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Selling Deep OTM Cash-Secured Puts with Exit Strategy Enhancements

This is a follow-up cash-secured puts article to the one published last week where I detailed how I was selling deep OTM cash-secured puts on Apple Computer (AAPL) to generate weekly cash flow. I was using strikes with Deltas below -0.10%, approximating less than a 10% of ending in-the-money. My goal was to generate 0.4% 5-day returns, 18% – 19% annualized. This past week, I continued this approach but also was able to take advantage of exit strategy opportunities.

 

AAPL trading log from 9/21/2020 through 9/25/2020 (5 contracts)

  • 9/21/2020: AAPL trading at $106.60
  • 9/21/2020: STO $96.25 put at $$0.38 per share
  • 9/22/2020: BTC the $96.25 put at $0.06 (AAPL appreciated in price) per share
  • 9/22/2020: STO the $101.25 put at $0.24 per share
  • 9/24/2020: BTC the $101.25 put at $0.16 per share
  • 9/24/2020: STO the $103.75 put at $0.34 per share
  • 9/25/2020: BTC the $103.75 put at $0.02

***I took advantage of share appreciation such that I was able to generate additional time-value profit while still retaining options with Deltas <-.10%.

 

Initial trade structuring on 9/21/2020

 

AAPL Put Trade with the BCI Put Calculator

 

This meets our target of 0.4% 5-day initial time-value return goal.

 

Brokerage statement showing initial trade with exit strategy implementation

 

Brokerage Statement from 9/21/2020 – 9/25/2020

 

4-day results

We will use a cost-basis of $103.41 per share ($51,705.00 for the 5 contracts) as this is the largest amount of cash required for all trades. Our option credits per share are $0.38, $0.24 and $0.34. Our option debits are $0.06 and $0.16 per share for a net option credit of $0.74 per share or $370.00 for the 5 contracts. On a cost-basis of $51,705.00, the 4-day return is 0.72%, 34% for a 48-week (avoiding earnings weeks) annualized return.

 

Final trade of the week: 5-day results

AAPL moved up early on expiration Friday driving down the ask price of the $103.75 put to $0.02. I closed all 5 contracts to lock in a final 5-day profit of 0.70%, 33.4% annualized over 48 weeks. The screenshot shows this final trade of the week:

 

AAPL Put Final Trade of the Week

 

Discussion

Selling deep OTM cash-secured puts can generate significant annualized returns in a low-risk manner. Taking advantage of exit strategy opportunities will enhance returns to the highest possible levels. As always, we must be prepared with exit strategies if the trades turn against us.

 

For more information and tools for selling cash-secured puts

Best book

Best online DVD program

Best calculator

 

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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:

Alan,

I was getting beat up in the stock market the last 6 months because I refused to gamble on any FAANG stocks. I am a value investor, and that has not been working. I have not given up, but I have listened to your advice and now selling covered calls on high-dividend paying aristocrat stocks and also sell cash-secured puts on them. If I get assigned, the great! WIN-WIN, I am getting paid either way. Thank you so much for taking the sting out of the Markets.

Jon

 

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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

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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.

41 Responses to “Selling Deep OTM Cash-Secured Puts with Exit Strategy Enhancements”

  1. Jim M September 26, 2020 2:29 am #

    Hi Barry & Alan,

    Alan, I noted on your Wednesday comments to keep emotions out of it and the fact you will be going to 80% to 100% cash prior to October earnings.

    Thank you for sharing as we BCI members do appreciate those insights.

    If I can indulge you with a question, or idea, due to the uncertainty of the markets and the vol swings we are seeing, does this scenario make any sense?

    Demonstration Example (see screenshot). I plugged in prices before today’s (9/25/2020) open.

    9/25/2020 buy 100 shares of XLK $111.28

    9/25/2020 buy 1 Jan 2021 ATM Put ($110) for $8.00 ($800)

    9/25/2020 STO Oct 2 Call for $1.50 ($150)

    10/2/2020 STO Oct 9 Call

    10/9/2020 STO Oct 16 Call

    10/16/2020 STO Oct 23 Call (Making call money by now as put cost has been recovered.)

    a. The idea is to have a 50% Delta neutral put (or close to) so that any downturn is protected by a 1 to 1 in price.
    b. Use the Weeklies to chip away at the cost of the put.
    c. It may take less weeks to pay for the put if we get the appreciation we hope for.

