Comments on: Selling Cash-Secured Puts to Simultaneously Generate Cash Flow and Buy a Stock at a Discount https://www.thebluecollarinvestor.com/selling-cash-secured-puts-to-simultaneously-generate-cash-flow-and-buy-a-stock-at-a-discount/ Learn how to invest by selling stock options. Fri, 10 Sep 2021 11:39:13 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/selling-cash-secured-puts-to-simultaneously-generate-cash-flow-and-buy-a-stock-at-a-discount/#comment-462888 Fri, 10 Sep 2021 11:39:13 +0000 https://www.thebluecollarinvestor.com/?p=20214#comment-462888 In reply to Dennis.

Dennis,

A Weekly option is the same as the last week of a Monthly contract. Use the 10% guideline.

When using Monthlys, set the 20% BTC limit order. The weekend prior to the last 2 weeks of the contract, we manually change that to 10%. I make a note on my calendar at the start of Monthly contracts.

See the screenshot below that reflects such a change in trade status.

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

Alan

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By: Dennis https://www.thebluecollarinvestor.com/selling-cash-secured-puts-to-simultaneously-generate-cash-flow-and-buy-a-stock-at-a-discount/#comment-462373 Thu, 09 Sep 2021 15:03:51 +0000 https://www.thebluecollarinvestor.com/?p=20214#comment-462373 In reply to Alan Ellman.

Hello Alan,

Thanks.

BTW, you mentioned 20% for the first half of the period (first 2 weeks for Monthly Options) and 10% for 2nd half of the period (later 2 weeks for Monthly Options). Do you do the same for Weekly? First Half of the Week and Second Half of the Week?

Also, can you automate the first and second half? Do you need to manually change to 10% in the 2nd half of the period?

Thanks.

Regards
Dennis

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By: Alan Ellman https://www.thebluecollarinvestor.com/selling-cash-secured-puts-to-simultaneously-generate-cash-flow-and-buy-a-stock-at-a-discount/#comment-462286 Thu, 09 Sep 2021 12:13:48 +0000 https://www.thebluecollarinvestor.com/?p=20214#comment-462286 Dennis,

Broker trade execution forms will vary in appearance but have the same basic information. After entering a covered call trade, we place a buy-to-close (BTC) limit order at 20% or 10% of the original option premium sold depending on the time to expiration (that info is detailed in my books and online video courses).

The screenshot below shows how to enter these limit orders. Note the following:

Click on the ticker symbol of the option just sold (top left)
Order type: Limit order
$: Enter 20% or 10% value
Action: Buy-to-close
Quantity: Enter the same number of contracts sold
Timing: Good until cancelled

You will then be asked to review and submit the trade.

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

Alan

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By: Alan Ellman https://www.thebluecollarinvestor.com/selling-cash-secured-puts-to-simultaneously-generate-cash-flow-and-buy-a-stock-at-a-discount/#comment-462278 Thu, 09 Sep 2021 12:02:15 +0000 https://www.thebluecollarinvestor.com/?p=20214#comment-462278 In reply to MarioG.

Mario,

My preference is to take advantage of exit strategy opportunities whenever they present themselves and they can enhance portfolio value. In the case of rolling-down to an OTM strike with XLE, I was able to generate an additional $44.00 with 3 hours remaining until contract expiration. Certainly, not a windfall, but cash in my pocket nonetheless.

Before I get to the 2 cases, I want to point out that in the 2% loss scenario, XLE, a declining stock, would have to turn around in the last few hours of the trading day and move up by $1.00 plus the distance between current market value and the $48.50 OTM strike. Possible? Yes. Likely? No.

Case 1: When our 10% BTC thresholds are reached, we are typically dealing with a stock that is under-performing. We are focusing in on generating as much cash as possible prior to contract expiration. If assigned, we can always buy the stock back on Monday if it meets our system criteria. Usually, that will not be the case, but it’s possible. 0.22% is a small number for sure. On the other hand, it’s a 3-hour return, 160% annualized. It takes under 4 minutes to execute… $44.00 for 4 minutes? I say yes.

Case 2: I like to roll-down to an OTM strike, when the premium justifies the trade. If I want to remove this security from my portfolio for the next contract, it will either be assigned or sold on Monday.

Thanks for your excellent questions. Thinking these trades through is what makes us better investors.

Alan

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By: Dennis https://www.thebluecollarinvestor.com/selling-cash-secured-puts-to-simultaneously-generate-cash-flow-and-buy-a-stock-at-a-discount/#comment-462253 Thu, 09 Sep 2021 06:36:39 +0000 https://www.thebluecollarinvestor.com/?p=20214#comment-462253 Hello Alan,

May I know how I can automate the 20%/10% guidelines (using Interactive Brokers)?
What are the settings I should take note of?

Regards
Dennis

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By: MarioG https://www.thebluecollarinvestor.com/selling-cash-secured-puts-to-simultaneously-generate-cash-flow-and-buy-a-stock-at-a-discount/#comment-461877 Wed, 08 Sep 2021 23:57:31 +0000 https://www.thebluecollarinvestor.com/?p=20214#comment-461877 Alan,

Regarding your Blog post on Aug. 28 where you had a CC on XLE at 49.50 and then traded a BTC at 10% limit threshold at a cost of $.03 per share. In the last few hours of the option, you then rolled down OTM to 48.50 at 0.14 income per share for a net total income of $0.11 per share.

Assuming your reference basis is 49.50 per share, the $0.11 additional income from the two trades is 0.11/49.50 or 0.22% additional gain. I am assuming the $0.11 per share was a near the money OTM covered call, and the next OTM strike option was not worth much.

If by expiration the underlying for some reason did rise above $48.50 option, your share would be assigned and you lose $1.00 or 1/49.50 = 2.0% from you original trade.

I realize that since the 10% threshold was reached the underlying is already 3% to 5% (or greater) down from our original purchase price. So the net position is at a loss if one just unwound the trade (after expiration) if the share were not assigned and you wanted out.

Case 1: Since this was favorable stock to begin with, and looking at the stats and market you feel the stock would recover, is it worth the risk to roll down for the additional income of 0.22% and lose the underlying?

Case 2: If however you have already decided this is an underlying you were not interested in keeping after expiration, you have reduced you losses by 0.22% and the rolled down covered call at $48.50 is justified.

Can you comment?

Regards,

Mario G.

Question: Is it worth risking the 2%

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By: Alan Ellman https://www.thebluecollarinvestor.com/selling-cash-secured-puts-to-simultaneously-generate-cash-flow-and-buy-a-stock-at-a-discount/#comment-461764 Wed, 08 Sep 2021 20:38:05 +0000 https://www.thebluecollarinvestor.com/?p=20214#comment-461764 Premium members:

This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.

The mid-week market tone is located on page 1 of the report.

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