Covered call writers and put-sellers are aware of the value to avoiding risky events like earnings announcements. An impending FDA announcement regarding the efficacy of a new drug being tested is another example. This article will define and explore the potential concerns of trading on or though Russell Rebalancing Day.
What is Russell Rebalancing Day?
This is the annual reconstitution of the Russell Indexes, where the index provider makes rule-based changes to the its indexes, to ensure that market shifts that have occurred in the past year reflect that investors continue to have the most accurate market benchmarks. It usually occurs mid-calendar year.
What are the Russell US Indexes?
- Russell US Indexes are the leading US equity benchmarks for institutional investors. This broad range of US indexes allow investors to track current and historical market performance by specific size, investment style and other market characteristics.
- All Russell US Indexes are subsets of the Russell 3000® Index, which includes the well-known large cap Russell 1000® Index and small cap Russell 2000® Index.
- The Russell US Indexes are designed as the building blocks of a broad range of financial products, such as index tracking funds, derivatives and Exchange Traded Funds (ETFs), as well as being performance benchmarks.
Notable changes in the past year
- Moves in financials (up significantly) and energy shares (down significantly) over the past year will represent the most notable alterations in the Russell indexes, which will offer investors a chance to reassess their own portfolio makeup amid sizable moves in those sectors, much of which occurred in the wake of Donald Trump’s surprise presidential election victory on Nov. 8th.
- Much of this year’s reconfiguration also has been shaped by the “Trump bump,” or the rally in sectors and stocks tied to Trump’s campaign promises around Wall Street deregulation, tax cuts and a boost to infrastructure spending.
- In total, nearly 200 companies will be added to the Russell 3000 this year. Total market capitalization for Russell components increased more than 10% to around $27 trillion since last year.
- Technology has been the main driver of these gains, rallying nearly 40% since last reconstitution.
- The “value stocks”, which trade at a relative discount to peers based on measures like price-to-earnings, have lagged behind growth names, or shares of companies that increased in value at a faster-than-average rate. But those value names, including financials, energy companies and retailers, could garner more traction if Trump’s policy pledges are enacted.
One of the busiest trading days of the year
With approximately $6 trillion in assets tracking the Russell indexes as of December 31, 2015, Russell Reconstitution is a notable event for US equity investors. The annual Russell rebalance, traditionally one of the busiest trading days of the year: according to Bloomberg, last years rebalance helped propel a near record turnover of over 15 billion shares, as a result of the $10 trillion in stocks currently linked to the various Russell indices, many of which will be forced to find new owners after an index recomposition. In fact, in four of the last five years, reconstitution day ranked in the 10 busiest trading sessions.
Volume Spikes on Russell Rebalancing Day
Is this a high-risk event we should avoid?
Surprisingly no. Despite the traditional annual surge in volume, the rebalance rarely leads to spikes in volatility or major market moves: since 2008, the S&P 500 has moved more than 0.5% on the day of rebalancing only twice, in 2011 and 2016. The reason why the transition at the end of the rebalancing day rarely leads to turmoil is because investors are prepared for the changes.
Discussion
High-risk events like earnings and FDA announcements should be avoided as they lead to increased implied volatility in the underlying securities and therefore make us susceptible to additional market risk. Russell Rebalancing Day does result in a substantial increase in trading volume and liquidity but does not cause a significant change in volatility risk so trading can proceed normally during this annual event.
Upcoming speaking event
Orlando Money Show
February 8th – 11th, 2018
Market tone
Global markets moved up this holiday-shortened week with the CBOE Volatility index closing down at 9.67. This week’s economic and international news of importance:
- Leading economic indicators +1.2% (previous +0.1%)
- US: Existing home sales 5.48 million above expectations
- Weekly jobless claims 239,00 slightly below expectations
- Durable goods orders (-)1.2% below expectations
- Consumer sentiment 98.5 better than expected
- Markit manufacturing PMI 53.8 (growth)
- Markit services PMI 54.7 (growth)
THE WEEK AHEAD
Mon Nov 27th
- New home sales (Oct)
Tue Nov 28th
- Case-Shiller home price index (Sept)
Wed Nov 29th
- GDP
- Pending home sales
- Beige book
Thu Nov 30th
- Weekly jobless claims (11/25)
- Personal; income (Oct)
- Consumer spending (Oct)
- Core inflation (Oct)
Fri Dec 1st
- Markit manufacturing PMI (Nov))
- ISM manufacturing (Nov)
- Construction spending (Oct)
- Motor vehicle sales (Oct)
For the week, the S&P 500 rose by by 0.91% for a year-to-date return of 16.24%
Summary
IBD: Market in confirmed uptrend
GMI: 6/6- Buy signal since market close of August 31, 2017
BCI: My portfolio makeup remains in a neutral bias, selling an equal number of out-of-the-money and in-the-money calls. Waiting to see how the vote on the new tax plan plays out before taking a more bullish stance. Outside of this concern the global economy is performing well.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a slightly bullish outlook. In the past six months, the S&P 500 was up 14% while the VIX (11.43) moved down by 4%.