    Just noodling to keep my emotions in check and if this deviates too greatly from BCI methodology, then I understand completely, and just drop it into the Trash folder. Not a problem at all.

    Have a great weekend.

    Jim M

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

    • Alan Ellman September 26, 2020 7:53 am #

      Jim,

      I admire all our members who think outside the box. Now, this is a series of trades that may work out but let’s analyze from several perspectives:

      1. We are paying for a 4-month expiration put, implying a long-term commitment to XLK… what if our bullish assumption on the underlying changes?

      2. The screenshot shows that we lose if we are forced to close the trade in week #1.

      3. Compare the initial returns to the possibility of share price declining below the put strike. Are those risk-rewards we are comfortable with?

      4. The first analogy that popped into my head was that we are riding our bicycle uphill, working hard to cover the debit we created. How about starting at the top of the hill and initiating with an option credit (call premium > put cost)? This traditionally would mean the same call and put expiration dates. If we are forced to close the trade after expiration, it will result in a significant gain or a manageable loss.

      This proposed strategy can work under a certain set of circumstances but we must view the upside versus the downside before making a final determination.

      Keep up the great work.

      Alan

      • Jim M September 26, 2020 9:21 am #

        Thank you Alan for taking the time to read and reply.

        The analogy is perfect.

        What I proposed is long and drawn out keeping one in a trade for longer than one expiration cycle, with multiple transactions, with a hope & prayer it will work.

        Thank you again,

        Jim M

  2. Jim B September 26, 2020 3:11 am #

    Alan,

    This is insane I have owned “O” the REIT for a couple of years, my adjusted basis is now $8.08 per share. Today I was looking at selling a covered call (O Oct 60 C) and the ROO is 13.60%.

    Do others find this kind of return on legacy stock? Is it appropriate to use the adjusted basis of a stock rather than the current market price when computing the ROO?

    I ended up selling O Oct 62.50 @ $0.40 for a ROO of 5%, trying to not be too greedy.

    Jim B

    • Alan Ellman September 26, 2020 9:37 am #

      Jim,

      When we are analyzing our covered call trades, we use current market value, not previous stats. This applies if the stock traded much higher or much lower when it was initially purchased.

      Reilly Income Corp (“O”) has an implied volatility slightly higher than the S&P 500 so premium returns will be reasonable, not incredibly high.

      I created a screenshot of the calculations based on the most current data for your trade. It shows an initial 20-day time-value return of 0.7% with an additional 4.3% of upside potential.

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

      Alan

  3. Georgia September 26, 2020 7:36 am #

    Hello again Alan:

    Can you please explain what a leveraged EFT is and if it’s a good covered call. BTW, are all EFT’s leveraged? If so, what is being leveraged?

    Thank you.

    Georgia

    • Alan Ellman September 27, 2020 7:51 am #

      Georgia,

      An ETF is a security that tracks a basket of stocks or an index (like the S&P 500 or a particular sector) that trade like stocks. Unlike mutual funds, the prices change throughout the trading day as they are bought and sold. They provide diversification to our portfolios. Most are not leveraged.

      Leveraged ETFs use financial derivatives (like options) and debt to magnify the returns of the underlying index or securities. The volatility is much greater than that of non-leveraged ETFs creating greater option premium for option-sellers but also creating greater risk.

      In my view, leveraged ETFs are not appropriate for most retail investors who use low-risk option-selling strategies with capital preservation a key requirement. There are exceptions.

      Alan

      • Georgia September 27, 2020 8:40 am #

        Thank you always for your well heeded professional advice.

