Establishing our covered call trades require a sequential process including stock selection, option selection and position management. This article will analyze the procedures using a real-life example with Tenet Healthcare Corp. (NYSE: THC).
Stock selection using our BCI Premium Stock Report as the resource on 9/20/2024
- Passed BCI’s rigorous fundamental, technical and common-sense screens
- In medical industry segment ranked “A”
- Excellent mean analyst rating of 1.43
- On balance volume bullish
- On our stock list for 16 weeks
Option-chain on 9/20/2024 (preliminary view, will change when ready to trade)
- Consider the OTM $170.00 call strike in normal to bull market conditions
- Consider the ITM $160.00 call strike in volatile and bear market conditions
- The $170.00 strike will be used in this article
Broker screenshot of share purchase and option sale
- 100 x THC purchased at $165.44
- Sell-to-open 1 x 10/18/2024 $170.00 call at $380.00/contract
- Notice the slight changes from the pre-trade option-chain
- Not shown is the 20% BTC/GTC limit order of $0.76, which is 20% of $3.80 and protects against share price decline
Initial trade calculations with the BCI Trade Management Calculator
- 29-day trade if taken through contract expiration (red circle)
- 2.30% initial time-value return, 28.91% annualized (brown cells)
- Upside potential of 2.76%, if THC moves up to, or beyond the $170.00 strike at expiration (purple cell)
- Possibility of a 5.06%, 29-day return
Discussion
The crafting of our covered call trades incorporates stock selection, option selection and position management. Successful execution of these trades is facilitated by following a blueprint like the one analyzed in this publication.
BCI Trade Management System (TMS) & Calculator (TMC) with Exit Strategy Book
This is a unique tool that is used to manage covered call writing and selling cash-secured put trades from start-to-finish. To our knowledge, it’s the only one of its kind anywhere.
The TMS consists of 4 tabs:
- TMC
- TMC user guide
- “What Now Worksheet” tab for covered call writing
- “Unwind Now Worksheet” tab for covered call writing
The TMC is the” meat and potatoes” of the TMS. It has 2 main sections; one for covered call writing (top of spreadsheet) and one for selling cash-secured puts (lower half of spreadsheet).
Each of these sections is divided into 4 sections that flow left to right in the same sequence as we enter and manage our trades:
- Opening trade entries
- Opening trade and total portfolio initial calculations
- Exit strategy trade adjustment entries
- Exit strategy calculations & final combined trade results for both individual trades and total portfolio results.
We also added a Trade Journal to each section to make notes regarding our trades.
Click here for more information and scroll down for 2 videos.
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Facebook post:
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Upcoming events
1. Las Vegas Money Show
February 17 – 18, 2025
- Ultra Low-Risk Approaches to Covered Call Writing and Selling Cash-Secured Puts
- Covered Call Writing Technology Stocks
2. Long Island Stock Investor Group Part II
March 13, 2025
7:30 – 9:00 ET
Private investment club
Cash-Secured Puts: 2 Outcomes
3. Money Masters Symposium Dallas 2025
Saturday April 5, 2025
Hilton DFW Lakes
Saturday April 5, 2025
Hilton DFW Lakes
2 events:
45-minute workshop
- Option basics
- The 3-required skills
- Practical applications
- Traditional put-selling
- PCP (Put-Call-Put or wheel) Strategy (adds covered call writing)
- Buy a stock at a discount instead of setting a limit order
All Stars of Options panel discussion
4. Money Masters Symposium Miami 2025
Thursday May 15, 2025
Details to follow.
5. BCI Educational Webinar Series
Using Cryptocurrency in Our Low-Risk Option Portfolios
Registration details to follow.
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 02/14/25.
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
Barry and The Blue Collar Investor Team
Alan,
How would you use delta for in the money covered calls when you want to be extra defensive?
Thans,
Joyce
Joyce,
When we sell deep ITM covered calls, we are establishing ultra-low-risk positions, accepting lower returns in exchange for greater protection to the downside.
You are spot on suggesting that Delta can play a role in quantifying our risk.
A successful trade of this nature is one where the stock price does not decline in value below the deep ITM call strike. In other words, we want the stock price to expire ITM, as it is when the trade is established. Delta tells us the approximate probability of the shares expiring ITM. We choose a high-Delta option. It we are willing to accept a risk factor of 15% or less, go with a Delta of 85 or higher.
Alan
Hi Alan,
I am not a member of the BCI yet, and lack expert knowledge of options trading. I have watched many of your videos on Youtube to gain better understanding of covered call strategy, and I am wondering how I should proceed in order to get some specific advice from you on a situation I’m in currently.
In short, I have the following covered call positions (please see spreadsheet below) but I feel I could be doing better by enhancing future returns on these positions in such a way that I can generate maximum monthly returns on a regular basis, while keeping the stock indefinitely going forward if possible, and continuing to generate that monthly income.
Any guidance or advice you can give me will be much appreciated.
I look forward to receiving your input.
Thank You and Best Wishes,
Amin
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Amin,
Exploring the following questions will direct you to a positive path for success:
1. Do I want to use a leveraged ETF, which converts a low-risk strategy into a high-risk strategy? Am I willing to generate higher initial returns and accept greater risk to the downside?
2. Is my portfolio properly diversified with multiple stocks and ETFs?
3. Is my portfolio cash value allocated into multiple positions, such that if 1 position declines, the others will protect my total portfolio net worth?
4. Do I want to use long-term positions which results in lower annualized returns and minimizes opportunities to re-evaluate bullish assumptions on the underlying securities?
5. Is my exit strategy skillset in place, such that if share price accelerates exponentially or declines precipitously, I will be prepared to react properly?
Once you have analyzed these questions and made guidelines for the strategy approach based on your conclusions, your opportunities to generate the highest returns will be significantly enhanced.
Alan
Hi Alan,
Thank you for your prompt response. You have given me a lot to think about, which I really appreciate. Perhaps once I have been able to evaluate all of that, I can enroll in BCI and use strategies discussed there by you and the BCI community.
Thank You and Best Wishes,
Amin
Premium members:
This week’s 4-page report of top-performing ETFs, along with our sample trade of the week, 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.
We have also included a sample trade taken from one of our BCI watchlists.
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 and the BCI team