Much success to all,
Alan and the BCI team
Premium members,
The December 2017 edition of the Blue Chip (Dow 30) Stock Report has been uploaded to your member site. Login and scroll down on the right side of the page in the “resources/downloads” section ass shown in the screenshot below.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG
Alan
Speaking of the RUT, interesting that it closed at an all time high on Friday, while the VIX touched an intraday all time low of around 8.5.
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 11/24/17.
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 BCI Team
[email protected]
Hey Friends,
Well, you will be proud of me: I was away visiting family all week and did not look at the market even once! I just knew seasonality was bullish and the market would go on without me.
Turns out I made money on my usual holdings and CSP’s on SVXY. I’ll tidy some of that up tomorrow.
It is refreshing to get away every now and then. – Jay
Welcome back. I thought I saw a comment from you last week. Or this there a second Jay?
Mario
Thanks Mario, congrats on your continued success!
There is another “Jay” in the community but he adds a last initial to differentiate us.
Welcome back Jay.
Roni
Thanks Roni!
Some thoughts this fine Monday morning as I re-engage the market for what they are worth:
From a seasonal perspective December has been a bullish to quiet month up here in the US markets ideal for CC selling and selling iron condors taking in two premiums bracketing a range using blue chips or SPY/DIA/QQQ..
Of course, every year stands on it’s own and this one has some politics in it with government funding issues. But I still like the month as a good time to be long and keep adding to successful positions on down days, trim the losers on up days, sell CSP’s on dips and sell CC’s on bounces.
My “Dinner Party Indicator” suggests we are no where near the top of this market. My DPI measures the sentiment of friends – average folks like me – at parties when the market comes up in casual conversation. Most say they are fearful of the market, just holding what they have, not taking any risk, not buying much and holding bonds and cash. That is not topish behavior! If we were near a top they would be exchanging hot stock tips :).
So I think it is safe to be in the water…..- Jay
Jay,
good to hear your DPI sensor. That is one thing I miss a lot because nobody I know invests in the USA Stock Market.
Therefore, I follow blindly Alan’s indications, and your opinions to set my trades accordingly.
Roni
Roni,
If you are following Alan and Barry the last thing on earth you should fear is operating in the blind! They are good at what they do for subscribers.
If you are following me that is a different matter – do that at your own peril :). In my opinion we are in a bull market in a seasonably favorable time. I have over written only a small amount of my holdings. This is the season to let things run.
If one can afford 200 shares of any ticker this is a good time to sell one contract NTM and let the rest do it’s thing. – Jay
OK Jay,
it looks good to me too.
I’m fully invested for the 12/15 cycle calls NTM.
Roni
Thanks Roni, I hope you hit all your targets for the 12/15 expiry and log another profitable month!
I have been overweight in the Tech sector all year and that has worked well so I added to a few holdings on today’s weakness in QQQ since I still have some sideline cash.
SPY not off near as much as QQQ today since many of it’s sectors are looking good. I added a speculative long call ITM on HD since I like their business and, at least in the US, the home builder sector has been doing well and stocks like DHI and HD have been good bets.- Jay
Thanks Jay,
seems like you did well on HD.
I do like this stock too.
Best – Roni
Roni,
I got lucky on a low risk speculative short term idea yesterday buying 2 ITM contracts for tomorrow’s expiration with almost zero time value and high delta. I sold the two contracts today and made $700 on my $320 risk.That is not how my luck usually goes :).
Now, such gambling is not what we advocate on this site. We are conservative level headed investors. So if anyone is inclined to buy calls or puts for speculation please do so with tiny dollar amounts at risk and pre-set stop loses.
I use 30% stops on trades like that. HD could have easily gone down yesterday or today and stopped me out fast, which happens all the time in small lot options buying for “fun”! – Jay
Nice 🙂
Justin and Anyone:
– I replied to 2 of your blogs last Friday 11/24 at 4:30pm.
A. Comments on the fact you stated a market downturn will hopefully be made up by your Gains for far this year. If your YTD is up X%, and market downturns Y%, what is left? (last blog post 11/24 5:54pm)
B. (5 blogs up from the bottom – 4:31pm) I posted a reply to another of your blog comments on what positions do I NOW have for the December cycle. I noticed now you replied to it at 11/24 7:30pm and mention TTWO Return and why I chose it. How did you know that I replied to your post? Did you actually review the blog one by one to look for a new reply? That was sharp and you took a chance I would for a reply but I caught because I wanted to make a comment here. That is the only reason.
(I will answer you question on TTWO in a separate thread.)
.****************************
I wish Alan and Barry would get the Subscription feature to the blog fixed so I can received email automatically on Gmail for anyone’s reply to the blog. Otherwise it makes it tough to keep reviewing the whole blog all the time. If this was working any reply to any blog would send that reply in gmail to me. Other wise the reply is buried forever in bit heaven.