        Georgia

  4. Kamil September 26, 2020 2:06 pm #

    Hi Alan, thank you for sharing your extensive knowledge on this blog, i find it extremely helpful and insightful. I have a question about managing a broken covered call position where the stock drops significantly below the strike and the cost basis of the position. For example, i had written a call on SPOT in early September before the NASDAQ plunge and the stock dropped below my cost basis. The cost basis now is ~$268 and i am thinking about different ways of managing the exit. I could write a $260 call five weeks out to collect $8 in premium. But I am thinking about writing a call for next week 10/2 for $240 strike for $5. I think of two possible scenarios: 1) stock closes below $240 and thus i lower my cost basis by $5, then write another call for 10/9, or 2) stock closes above $240, in which case in order to not close the position at a loss (given new cost basis at ~$263), i roll the call one week forward at $240-$242.5 strike, since doing so by definition will be at net credit, again slightly lowering my cost basis and getting the call strike slightly closer to my breakeven. The reason i want to be writing calls for one week out is to have a better hedge against further declines in stock, since their delta is higher. this approach seems pretty conservative to me, and allows me to consistently lower cost basis (when these calls with strike below my cost basis expire worthless) or keep getting the strikes closer to cost basis (when the calls are in the money and i have to roll them forward, given time value premium always at a credit to same strike or higher strike). I’ve read about your approach to selling calls and entering a call spread to exit such broken covered call positions, but i wonder if you’ve tried this approach and your thoughts on using it. Thank you

    • Kamal September 26, 2020 5:33 pm #

      and one point i didn’t mention, as i compare this approach (next week call with strike below cost basis) to simply writing a longer-dated call five weeks out at $260 to collect $8 in premium – assuming every week i have to roll forward, rolling to the same strike would always be at a credit of time value, which is ~$2/week for SPOT. thus, in the worst case where i keep rolling the calls forward, doing this five weeks in a row would lower my cost basis by $2×5=$10 plus initial premium, compared to just $8 in premium writing the $260 call five weeks out, so seems like a better approach.

      • Alan Ellman September 27, 2020 8:28 am #

        Kamal,

        There are so many lessons learned from this trade and multiple perspectives to incorporate into our decision-making process. Here are some considerations:

        1. SPOT dropped in price in the 1st week of September from $290.00 t0 $240.00… why?

        https://finance.yahoo.com/news/spotify-defensive-mixed-quarter-132818996.html

        2. With our 20% BTC guideline in place, the option would be closed automatically leaving us opportunities to roll-down to an OTM strike or sell the stock. We could also wait to “hit a double” but it depends if our bullish assumption is still in place.

        3. The reality of the situation is that we now have a stock worth $236.07 per share. We ask ourselves…where is that cash best placed? In SPOT? Or, in a different stock?

        4. If our analysis is that we want to retain SPOT, we then write OTM calls on a monthly or weekly basis (both will work), avoiding earnings releases.

        5. If our bullish assumption has changed, we sell the stock and move on to a better-performer and start generating premium with a new underlying.

        6. It is important to remember that it is the cash, not the stock, that is what we care about. We should have zero loyalty to a stock but extraordinary allegiance to our cash.

        Most of our trades will be winners once we master the 3-required skills but some will be losers. All represent learning opportunities. Even the losers can assist in becoming financially independent.

        Alan

    • Roni September 27, 2020 11:40 am #

      Dear Kamal,

      I know how this feels. We all have these sudden losing trades, and it hurts.
      But most of the time it is best to liquidate and look for a better stock to recover our losses.
      Your efforts to recover the trade sound very difficult. Like holding on to a sinking ship.

      Roni

      • Marsha September 28, 2020 6:16 am #

        Kamal, Roni,

        One of the hardest lessons for me was to sell a losing stock. I held on too long in many cases and it cost me. As Alan says, taking emotion out of our investing will benefit us in the long run.

        Good luck.

        Marsha

        • roni September 28, 2020 11:34 am #

          Hey Marsha,

          Yes, liquidating a loser is very hard.
          I still do not completely master this emotional struggle.

          Roni

  5. Barry B September 26, 2020 8:56 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 09/25/20.

    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

    On the front page of the Weekly Stock Report, we now display the Top 10 ETFs, the Top Performing SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.

