give me 4.38%. Today’s high was 65.26 with current volatility, closing at 64.25. Prefer waiting, especially since the ER is 3/1.

      *****

      Mario

    • spindr0 February 8, 2018 12:52 pm #

      Roni –

      The primary determination that you have to make is whether the market (and your stock) will stabilize. If the answer is yes, rather than locking in a loss with a covered call, consider the possibility of a Repair Strategy, placed for zero cost or a credit. With higher IV, the credit for them increases, thereby making them more attractive. If the underlying doesn’t have a huge loss, you may be able to find one that will get you to break even or better. If executed for no cost or better, you won’t do worse than just holding the stock. Do not go out many months. Use the nearest expiry possible.

      Spin

      • roni February 8, 2018 1:32 pm #

        Thank you Spin,

        please explain the “Repair Strategy, placed for zero cost or a credit”. My knowledge is limited, and I did not understand it.

        Roni

        • spindr0 February 8, 2018 3:18 pm #

          Roni –

          Perhaps Alan has an article on the Repair Strategy (I couldn’t find it) so here’s the CBOE explanation:

          http://www.cboe.com/strategies/advanced/equity/stock-repairs-strategy/part1

          Fidelity offers a more aggressive Repair that attempts to profit from a stock price recovery:

          https://www.schwab.com/active-trader/insights/content/the-option-repair-strategy

          There are some subtle nuances to these so if they interest you, model them in your broker’s software so that you can see their performance over time.

          Spin

        • spindr0 February 9, 2018 8:18 am #

          Roni,

          I posted a reply to your question about the Repair Strategy but the information that I provided to help you manage your market positions that are under water has a tag of “Your comment is awaiting moderation.” Get back to me if it doesn’t clear customs :->)

          Spin

          • roni February 9, 2018 9:09 am
            #

            Thanks Spin,

            I will wait for your post eagerly.

            Roni

          • roni February 9, 2018 9:20 am
            #

            Also, if you don’t mind, you can send mr a message to my secondary e.mail address rschott@sti.com.br.

            I promise to be discreet regarding your e.mail address.

            Roni

          • spindr0 February 9, 2018 3:05 pm
            #

            Roni –

            Like you, I use a secondary E-mail addy for web sign up stuff. If it gets ot of hand, I just create another one. I’ll send you a message. Let me know here if you got it.

            Spin

          • roni February 10, 2018 8:56 am
            #

            Hi Spin,

            I got your message 🙂

            Roni

  15. Terry February 8, 2018 3:09 pm #

    Fear and Greed Index – currently reading 16 which is extreme fear.

    http://money.cnn.com/data/fear-and-greed/

    Terry

  16. Kerry February 9, 2018 9:25 am #

    Hey Alan,

    I had a question regarding the market volatility recently. In my portfolio I currently have some stock which I had planned to sell after the Feb 16 friday because they were coming out with earnings. Since the recent market volatility my stock have plummeted. I did buy to close all of most of my options for this month, however the stocks have all have taken a huge downturn. My question is should i sell my stocks to minimize my loses, or should i wait to see if they recover in the coming months. On average the stocks have lost about 15-25%. Currently I was planning to not sell and trade options on the stocks until they rebound some so I can minimize the losses. But I am afraid the stocks could possibly move down more with the volatility in the market and with there earnings approaching. I knew there would be a market correction at some point. What advise would you give to a newer blue collar investor like myself.

    Thank you,

    Kerry

    • Alan Ellman February 9, 2018 9:37 am #

      Kerry,

      When our stocks gap down due to overall market decline and not corporate fundamentals or negative news, it is reasonable to close our short calls and roll down to out-of-the-money strikes. Panic cannot be part of the equation. Corporate earnings, the US economy and global economies are all healthy and the new tax plan favors continued corporate success. US politics remains my concern but the market has proven resilient in this regard.Here is a link to an article I wrote several years regarding this matter:

      https://www.thebluecollarinvestor.com/covered-call-writing-managing-stocks-that-have-gapped-down/

      Alan

  17. MarioG February 11, 2018 8:54 am #

    The account value of my 4 account portfolio on last Friday (2/9/18) is down 8.47% from its high two weeks ago on 1/26/18.

    Options Action show on 2/9/18 had an interesting historical analysis of previous similar market corrections comparing the average market performance 1 month and 3 months later. All results were pointed to a positive picture for coming out of this correction.

    Mario

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