Anyone:
Does anyone have the Subscription feature working? It worked long time ago and after a software update to the blog for the subscription feature, it stopped working for me.
Anyone:
Does anyone use the RSS Feed feature and would like comment on how useful it is? I am hesitant to use as I don’t my PC cluttered with things running unnecessarily.
Regards.
Mario
Hello Mario,
I do read all the blog posts almost every day, including last week posts on Sunday and sometimes Monday, if I am expecting a response from a member.
I agree that it takes some time to skim through the whole lot each time, but it’s not really that bad.
An e.mail communication leading directly to a response would be helpful, but maybe you would miss some interesting responses to other members.
Also keep in mind that most of us get too many messages each day already.
I remember the time when I was receiving lots of messages from Seeking Alpha, every time someone posted on a thread, it was becoming unpleasant.
Roni
Glad you are pleased with scanning the emails for responses. . I will do it if I have to, but prefer not to.
It worked the same with BCI. All new threads got sent to me. But I did not complain or did it matter to me. It is all very interesting questions that BCI gets and I learn from all of it and from Alan’s and others responses.
It save me time and less effor to receive the automatically sent email, too.
If I did not like a question, I just press Delete. and gone from Gmail in 30 days.
Mario
\
Justin:
Here is my reply on your question last Blog on why I picked TTWO for my recent CC trade on 11/24.
Great program you have to review the Returns for a position for multiple strikes and ITM and OTM scenarios. You mention it had an ROO of 2.3% at Strike 118 ITM.
I ended up with Strike 120 OTM with ROO% of 1.54% Upside Potential 1.62% Net Return total 3.17% with share appreciation to Stirke 120.
I end up with TTWO with Strike 120 covered call. Order was Dlimit of 116.15 filled (Last price 118 – Bid Mark 1.85= 116.15) .
Final share price filled was 118.06 [4.95 comm / 0 Fee] = 118.08 after commission). For the sold call: STO 1 Cn 120 Strike Call @ 1.83 [1.3 commission / .04 fee] = 1.8231 after commission.
Cost Basis for ROO (CBr) = 118.08, BEP = 116.257 (118.08 – 1.8231)
ROO% = 1.54% Upside% = 1.62% NET ROO = 3.17%.
Decision Process:
I take portfolio value and divide by 5 and get a net investment per covered call goal.
I picked TTWO after reviewing the Run list that I enter in FINVIZ.com. I look at the change% column for the day sorted with the low to high (negative returns on top). At the same time with this sort I look at the Gain% column – looking for those stocks that have not change much since the last Friday’s price of the run list (Gain% around 0). These stocks represent those that have changed the least over the market week and currently are experiencing a temporary dip that I may benefit from.
As I mouse over each stock, FINVIZ give me a quick chart so I can quickly see the overall chart for a quick yes / no initial decision. Swings and erratic volatility changes I stay away from.
If I do not find any satisfactory stock I keep look at higher change% values while glancing at the Gain% column for low Gain% values. That usually give me other choices.
I quickly calculate the returns on paper for each stock I pick to evaluate.
I double check the ER Date in the Run list and see it agrees with Fidelity before checking further.
I try to look for stock which will give me at least 200 shares and and meets my investment limit amount. That way I minimize my cost per share from the commission charged and reduce cost for an MCU (mid contract unwind) or a Rule 20/10% exit. (TTWO was 200 shares or 2 contracts)
I calculate the BEP Breakeven and see if the past history give me a good chance of at least breaking even if the stock declines because of a market swing. (Volatility margin)
I check Barchart.com and Fidelity for Summary score and Buy opinions and company description (usually favorable for Run list but not always true) (TTWO was strong buy and 7.5 Bullish)
I look at the past trades for my current ITM versus OTM balance in case I have a choice to pick an OTM strike. (I had 10 and 10)
If the chart history is trending positive smoothly (helps if the market is leaning bullish) maybe an option trade now is a limiting trade and a long position would be more beneficial. This may have the disadvantage if the stock swings up and then down at expiration and you have no income to show for it. That is why we are playing the option game. Maybe reaching into greedy territory.
I like stock that are trading near the strike value NTM (Plus or Minute) since the Time Value is highest, ROO% more favorable. If the breakeven is favorable as well, that is my downside protection guideline. If the stock value is higher from the strike, downside protection increases, ROO% decreases. If the stock value is below the strike, ROO% is less but then I have upside potential to the strike.
At the time I evaluated TTWO, here are the calculations::
Underlying 118.002
* Strike 118 ROO% 2.79% BEP 115.3 ITM
* Strike 119 ROO% 1.92%, Upside 0.85%l, Total 2.78% OTM
* Strike 120 ROO% 1.6%, Upside 1.6% Total 3.2% BEP 116.15 OTM
(Thinking positive about the market, I picked the Strike 120)
I am now 92% invested.