    Best,

    Barry and The Blue Collar Investor Team

    [email protected]

  6. Terry September 27, 2020 10:46 am #

    Alan;

    During your trade for AAPL in the example shared above, the following sequence was executed:


    9/22/2020: STO the $101.25 put at $0.24 per share
    9/24/2020: BTC the $101.25 put at $0.16 per share

    Would you expand on the reasoning/thinking in opening for $0.24 and closing for $0.16.

    Best regards;

    Terry

    • Alan Ellman September 27, 2020 2:34 pm #

      Terry,

      This is an example of taking advantage of a price increase in AAPL that allowed me to roll-up from the $101.25 strike to the $103.75 strike for a net option credit of $18.00 per contract or $90.00. ($34.00 – $16.00) while still retaining a short position with a Delta < .10. Alan

  7. Tay September 28, 2020 2:46 am #

    Hi Alan,

    The “main question” I have always struggled with in my portfolio management with is as follows:

    I have understood the “Mid-Contract Unwind” exit strategy as follows:

    The “Mid-Contract Unwind” exit strategy” is used typically during the first half of an option contract, where the market price has risen well above the strike price sold, where the options premium “approaches zero” and the ability to generate a second income stream is greater than the “Buy to Close”.

    Actions taken given the above:

    #1. “Buy to Close” the existing option. #2. Sell the underlying stock previously covering the option contract. #3. Purchase a new stock. #4. “Sell to Open” the related option with the same option expiration date .

    I have done this numerous times and have done very well and have increased profits.

    My question revolves around the following set of circumstances:

    During the first half of an option contract, where the stock’s market price has risen well above the option’s strike price sold, where the options premium is not yet really “approached zero” and the ability to generate a second income stream is greater than the “Buy to Close”.

    Let’s say, if the general market tone and the specific stock technicals are positive, why not BTC the existing option and STO a higher strike price with the same expiration date as the original expiration date?

    My example:
    ==========

    I purchased shares of AAPL, let’s say for example purposes 100 shares of AAPL on 9-21-20 at $106.73 and immediately STO one 10/16/20 contract for $5.40.

    * The stock is now trading at $112.28 as of the close of the market on Friday, 9/25/20 (now trading “In The Money”).
    * I am positive on the AAPL technicals and let’s say also positive on the market in general.
    * The current AAPL 10/16/20 $107.50 call option price is $7.58, with an intrinsic value of $4.78 and a time value of $2.80.
    * The 10/16/20 $115.00 call price is currently $3.60.
    * The original options premium paid to me is NOT actually approaching zero, but I am stuck with a 10/16/20 option at $107.50, a stock now priced at $112.28 and further, a stock and market let’s say I am positive on. Due to recent mass tech selling, I believe AAPL is underpriced and the price will increase in the short term (before the expiration date of 10/16/20).
    * Why not do the above?? I make a profit of 80 cents options premium difference and have the possibility of $2.78 in price appreciation, all with the same expiration date. I totally understand the possibility of the AAPL stock decreasing in value from its current price at expiration date..

    If I do nothing through the 10/16/20 option expiration date and I will have earned the full $5.40 in options premium, assuming the stock price holds at or above $107.50.

    Of course, I could BTC the $107.50 10/16/20 AAPL option, then immediately sell the 100 shares of AAPL and immediately buy another qualified stock and immediately STO another 10/16/20 expiration date. I would not do this, as the cost for the net BTC is approximately 2.50% and normally too high to STO another quality option with the same 10-16-10 expiration date.

    Help…. where is the fallacy in my logic or is there a fallacy?

    The fallacy normally could be said or explained that the stock shot up so quickly, investors maybe then maybe taking profits or the stock had “peaked” out so to speak.

    Thank you.

    Tay

    • Alan Ellman September 28, 2020 6:36 am #

      Tay,

      Your analysis of this trade is spot on. We have a situation (a really good one, I might add) where the time-value cost-to-close is too high for a mid-contract unwind exit strategy yet leaving some investors feeling like there is a lost opportunity if we take no action.

      The reason I do not like rolling-up in the same contract month was well-stated in your final paragraph… a quick price run-up may result in short-term profit-taking impacting what is now a max-return trade.

