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Sector Rotation and the CEO Strategy

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In 2023, BCI introduced the CEO Strategy, a streamlined approach to covered call writing using the Select Sector SPDRs. This article will explain why sector rotation in our business cycle will create opportunities for this strategy to beat the market on a consistent basis. First, some definitions.

What is the CEO Strategy?

This is an acronym for Combining Exchange-Traded Funds with Stock Options. The database of over 8000 securities is reduced to 11 and the number of exit strategies available for covered call writing is reduced from 14 to 4. Each month or week, we select the top 4 or 5 to populate our covered call writing portfolios.

What are the Select Sector SPDRs?

These are exchange-traded funds (ETFs) that divided the S&P 500 into 11 index funds and managed with the objective of matching the price and yield performance of their underlying sector indexes. Historically, these sectors will out- or under-perform depending on the stage of the current business cycle in our economy.

What is the business cycle?

Fluctuations in Gross Domestic Product (GDP) explain the expansion and contraction of economic activity that an economy experiences over time.

Top-performing Select Sector SPDRs during each phase of the business cycle reflecting sector rotation

Recession:

  • XLP: Consumer staples
  • XLU: Utilities
  • XLV: Health Care

Recovery:

  • XLRE: Real Estate
  • XLY: Consumer Discretionary
  • XLB: Materials

Expansion:

  • XLK: Technology
  • XLF: Financials
  • XLRE: Real Estate

Slowdown:

  • XLV: Health Care
  • XLP: Consumer Staples
  • XLF: Financials

Discussion

Selecting our best performing Select Sector SPDR ETFs each week or month allows our portfolios to become populated with securities that align with the current business cycle. Although there are no guarantees, this does enhance our opportunities to beat the market on a consistent basis especially while we lower our cost-basis when selling covered call options.



Poor Man’s Covered Call Calculator

The PMCC Calculator is designed to determine initial trade structure and status as well as various position management price point considerations and the exit strategy price buyback points to buy back the short calls based on the 20%/10% guidelines detailed in the BCI books and Online Video Programs. The spreadsheet comes with a user guide.

Cells are provided to enter the option month and current date, used to assist with the calculations. There are 5 tabs incorporated into this calculator. The image above shows the 1st tab for trade initialization.

Click here for more information and a detailed video.


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:

Hi Alan,

Thank you for sending the recording of the excellent Cash-Secured Put Class today. 

I have been selling option contracts using the BCI methodology since June. I really appreciate how clearly you explain the concepts by giving real life examples step by step so that even a nervous investor like me could understand and follow. 

Thank you so much for your help. 

Best regards,

Faye

Upcoming events

1. BCI-Only Webinar: Portfolio Overwriting

Thursday January 11, 2024

8 PM ET – 9:30 PM ET

You can register here, now (click on this link).

Portfolio Overwriting: Covered Call Writing Our Buy-And-Hold Stocks

Increasing profits and avoiding tax issues

Our buy-and-hold portfolios in non-sheltered accounts are generating 8% – 10% per year. Can we increase these yields by selling stock options while, at the same time, dramatically decreasing the probability of our shares being sold to avoid potential tax implications? The answer is a resounding “yes”.  Portfolio Overwriting is a strategy that can benefit millions of investors seeking to enhance portfolio returns using a low-risk covered call writing-like strategy.

Topics discussed

  • Brief review of covered call writing
  • Option basics
  • What is an option-chain?
  • Option selection
  • Calculating covered call returns: Real-Life examples
  • Portfolio overwriting defined
  • Pros and cons of portfolio overwriting
  • Why early exercise is so rare
  • Rolling options
  • Role of dividends
  • Locating ex-dividend dates
  • How to avoid early exercise
  • Real-life examples with calculations
  • BCI Portfolio Overwriting Calculator
  • BCI Trade Management Calculator
  • Summary

You can register here, now (click on this link):

2. Long Island Stock Traders Meetup Group (private investment club- Part I)

Thursday February 15, 2024

7:30 PM ET – 9:00 PM ET.

Club members only.