I can still do one more 11.1K CC with the reserve limits I have set.
My Account value jumped 1.2% at end of week 1 from 24.0% to 25.2% or (26% to 26.8% annualized). This is the last month of my year so lets hope for a positive.
Regards,
Mario
Mario,
nice method, and well explained.
The curious thing is that each one of us develops his favorite method, and most turn out to be very successful.
My preferred method is as follows:
Beginning on expiration weekend Sunday, I check every bold ticker on Barry’s list.
Starting with the monthly NTM strike ROO and related OI.
I never trade for less than 2% ROO and OI under 100.
Most of the time I select the highest OI available.
Also, I avoid too good to be true ROO.
Next step is look at Yahoo chart, 1 day, 5days 1 month, 6 months, YTD, 1 year. and check the pattern, preferably smooth and consistently up. Also check for details of company, and make sure it is American.
Than I go to my Schwab edge technical weekly analisys, and recomendation. Strong buy, buy, hold, avoid etc.
Last, ErnningsWhispers, confirm date, and read the short comment clicking on the arrow.
Than I place Buy/Write
Roni
Excellent, Roni…. Let’s see it others have a variation.
Early in my early BCI days, I did use the run list and did select bold stocks to look at first. Another time I looked at those with a dividend first. But I feel I am more efficient now using Finviz.com as a starting point for selection.
Since I have the run list in Finviz, if the market drops 200 points for a day, I can quickly see if any of the Run List stocks dropped reacting to the negative news. I could pick that stop up and let it go back up to its normal level.
I did forget to mention the OI and Bid Spread should meet the BCI requirements. For the TTWO strike, the OI was less than 100, Spread ok but surrounding strikes were ok OI and Spread.
Happy trading,
Mario
Mario,
Actually that option chain calculator is just the Ellman Calculator with the formulas altered to get the share price from cell A2, which I type in after copying and pasting the data from nasdaq.com, so anyone can easily create their own version if they want.
Always interesting to see how others choose their stocks – I mainly use a combo of looking for good charts and good premium, then check to see if there’s anything fundamental likely to affect the share price in the contract period (thus avoid biotechs, airlines etc.) Since I’ve been running a scan on all stocks > 800MM market cap I’ve got much greater choice, though I’d not recommend that to most people unless they’re good with charts (I’ve been analyzing them since 1985 myself) – best for inexperienced investors to stick with the BCI choices.
Re finding your comment I have a couple of pc’s running all day – I just leave the BCI blog open on one and refresh it every few hours or so, so I can see if any new comments have been added.
My experiment with buying stocks and waiting over Thanksgiving had mixed results – would have been better overall to have bought everything on Monday. Anyway I sold a couple of stocks for a small loss on Friday (still holding SYX uncovered) and added TROX and UNT with the money that freed up.
Justin
It is great we are describing our trading thoughts and processes to select the Underlying stocks. If someone picks up an idea that someone else is using and benefits, it was well worth the time.
Mario
Hey Justin,
Since I have been the main – maybe the only :)? – advocate of buy/wait on CC’s I’ll say a few more words about that approach. First, the main “risk” with it, as Alan explains lower in this thread and has before, is theta decay will be lost. And there is no guarantee stock/ETF appreciation will overcome that or even happen. So I think if one is a traditional covered call writer using trending stocks and expecting a high monthly/weekly portfolio turnover the results of buy wait will be mixed as yours were.
It works for me because I have shifted to ETF’s for my over writing, I am not interested in a high portfolio turnover. I like to build up a gain in a position before I start covering it. That way I can write ITM or ATM and if called still have a gain on the position with a better premium and start again buying the next dip. I also do all options trading of any type in an IRA account which avoids immediate tax issues in US accounts.
Even when I was buying stocks off the Premium List and selling calls on them for short duration holding I had better results splitting the tickets buying the stocks on dips and the calls on bounces. I remember a few times that was intra-day!
The stocks would not be on the list unless they were trending up. But the market is not linear day to day. You need a little extra market following time to do that or set auto orders once in a stock. And stocks with weeklies help so you don’t get limited by regular monthly expiry. Nothing works perfectly! – Jay
Hey Jay,
Yes theta decay, and the fact that good premium offered one day can be gone the next, are the main reasons I don’t use that approach more often. It does look much more attractive at Thanksgiving though, and if as I said I’d bought all the stocks on Monday (and sold Friday) I calculate I would have done a lot better – something to remember for 2018 🙂 Speaking of seasons, the next contract period has usually been friendly to the bulls as well.
Alan,
If I have a stock that I paid 75 per share and it is now over 100 plus I’ve received more than 10 in option premiums, what do I use when I enter stock price in the spreadsheet for new positions? 75, 100 65?
Thanks,
Frank
Frank,
When writing a covered call and using The Ellman Calculator to determine return on option (ROO), upside potential or downside protection, we use current market value, in this case $100. By doing so, we can compare the returns for writing this option versus other investments for this amount of cash.
