We can leverage our knowledge of cash-secured puts to take advantage of common scenarios. In this article, we will detail how to take advantage of a disappointing earnings report from a stellar blue-chip company. On 7/25/2023, MSFT reported earnings and issued guidance that fell short of market consensus. Share price declined by more than $15.00 per-share. Did MSFT suddenly become a company we would want no part of? Of course not. Will share price decline even further or will it recover? I would lean towards the latter but no guarantees.
Rationale for selling weekly cash-secured puts (CSPs) after a disappointing chip earnings report
- Using out-of-the-money CSPs will hedge against further share price decline
- By selling weekly puts, our annualized returns will be greater than using longer dated options
- Significant annualized returns are probable
- Favor companies that we would otherwise not minding including in our stock portfolios
MSFT: Year-to-date chart through 7/28/2023
Note that MSFT was outperforming the S&P 500 for over 6 months and continued to do so even after the 7/25/2023 earnings release.
Broker screenshot showing sale of the 7/28/2023 $325.00 put for $1.03 per share
MSFT: 3-day calculations
- The BCI Trade Management Calculator shows a 3-day return of 0.32% (brown cell)
- The spreadsheet shows an annualized return of 38.68% but that stat is exaggerated because it includes weekend days which we can’t take advantage of using weekly options
- The more accurate annualized return is 17%, still significant
- If the put option is allowed is exercise, MSFT would be purchased at a breakeven price point of $323.97 (yellow cell), a discount of 3.17% (purple cell) from trade entry
Discussion
Mastering all aspects of option-selling allows us to take advantage of a myriad of scenarios that come up all the time. One such event is a disappointing earnings report from an elite-performing blue-chip company.
Covered Call Writing: A Streamlined Approach
How to consistently beat the market using our CEO Strategy
Combining Exchange-Traded Funds with Stock Options
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This book Is written for investors seeking a low-risk approach to generating cash flow in a user-friendly and time efficient manner. It utilizes covered call writing and then tailors the strategy to achieve the following goals:
- Sell options to lower our cost-basis
- Generate weekly or monthly cash flow with reduced but still significant initial percent returns
- Reduce the database of underlying securities available from 8500 to 11
- Reduce the number of exit strategy considerations from 14 to 4
- Beat the market on a consistent basis
- Reduce portfolio volatility
This book provides a roadmap as how to accomplish these objectives. The “how”, the “why” and the “when” is addressed for every aspect of each trade. Chapters 9 through 20, show every trade the author executed for each monthly contract in 2022. Screenshots taken from the Scwab.com platform are archived in each chapter.
Here’s what you will not find in this book:
- A stock called “XYZ”
- Hypothetical trades
- Computer generated trades
- Unrealistic promises
- Only winning trades
Join us in this 1-year journey using our CEO Strategy, a streamlined approach to covered call writing.
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Alan,
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Upcoming events
1. BCI-Only Webinar: Portfolio Overwriting
Thursday January 11, 2024
8 PM ET – 9:30 PM ET
Registration link available on 12/28/2023
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
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- How to avoid early exercise
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- BCI Portfolio Overwriting Calculator
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- Summary
Registration link to follow on 12/28/2023.
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Thursday February 15, 2024
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February 22 & 23, 2024
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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
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Alan,
I’m reading your book on cash-secured puts and like the idea of buying stocks at a discount.
Can you help me with strike selection when I want to own a stock for the long run?
Thank you and happy new year.
Jim
Jim,
The best way to craft these trades is to make a pre-trade determination of our goals.
What is our target discount?
What is our target initial time-value return on the put option sold?
Let’s say our 1-month target for both is 2% – 4% and we are looking at DOCU:
The $60.00 (near-the-money) put (current bid price of $1.88) offers a purchase discount of 4.19% and an initial time value return of 3.23% for the 1/19/20254 expiration.
Our Trade Management Calculator will do all the necessary calculations for us.
Alan
Alan,
The TMC user guide is great , I just have one question . Column AI ( final stock price if sold) use this column if stock was exercised which obviously is the strike price . Is that correct ?
And nothing goes in AJ unless it went unsold?
John
John,
You are 100% correct.
Now, if the share price in less than the strike sold and we are retaining the shares, we enter the current market value at expiration into column AJ and the Trade Management Calculator will compute the option credit and share credit or debit at expiration. In this scenario, current market value is entered into the next expiration cycle spreadsheet (TMC).
If we are rolling an in-the-money strike at expiration, we enter the initial strike into column AJ and the same price into share price in the next expiration cycle spreadsheet.
Keep up the good work.
Alan
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 12/22/23.
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
Alan,
Happy Holidays.
On your weekly list how do stocks, in the next month do, in “ Passed Previous Week and Failed Current Week “ to “ Passed Both Weeks “
Is it OK to choose stocks from “ Passed Previous Week and Failed Current Week “ list?
Have you done a study?
Thanks,
Neville
Neville,
If we entered a trade with an “eligible” security (white cells), and that security moves to “failed in the current week” (pink cells), we continue to manage that trade with our exit strategy arsenal.
We do not close a trade because it gets “bumped” from our eligible list. It still can be a strong stock or ETF, just not an elite performer at the time the report is crafted.
If we need a replacement stock mid-contract, we select from the eligible securities at the time the most recent report was crafted.
I have not done a study regarding the stocks that have moved from “eligible” to “failed this week”, but I have had consistent success for nearly 3 decades following the methodology I present to our BCI community. I only use the reports we provide to our premium members, nothing else.
Alan
Alan.,
I liked your idea of cash secured put following poor earnings report.
It seems you decided on a short-put strike about 3% below the market on the day of purchase.
Did you use technical analysis for that choice or just “black magic?”
i have quite a few partial positions, shop /nvda/etc that I can use it on when necessary.
Thanks!
Michael
Michael,
Let’s rule out “black magic” as 1 of our strike price selection methodologies!
I will typically select an out-of-the-money put strike that meets my pre-stated weekly, monthly or annualized initial time-value return goal range.
We also factor in the % discount we will receive, if the shares are, in fact, “put” to us.
In this MSFT real-life example, I felt the returns were significant and the discount was also reasonable.
Alan
Premium members:
This week’s 5-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.
There has been a noticeable uptick in the # of eligible securities, a reflection of how the market winners are broadening.
Premium member video link:
https://youtu.be/EXMO-KwZuJs
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Alan and the BCI team