3. Las Vegas Money Show & Stock Traders Live In-Person Event

February 22 & 23, 2024

Paris Hotel

Thursday, February 22, 2024, at 4:55 pm – 5:25 pm PST

The PCP (put-call-put or “wheel”) Strategy

Friday, February 23, 2024, at 12:00 pm – 12:45 pm PST
Covered Call Writing: A Streamlined Approach

4. Long Island Stock Traders Meetup Group (private investment club- Part II)

Thursday March 14, 2024

7:30 PM ET – 9 PM ET

Club members only

Alan speaking at a Money Show event*********************************************************************************************************************

11 Responses to “Sector Rotation and the CEO Strategy”

  1. Otto January 6, 2024 10:45 am #

    Alan,

    For the Q&A for this Thursday’s webinar, do you want us to email you our questions before the seminar or will you take them live?

    Looking forward to Thursday and hope you do a lot more.

    Thanks,
    Otto

    • Alan Ellman January 7, 2024 7:39 am #

      Otto,

      We are taking questions live. Barry will respond to chat box questions relating to the topic (portfolio overwriting) while I discuss the PowerPoint slides.

      After the [presentation, we’ll both respond to questions on any topic related to covered call writing and cash-secured puts.

      You can also send questions in advance, and, if needed, I can prepare slides to assist in our responses.

      See you Thursday.

      Alan

  2. Barry B January 6, 2024 10:09 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 01/05/24.

    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:

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

    Reminder: Premium Member’s pricing is locked into your current rate and will never see a rate increase as long as the membership remains active.

    Best,

    Barry and The Blue Collar Investor Team

  3. Eileen January 7, 2024 2:21 am #

    Alan,

    Can the CEO strategy apply to cash secured puts? I prefer puts and like the idea of streamlining the process.

    Thank you.

    Eileen

    • Alan Ellman January 8, 2024 7:50 am #

      Eileen,

      Yes, we can. We will need to make a determination as to which of our put exit strategies we will include in this approach, and this is something I haven’t researched with real-life trading.

      My exit strategy starting points would be to include the 3%, 10% and 20% guidelines, rolling-up and closing ITM strikes.

      Alan

  4. Stan January 7, 2024 9:24 am #

    Alan,

    Can I use the CEO strategy if I have 25,000 to invest. In your book, you use 100,000.

    Thank,
    Stan

    • Alan Ellman January 8, 2024 7:58 am #

      Stan,

      With $25k available and targeting maximum diversification, I would use 3 Select sector SPDRs, allocating $8333.00 per position.

      This means I would look for securities priced in the $80s or less.

      I set up a sample portfolio make-up given this scenario, based on the best-performing Select Sector SPDRs from our last premium member ETF report, using 1 of our CEO spreadsheets.

      Notice that we are diversified with approximately 27% of the S&P 500 (3/11) and have $1158.00 in cash reserve for potential exit strategy opportunities.

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

      Alan

  5. Barry B January 7, 2024 12:32 pm #

    Premium Members,

    The Weekly Report for 01/05/24 has been revised and uploaded to the Premium Member website. Data for NVO and LPG have been updated. Look for the report dated 01/05/24-RevA.

    Best,

    Barry

  6. Alan B January 9, 2024 9:12 am #

    Alan,

    I learn by asking questions.

    Situation: There were a large number of “Buy to open” Calls in BCI stock at a strike price of $100 for the next expiration date. The stock suddenly rose to $105 overnight and all of the Calls were then exercised at the $100 strike price.

    How would the exercise effect the current market price of $105?

    Thanks,
    Alan B

    • Alan Ellman January 9, 2024 12:37 pm #

      Alan,

      Good question.

      If I stipulate up front that we’re talking about roughly 100 Delta calls (deep in-the-money) that are being exercised, and with the reminder that exercise/assignment involves the delivery of shares from one person to the other and does not represent a transaction in the open market (i.e. doesn’t have a direct effect on the balance of supply/demand for the shares), then I wouldn’t expect exercise to have much of an effect on the share price.

      However, an effect on the share price is possible, particularly if there are a large number of lower Delta calls that are exercised.

      If this occurs, professionals who are hedged against a 70 Delta short call position, for example, that suddenly turns into 100 Deltas as a result of assignment (short calls becoming short stock), would immediately have additional Deltas to cover and would need to do that by buying more stock in the open market.

      The general answer is little to no effect.

      Alan

  7. Alan Ellman January 10, 2024 4:42 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.

    Premium member video link:

    https://youtu.be/EXMO-KwZuJs

    For your convenience, here is the link to login to the premium site:

    https://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

    https://www.thebluecollarinvestor.com/membership.shtml

    Alan & the BCI team

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