If rolling an option prior to contract expiration, we use the strike price of the in-the-money strike of the near-month option.
For tax purposes, we would use the lower cost basis.
Alan
Alan, I purchased a stock and subsequently entered a STO CC trade. The bid/ask was .90/1.15. I entered my trade order for $1. The bid/ask dropped immediately to .90/1 and my order was never filled. It’s been a couple of days and the stock is slightly down from where I purchased it. I am still bullish on the stock, but it is uncovered and accepting less that $1 per contact doesn’t make it worthwhile. How do you suggest handling such situations? Should I wait a few days and see if the stock bounces back a bit? thanks. Matt
Matt,
Good job trying to “negotiate” a better sale price on the option. When you entered the $1 limit order, the market-maker decided not to fill it and the new spread of $0.90/$1.00 was due to your limit order…that was you! That could have been followed up by placing a new limit order at $0.95 and finally at $0.90 if the second order was not accepted.
At this point in time, if you are still bullish on the stock, consider writing an out-of-the-money call option that generates an initial time value return that falls into your initial return goal. Waiting may be counter-productive because Theta is eroded the time value component of the premium.
Alan
Alan,
I purchased 200 shares of this in the am at 22.90 and sold 2 24$ calls December.
The underlying is down almost to my stop level, the 10 MA.
If it breaks tomorrow I’d have to buy back the calls and sell the underlying.
Do you agree or have a different risk mitigation strategy?
Just curious about different styles, not asking investing advice of course.
Ted
Ted,
In the BCI methodology, we use the 20%/10% guidelines to determine when to buy back the short call. This assures retaining 80% – 90% of the original premium generated. At this point, we are simply share owners with no option obligations. We have several choices from here:
Take no immediate action and look for a share rebound and then re-sell that same option
Roll down to a lower strike
Sell the stock
Having several position management techniques in our arsenal will elevate our long-term results to the highest levels.
Alan
Hi Alan, I know it has been quite a few weeks since I have been here, as I have been backtesting a lot of my past papertrade stocks, really just comparing the chart trends to the indicators.(quite intrigued though at my findings on all these loser stocks when the market ended Up, – if you would like to know more on this I can tell you.)
*I have 2 long questions this week, and this first one below is to go over a question about Roll-outs.
– If you have bought a stock and sold a slightly ITM call on it, and then at the end of the contract the stock price is down a little more than the B/even point, meaning that if it was closed-out now then it would be a slight loser trade.
At this moment the stock Technicals are now looking ‘Mixed’, yet the stocks performance seems quite good still as the ‘1-Month Price performance line’ has the stock price above it, and also the ‘RS-line'(what I personally use) is still in a very slight Uptrend too.
Needing to know what is the best thing to do in this kind of situation?,- because if I roll-out to the same strike then it is now OTM, yet for Mixed Technicals I know you would usually sell ITM strikes(unless market very bullish).
Would you most likely just close out this trade, or let it expire worthless to re-sell OTM options on it the following contract- seeing as it’s still performing alright for the time being?
So yeah just to say I am still around and haven’t given up on your great system. My papertrade results have been positive for quite a while – but by how much I will need to get a MCU calculation trade review first to get an accurate measure.
Not really many questions left to ask you either, – otherwise it’s obvious I would likely have been on this blog the past weeks, just as I had in the past.(Haha!)
(*One thing also, I tried to submit all this writing above on my computer but it wouldn’t go through, with an ERROR each time saying “duplicate comment sent”. I don’t know why, I haven’t been on here for months. Can you rectify this for me,- this is important because if I have an emergency question while trading live, then it would be quicker to get a reply from you on here than by email.)
Anyway I hope you can understand that above question. Thanks
Adrian,
I get the duplicate comment each time when I accidentally click twice on “submit comment”. If you click once you don’t get it. That way it does not post the same message twice. I just wait till the blog refreshes the screen or I refresh manually (F5) after a few moments to see if my message was posted.(F5).
What i have been doing if a stock price is below my Breakeven point at expiration and there is no major reason to suspect a losing trend, I leave it as a long position and wait to see if it recovers near near my purchase price so I sell another option..
I also consider selling it and usually post a Sell order so if it fills I show even a small gain after commissions from a temporary rise in the stock I may have to wait some days for that to occur. That works out well with a GTC order because the stock might spike up on opening or during a surprise jump during the day. That happens often. That frees up the money for a new trade. Will unwind if it nothing happens with order after a while.
Mario
Adrian,
Welcome back.
Let’s put some numbers to your trade:
Buy BCI @ $41
Sell the $40 call @ $2
BE = $39
Price @ expiration = $38
The option will expire worthless and we will still own the shares on the Monday after expiration Friday. Now, here is the key point: In our BCI methodology, what transpired last month should have no influence on what we do in the next contract month…nothing. We own BCI at $38 with mixed technicals and a bullish outlook. The questions we consider are:
Has this stock earned its way into our current month portfolio (probably yes) or do we have stronger candidates?