      You stated that you have confidence that AAPL will continue to accelerate in price. This may represent a reason to veer from our BCI guideline not to roll-up in the same contract month for traditional covered call writing (we do roll-up in the same month for the PMCC strategy).

      As I type, your $5.40 premium + $0.77 in share appreciation to the $107.50 strike is looking good. If AAPL remains above the strike, the 1-month return will be realized at 5.8%… no Kleenex needed.

      Bottom line: In most cases, no action is taken under these circumstances. If our confidence in share appreciation in the short-term is overwhelming, the guideline can be ignored.

      Alan

      • Tay September 28, 2020 4:39 pm #

        Hi Alan,

        Thank you for your very prompt and timely responses!!

        I really appreciate the detailedness of your responses too!!

        Tay

  8. Terry September 28, 2020 8:48 am #

    Thanks Alan for the explanation. You are targeting a 0.10 delta rather than using the 20%/10% threshold on buying back the short option.

    Best regards;
    Terry

    • Alan Ellman September 28, 2020 9:09 am #

      Terry,

      Yes. For traditional selling cash-secured puts in the BCI methodology, we use monthly expirations (Weeklys could be used as well) and the 20%/10% guidelines when share price rises significantly. If those thresholds are reached, we close the short put and enter a new put sale with a different security.

      In this article, we are crafting a specific strategy related to put-selling in a low interest rate environment while in challenging market conditions. We seek to achieve a substantial annualized return by generating small weekly profits and re-assessing our bullish assumptions on a weekly basis. Our risk of exercise is less than 10%.

      Alan

  9. William September 28, 2020 11:03 am #

    Hi, Alan.

    My name is William. I recently discovered your site via YouTube and purchased two of your books, “Exit Strategies for Covered Call Writing” and “Selling Cash Secured Puts”. I really enjoy both books!

    I have a question I was hoping you could clarify. I understand what you mean by rolling covered calls, specifically rolling out and rolling out and up. My concern is a problem I have ran into several times. In the comments of your blog post called “Am I Losing Money When I Buy Back My Deep In-The-Money Strike” you give an example of buying-up as:

    Buy 100 x BCI at $28.00
    STO $30.00 call at $0.80
    BCI trading at $34.00 on expiration Friday
    BTC the $30.00 call at $4.05
    STO the next month $35.00 call at $1.00

    My question and problem is, what do you do when the stock gaps back down to, for example, $27 (and it looks like your option is going to expire while at this price–i.e. the next line above in the example would be: BCI trading at $27.00 on/near expiration Friday)? It appears in cases like this that buying-up turned out to be a waste. Is there a way out?

    Again, I love your material! Thank you for any suggestions! It is nice to meet you.

    Best regards,
    William

    • Alan Ellman September 29, 2020 7:06 am #

      William,

      The “rolling” aspect of your question is secondary to the “gap-down” aspect.

      We decide to roll the option based on our system criteria… meeting fundamental, technical and common-sense requirements in addition to option premium meeting our target goals. We like this stock for the next contract and made a decision to incorporate it into our portfolio. View this as if we didn’t own BCI in the previous contract month and used it for the first time, buying it at $34.00 and selling the $35.00 call. Then the gap-down occurs. So, let’s take rolling out of the equation.

      Regarding the gap-down, we will have had our 20%/10% guidelines in place so the short call would, most likely, be closed. At this point, we evaluate our choices: waiting to “hit a double”, roll-down, sell the stock…

      Here is a link to an article I published last year related to this topic:

      https://www.thebluecollarinvestor.com/managing-news-driven-gap-downs-a-real-life-example-with-stamp-com/

      Good question.

      Alan

      • William September 29, 2020 11:34 am #

        Hi, Alan.

        Thank you for the explanation and link! I am going to try taking your advice and change from viewing the trades as one self-contained series of trades to viewing and evaluating them independently, “as if we didn’t own BCI in the previous contract month and used it for the first time”.

        Best regards,
        William

  10. Sunny September 28, 2020 12:12 pm #

    Hi Alan,

    I have few questions regarding ex-dividend dates with T as example. As I write this T trades at $28.50.