What strikes should I select if BCI remains in our portfolio?
Strike selection is based on chart technicals (as you correctly alluded to), overall market assessment and personal risk tolerance. In this scenario, I would favor ITM strikes (below $38) based on my trading style which may or may not be the same as yours. If I were selling 5 contracts, I may opt for 3 ITM and 2 OTM. More aggressive traders may favor OTM strikes…one size does not fit all.
Thanks to Mario for offering his valuable perspective and covering your 2nd question.
Alan
There was an earnings report for THO on 11/27/2017.
The 11/17 Premium Report had the date as 12/27/2017.
The 11/24 Premium Report had the date as 11/27/2017.
It seems corporations can surprise us. How can we know when there will be one of these surprises? Is there any way we can get a notice from BCI when there is a change in the earnings report date? BCI Premium Report on 11/24/2017 had the new date, but I didn’t notice it.
Jldtex,
In the ten years that we have been publishing the Weekly Premium Stock Report, ER date data has, at times, been elusive. Consider your comment, re; THO. Our most reliable and consistent ER date data site, Earnings Whispers, was showing the ER date as 12/27/17. While we were preparing the 11/24/17 report, both I and one of our subscribers found out that the ER date was 11/27/17. During the process, we found that Earnings Whispers was still showing 12/27/17 and other sites were showing 11/27/17 and other dates. To get a “final word” on the question, we went to the THO website and found a press release indicating that the date was 11/27/17. This date then appeared in the current report.
Earnings Whispers is the only site that we have found that identifies when an ER date is confirmed. In most cases, different sites give different/conflicting dates. Let’s take the upcoming ER date for RHT, Red Hat Software:
– Yahoo: 12/19/17-12/26/17
– IBD: 12/19/17
– Earnings Whispers: 12/25/17
– The CBOE website (Earnings Calendar): 12/20/17
– The NASDAQ website (Earnings Calendar): 12/20/17
– Red Hat’s website: No press releases announcing their
upcoming ER date
As a matter of fact, even the exchange websites themselves print an ER date disclaimer in the “fine print”. The following is from the NASDAQ website:
“*The upcoming earnings date is derived from an algorithm based on a company’s historical reporting dates. It is possible that this date will be updated in the future, once the company announces the actual date.
Data Provider: Zacks Investment Research”
So I hope you can appreciate that the actual ER date can differ across different websites until the company actually releases a press release indicating when the ER date will be. We have also seen numerous cases when an ER date is changed even after the company initially announces the date.
When we are in earnings season, the confirmed ER date is shown as “bold red” in the report. We make EVERY effort to provide the most current ER date data that we can. When we discover that an ER date has changed, we will immediately notify Premium Members via one of the following ways:
– In a blog entry
– In an email to Premium Members
– If there are more than one or two changes, we will publish a
revised report and upload to the Premium Member website
(with an accompanying email)
Best,
Barry and the Blue Collar Investor Team
Barry,
Thanks for the detailed response.I’m going to need to be more diligent in rechecking ER dates. I’m not always reading the blogs and I haven’t always looked at the premium reports that come out mid-contract. I’ve been using BCI about 18 months and I’m still learning. Thanks for the great service.
John
John,
I want to thank you for your question. It is one of the most often asked questions about the report. I was pleased to respond because it gave me the opportunity to fully describe the issues related to posting ER dates in the report and allow other members of the BCI Community to better understand these issues as well.
Best,
Barry
Alan,
I am subscribed to your private membership.
What do you think about today and how to adjust accordingly to the drop today?
I sold 190 LRCX at 12/15 expiration.
What do you think about buying leap options today? Eg Netflix long all for 2019 expiration. Or trying to catch the bottom today or just wait till later in week?
Alp
Alp,
Yesterday LRCX dropped by 8% and is up 1% in pre-market today. Yesterday, Zacks highlighted LRCX favorably which may give it a boost today. If you sold the $190 call, you are still in good shape as share price is above $194. Keep in mind our 20/10% guidelines regarding closing the short calls.
Buying LEAPS is not a strategy we focus on in this venue unless you are considering the “poor man’s covered call” In those cases, my personal preference are blue chip stocks.
Alan.
Was able to execute the 20% rule today on my holding of TER. 20% of my Option Entry STO price $0.8182 was $0.16. Actually filled 4 orders at $0.10 or 12.2% of my Entry STO.
I will take a break now and:
A. Wait for the double to kick in.
B. Or maybe I will do a little Buy and Wait for half or all off my positions
C. Or I could also create 4 GTC STO orders orders now for the Call price going back to Entry Roll Underlying Last Price by using my Delta and Gamma adjustments to predict the call value at the Entry Roll Price. Sometimes the underlying like to peak up on Opening bell, then return to normal, to fill those order while you are still getting up for the morning. have done that several times and bring a smile to me.
.****************
Also crested 4 BTC 20% rule order at $0.25 for PYPL Covered call I have. The current last price of the option is around $0.36.
Mario
Hi Mario,
Nice work taking your options profits on TER and maybe on PYPL. I hope the stocks turn back around for you. They are always the culprit in this game!
I am sitting here trying to figure out what the heck the market was telling me today :)? But it is always a mistake of over thinking to make too much of one day.
Today was interesting: 8 of 9 SPDR components of SPY were up but XLK dragged the index down a fraction. VIX was up over 6% out of step with SPY so someone bought protection.
Most of the darlings of 2017 like FANG and semi’s had bad hair days while the banks led. Small caps and the Dow rose to mask trouble elsewhere. Not surprised Gold and Treasuries were off given the Dow was up.
Still some politics left to resolve tomorrow and next month so having flexibility with cash on hand if positions don’t pan out is likely wise. – Jay
Hi Mario and Jay,
All my 10 positions were down yesterday. Many were down more than 5%
I did get a fill for my PYPL and ORBK calls @ 20% of the initial premium.
PYPL bounced back almost 3% today, so I’m waiting, but ORBK is down another 1%, so I will probably pull rhe plug on it tomorrow if it continues dropping.
Roni
Hi Guys,
I was glad to see PYPL bounce back for you today. Could be a “hitting a double” setting up on that one?
I have been a dip buyer all year and added to a few things in the tech area yesterday. That helped with today’s bounce.
I find it interesting SPY was up .88% yet VIX was up another 5.42% today. Likely larger accounts buying more put protection again at these low option prices so it may mean nothing at all. It just gets my attention when I see them out of synch. – Jay
I missed PYPL at 20% rule – was not available to trade. But good it is recovering.
TER was downgraded by analysts and losing now. Let’s see what happens.
Total position down 2.5% despite market up 300.
In my Trust account, EWZ, after a run up (did not exit) dropped down when the market went up 300. Guess I will have to wait and next time exit and not get greedy.
Mario
Hi Mario,
my total positin is also down 2.5% like yours.
Today we are having another scare. A short time before noon I got a fill for my IPGP 12/15 call @ 12% of original premium, and will wait to see what happens till Monday.
I am still hanging on to PYPL and ORBK too because this looks like a news driven situation which will hopefully blow over soon.
Roni
Roni,
I agree with your assessment this is news driven and I plan to sell a couple OTM CSP’s on things I like this afternoon for January expiry. The nice thing about sell offs is premium goes up :).
I am a bit worried about the continued unraveling of Trump and the people around him. But so far betting against him has not panned out. Have a great weekend, – Jay
Same to you Jay.
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Alan and the BCI team
Alan /MarioG, Thanks for both your answers/insight into what can be done in that technical situation. I had usually when the stock performance is alright just wait(as Mario says) for stock to re-bound from support levels, – I even did this recently on a trade that I held for 4-months, it rebounded back up to above the buy price, so it went from a big loser to a very big winner trade.(I may show you the chart soon on here.)
—————————————————————————————
* My 2nd question is:- When I have a stock that had expired worthless the 1st month, then I am needing to know how to workout the initial calculation of this stock for the following month.
My stock trades:- Buy 200sh’s of KEY@ $18.62, & STO 2x $18C @0.85c.
– Price expires w/less @ $17.73.
– Price at re-sell time (start of following months contract) is at ‘$17.67’, and I then STO 2x $18C @0.25c.
How do I workout the next initial months return?
Is it 0.25c/$17.73 = 1.41%?
Or 0.25c- 0.06c/$17.73 = 0.19c/$17.73 = 1.07%? (or are these both wrong?)
This was just 1 of 3 stocks I had months ago that I still to this day hadn’t known how to calculate.
I don’t like guessing so much so I’ll leave it up to you.
– Also a 3rd question, I still can’t submit comments from my computer, and I didn’t double-click!
My I.P default gateway address is 192.168.1.1, and my IPv4 address is 192.168.1.2.
Could you tell your tech. team to investigate this for why I can’t send comments through?
Thank you
Adrian,
If you can get to the Internet from your computer and view multiple sites your IP address is fine. The default gateway and ip address you state are normal for local ip addresses.
I recommend on your browser you clear the cache and files or later try completely clear all items (cookies, browsing history etc.) This may fix the posting issue.
Another way I improve my performance in a Windows PC is to clear the TEMP under your user profile. In Windows 8.1 it is C:-users\Your profile \ AppsData \ Local \Temp folder. I only erase folders older than current date. Cancel if a window appears that it cannot delete a folder. The improvement in response is usually significant if you have not cleared this for some time or never. You can search for more information on this on the Internet.
I gather you are entering blog comments with your cellphone, if the computer does not work.