    1. T goes ex-dividend on 10/08 and declared dividend is $0.52. So on 10/08 the stock price will be reduced by 52 cents. T 10/02 28.5 short call is $0.26, 10/09 28.5 short call is $0.33, 10/16 28.5 short call is $0.38, so ex-dividend is not reflected in option price. Why is that?

    2. T LEAPS are almost all intrinsic with not much time value left. T Jan 21 20 call is trading at $8.55. Does it means that on 10/08 it will be reduced by dividend amount?

    3. I have PMCC with short call most likely expiring worthless on 10/02 ($29.5 strike). If it was a traditional covered call I would receive dividend on stock, but having LEAPS doesn’t qualify me for dividend, so holding it through ex-dividend date means I will lose roughtly 6% of LEAPS value ($0.52/$8.55 *100). Is it a way to avoid this?

    Sunny

    • Alan Ellman September 29, 2020 9:29 am #

      Sunny,

      Quarterly dividends are known events and pricing models factor in ex-dates into the pricing well ahead of the actual ex-dividend date. On the ex-date the stock or ETF price will drop by the dividend amount but option premiums are not effected. This applies to all options, short and long-term.

      An exception would be special 1-time dividends, an unanticipated event, which likely will lead to contract adjustments. Here is a link to an article I published on this topic:

      https://www.thebluecollarinvestor.com/special-1-time-cash-dividends-and-strike-prices-of-american-depository-receipts-adrs/

      Alan

  11. Ali September 29, 2020 4:17 am #

    Hello Alan.

    Sorry, I don’t quite understand lesson 7 page 6 exit strategies.
    We sell a put at $50 strike price.

    On or near expiration date, the stock price dropped to $49.75.
    So we exited the $50 sell put option because the stock price dropped to $49.75.

    Then we bought the $50 Sell Put option again for Next Month.
    Can you explain why are we buying the Sell Put $50 dollar strike price again when the stock price is now $49.75 ? when we exited it because the price dropped to $49.75.

    Why are we putting ourselves back in the same place that cause us to exit the $50 Sell Put options in the first place?

    I could understand if we buy a sell put option at $ 48.95 strike price. But can’t understand why $50 strike price.

    Would really appreciate your explanation.

    Thank you,
    Ali

    • Alan Ellman September 30, 2020 6:30 am #

      Ali,

      We consider rolling the put option when we still have confidence in the underlying stock. Rolling avoids exercise for the near month.

      Now, if the stock price moves from $49.75 to above the $50.00 put strike by the next month’s expiration, the strike will expire worthless and out-of-the-money. We use this exit strategy when our bullish assumption on the stock is still in place and the calculations meet our initial time-value return goal range..

      Alan

  12. Alan Ellman September 30, 2020 7:01 am #

    FREE Wealth365 Summit Webinar (different from my 10/15 webinar)

    Monday October 12th at 7 PM ET

    This presentation establishes a foundation of option basics and specifically for covered call writing. The focus will be on 4 practical applications of the covered call writing strategy detailed with real-life examples highlighted with charts, graphs and calculations.

    Get your free pass now: https://summit.wealth365.com/alan-ellman/

  13. MarioG September 30, 2020 7:57 am #

    Trading Experiences 9/29

    Alan,

    ETF EPI was (India) listed in the 9/15/20 ETF Report.

    I checked the Open Interest and it is less then 50 and in many strikes a very low number. How did it get listed in the the ETF Report?

    The only reason I picked this up was that that I purchased it on 9/22 when it was down 4% as a long position. Monday my G/L% rose to 1.5% and I was interested in Overwriting it. Was surprised to see the Open Interest numbers with the price at 23.47 (400 shares). Near zero. Since it was just on your ETF report 1 week only, I then decided to unwind it for a Gain of 1.5% ($138.80) and release the cash for a new investment..

    Mario

    • Alan Ellman September 30, 2020 8:08 am #

      Mario,

      I love when we unwind for a profit.

      EPI was included in the report because our main concern with low liquidity is wide bid-ask spreads and that is not the case with EPI. The screenshot below shows favorable spreads for all near-the-money strikes. The BCI guideline is OI of 100 contracts or more and/or a bid-ask spread of $0.30 or less.