******************
The way I keep track of performance for a trade(s) is to keep tack of the following all the time on a per share basis. (I use values after commission charges for the Breakeven calculation to be more accurate):
Purchase price
Strike
Premium
Breakeven point
Cost Basis for ROO% (CBR) (stays a constant once calculated for all return calculations)
>***
You stated:
My stock trades:- Buy 200sh’s of KEY@ $18.62, & STO 2x $18C @0.85c.
– Price expires w/less @ $17.73.
– Price at re-sell time (start of following months contract) is at ‘$17.67’, and I then STO 2x $18C @0.25c.
How do I workout the next initial months return?
Is it 0.25c/$17.73 = 1.41%?
Or 0.25c- 0.06c/$17.73 = 0.19c/$17.73 = 1.07%?
.****
Entry date:
Underlying Purchase price: $18.62
Option: STO 2 Contracts (Cn) Strike18 Call @ $0.85
Intrinsic Value: .62
Time value: .23
ROO% .23 / 18= 1.28%
Downside protection: .62 / 18.62 = 3.33%
Cost basis for ROO% (Return) CBR = 18 (Strike value for ITM options)
Breakeven point: 18.62 – .85 = 17.77
Return check: (18-17.77)/18 = 1.28% (Option assigned at 18)
Total Gain: Time Value x shares = $0.23 x 200 = $46.00
Total Net Gain Check $: CBR x shares x ROO% = 18 x 200 x 0.0128 = 46.08
.******
Expires Worthless:
BEP still 17.77
CBR = 18
.******
Add Option Leg (Option OTM):
Underlying: 17.67
STO 2Cn 18 Ca @ 0.25
BEPnew = 17.77 – .25 = 17.52
CBR = 18
Effect on Gain from just the Sale of option (0.25 – 0.33 (share loss from strike))/18 = -.08 / 18 = -0.44% (Loss in position gain from the sale of this option from your original Entry ROO%)
Final Gain if price unchanged: 1.28% (Original ROO%) – 0.44 = 0.84%
Net gain for 200 shares is 18 x 200 x 0.84% = $30.24
If price appreciate above strike: Upside potential = .33 / 18 = 1.83% Total gain = 0.84% + 1.83% = 2.67%
Net Gain for 200 shares 18 x .200 x .0267 = $96.12
Alternate calculations to get same answer using BEP, CBR
BEP = 17.52, CBR = 18:
ROO% (U=17.67) At U=17.67 Net gain% for position is (17.67 – 17.52) / 18 = 0.833% = Gain if Underlying does not change
If underlying rises above strike shares are sold at 18, Net gain = (18 – 17.52) / 18 = 2.67% – Agrees with above.
.********
.***************
Another interesting way to look at the overall position gain is as follow by looking at the Share income alone and then the Option income alone:
Underlying Shares:
With U = 17.67 (price does not change), if unwind or exit completely at this this price :
Sell at 17.67 Buy at 18.62 = -$0.95 loss
Options:
Sale STO (entry) = 0.85 income At Expiration Worthless = 0 Total 0.85 income
Sale STO (add leg) = 0.25 income At Expiration Worthless = 0 Total 0.25
Total Income from options: 0.85 + 0.25 = 1.1
Combining:
Total income: -0.95 + 1.1 = 0.15
ROO% (U=17.67)= 0.15 / 18 = 0.833% This agrees with above.
,********************
So if you just keep tack of your current BEP and the CBR for position you can calculate your position gain at various Underlying prices.
The BCI Classic Encyclopedia discusses Share appreciation concepts when rolling on pages 288 Plus and on pages 402-405. The What now calculator on Page 132 Plus calculates comparative returns for different strikes for easy evaluation. Using CBR as I do above gives you the actual gain% or difference for a particular strike. .
Hope this helps.
Mario
.
Adrian,
The Ellman Calculator is designed to assist us in making the best possible investment decisions at the time of the investment or trade. This is different from statistics we would use for tax purposes where the Schedule D of the Elite Calculator will be useful. There is also a Daily Covered Call Writing Checkup tool located in the member site (“resources/downloads” section) to monitor active trades. Additional trading tools will be made available in 2018.
If, at the time of the trade, the stock is trading at $17.67 we are deciding whether to sell the shares and buy a new underlying or sell a call on the current stock. To compare “apples-to-apples”, our cost basis is $17.67. Using the “multiple tab” of the Ellman Calculator will show the following results:
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG
Alan
New Video User Guides for Premium Reports:
We have recently added video user guides for our Premium Stock and ETF Reports to our member site and on the membership link on this site:
https://www.thebluecollarinvestor.com/membership/
Alan
Executed 20% rule for SMH and SOXX on Friday 12/01 after false report by Network that turned the market down.
I missed outright 20% rule with TTWO but have BTC order GTC on it at 20% for Monday at opening to see if it will execute. Probably will not catch it since the market my be up on Monday with the weekend tax plan news. I am ready for it with that open order.
Mario