      Keep those successful trades going.

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

      Alan

      • MarioG September 30, 2020 9:20 am #

        As always, Alan, thank you.

        To be more complete, what do you think of making the following modification to your ETF report, first paragraph, to the bold sentence as follows.

        “We also screen for adequate open interest and/or bid-ask spreads at the time of the screening (100 contracts or more and/or bid-ask spreads of 0.30 or less).

        I remember asking you about this and/or requirement when studying your Vol.1 classic encyclopedia in 2015. EPI was unusual security in that it had great bid ask spreads throughout many strikes and almost nil Open Interest.

        Mario

        • Alan Ellman September 30, 2020 9:49 am #

          Mario,

          Excellent suggestion.

          Thank you.

          Alan

  14. Alan Ellman September 30, 2020 5:08 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs and analysis of the top-3 performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly option and implied volatility stats are also incorporated.

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

  15. Max September 30, 2020 7:21 pm #

    Great example showing positive outcome. Now what could we have done if we had started this strategy on AAPL September 1st (the high)? I don’t have access to the historic greeks, but i am assuming 10 delta put would have been ITM by that Friday, and writing against for the last month will have have reduced position somewhat (depending on 16 or 30 delta calls, IV relatively higher SPY?)

    thanks for your continued guidance!

    • Alan Ellman October 1, 2020 6:49 am #

      Max,

      We are initiating our trade with an option that has less than a 10% of expiring in-the-money (ITM). That tells us that we must be prepared, prior to entering the trade, with a plan should that occur.

      Our position management trades at our disposal if the strike is expiring ITM:

      Roll the option down (now OTM)… depends on calculations

      Roll the option out (depends on calculations)

      Close the short put (BTC)

      Allow assignment and keep the stock in a long-term buy-and-hold portfolio (reasonable for AAPL)

      Allow assignment and write a covered call (PCP strategy)

      A plan must be in place for this small, but possible, outcome so we can act in a non-emotional manner if and when we are faced with these decisions.

      Big picture: If we set an annualized return goal range of 18% – 20%, we will have some weeks where we meet this goal as I detailed in last week’s article. There will be some weeks where we exceed this goal as in this article. There will be some weeks when rolling or closing the short put will result in a loss. Our target of 18% to 20% is a reasonable one for those of us who have mastered the 3-required skills.

      Good question.

      Alan

      • Max October 1, 2020 9:46 am #

        Thanks for the quick response! Having tight Bid/Ask spreads and liquidity, as well as your “3-reqd skills” , allow this to be profitable, especially since commissions are at all time low… if you take into acct commissions on your example (Schwab $0.65 per contract), your annual drops to 32.5%.

        My question is, would you do the same with ETFs (QQQ, IWM) that meet the above reqs?

        thanks again, Max

        • Alan Ellman October 1, 2020 11:29 am #

          Max,

          Absolutely. Any of the securities on our watch lists of elite-performing securities can be considered but initial time-value return goals will need to be adjusted. For those who are premium members, I urge you to consider securities from these lists. For others, use your lists of choice.

          Now, the implied volatilities of our selections will vary meaning the premiums will also vary. For example, the IV for AAPL is about 45%, for QQQ about 34%. The 5-day return for AAPL <10 Delta puts will be about 0.4%; for QQQ about 0.2%. There is no right or wrong here as long as the initial trade structuring meets our goals and personal risk-tolerance.

          Alan

  16. Marsha October 1, 2020 11:22 am #

    Alan,

    Are you going to post another article this weekend about your put trades? Really interested.

    Thanks,
    Marsha

    • Alan Ellman October 1, 2020 4:20 pm #

      Marsha,

      This weekend, I’m publishing an article on a new topic. I’m pleased that so many of our members are interested in these trades. Time to move on.

      As a final comment on this subject, I did multiple put contracts on AAPL again this week. If AAPL ends the week above the $110.00 put strike, I will have realized a 0.5%, 5-day return (24% annualized over 48 weeks).

      As always, I am prepared to take action anytime a trade turns against me.

      Alan

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