Many covered call writers and put-sellers favor a portfolio mix of blue-chip and tech companies and turn to the S&P 500 and the Nasdaq exchange for locating the best underlying securities. Since this benchmark and exchange total nearly 4000 stocks, locating an elite portfolio can be an overwhelming task. This article will present an approach that is both user-friendly and time-efficient for retail investors.
What is the Invesco QQQ Trust (NASDAQ: QQQ)?
This is an exchange-traded fund (ETF) that trades on the Nasdaq exchange. It offers broad exposure to the tech sector by tracking the Nasdaq 100 index, which consists of 100 of the largest non-financial stocks on the Nasdaq. It is also known as the triple Q. Here is a chart of the top-holdings of QQQ as of June 1, 2020:
QQQ: Top Holdings as of 6/1/2020
What are the SelectSector SPDRs?
Select Sector SPDRs are unique ETFs that divide the S&P 500 into 11 sector index funds. They have the diversity of a mutual fund, the focus of a sector fund, and the tradability of a stock. Together, the 11 Select Sector SPDRs represent the S&P 500 as a whole. However, each Select Sector SPDR can also be bought individually, providing us with exposure to a particular sector or industry group.
These securities all have options and can be used with a covered call or put-selling strategy.
The 11 Select Sector funds and their ticker symbols are:
- Consumer Discretionary (XLY)
- Consumer Staples (XLP)
- Energy (XLE)
- Financials (XLF)
- Health Care (XLV)
- Industrials (XLI)
- Materials (XLB)
- Real Estate (XLRE)
- Technology (XLK)
- Utilities (XLU)
- Communications (XLC)
By choosing the top- 3 performing SelectSector SPDRs, we will own the top-performing 27% of the S&P 500 (also known as “the market”). This gives us an immediate advantage over those who own the index as a whole.
Tech: Make sure QQQ is trading at or above the S&P 500 benchmark over the past 3-months using a comparison chart
QQQ/S&P 500 Comparison Chart as of 6/5/2020
Blue-chip: Use the SelectSector SPDR Tracker to determine the top-3 performers
http://www.sectorspdr.com/sectorspdr/tools/sector-tracker
SelectSector SPDR Tracker on 6/1/2020
XLV, XLK and XLU are the top-3 performers
Using the Ellman Calculator to ensure our initial time-value return goal range of 1% -2% is satisfied
ETF Calculations on 6/1/2020
The yellow field shows initial time-value returns and the brown field shows modest upside potential.
Discussion
A practical way of selecting blue-chip S&P 500 stocks is by locating the top-3 performing SelectSector SPDRs. Similarly, a time-efficient way of incorporating tech companies into our option-selling portfolios is by using the Qs. A initial time-value return goal range between 1 to 2 % (up to 3% when market volatility is high) is reasonable and achievable by using slightly out-of-the-money strikes.
New Educational Products Now Available at a Discount
To our BCI community,
Many of our members benefit from video products, others from books and a good percentage prefer to use both.
The BCI team is proud to announce the creation of 3 new online streaming DVD programs with downloadable workbooks. They are based on our book, Covered Call Writing Alternative Strategies, co-authored by me and Barry.
The new online streaming DVD products are:
The Collar Strategy: Covered call writing with protective puts:
https://thebluecollarinvestor.com/minimembership/video-the-collar-strategy/
Portfolio Overwriting: Covered call writing long-term buy-and-hold portfolios:
https://thebluecollarinvestor.com/minimembership/video-portfolio-overwriting/
Poor Man’s Covered Call: Covered call writing with LEAPS options, instead of stocks:
https://thebluecollarinvestor.com/minimembership/video-poor-man-covered-call-program/
SAVINGS + Early-Order Promo Code
These programs are available individually ($49 each) or as a discounted bundle package of all 3 ($125), a $22 savings:
We are also offering an early-order discount of $10 for this bundle package, good through June 10th. Use promo code: newdvd10-2
To celebrate the launching of these new products, we are also offering discounts to these related book and calculator products:
Covered Call Writing Alternative Strategies:
https://thebluecollarinvestor.com/minimembership/covered-call-writing-alernative-strategies/
Use promo code: ccwas10% for a 10% discount on this book, good through June 10th.
Covered Call Writing Alternative Strategies Calculator Package:
https://thebluecollarinvestor.com/minimembership/calculator-package/
3 calculators, one for each of the 3 strategies. Use promo code 3calculators10 for a $10 discount on this package, good through June 10th.
For the past 14 years we have been listening to your feedback and respond accordingly. The BCI team will never lose sight of the fact that it is you, our members, that put us on the financial map, and we thank you for that.
Summary of the promo codes good through June 10th:
New DVD bundle package:
newdvd10-2
- Covered Call Writing Alternative Strategies (Book):
https://thebluecollarinvestor.com/minimembership/covered-call-writing-alernative-strategies/
ccwas10%
- Covered Call Writing Alternative Strategies Calculator Package:
https://thebluecollarinvestor.com/minimembership/calculator-package/
3calculators10
It is our mission that you both enjoy and benefit from our new and existing educational products.
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,
My name is Gil and I’ve been watching your YouTube channel for beginner covered call options. It has been very helpful and eye-opening.
Thank you very much for all this information.
Gil
Upcoming events
1. Michigan AAII Chapter webinar
Trading in a Low Interest-Rate Environment
Creating a 3-income stream strategy
Wednesday June 24th
7 PM
Login information to be sent to registered members (club and premium members)
2. Greensboro North Carolina AAII Chapter webinar
Covered Call Writing to Generate Monthly Cash-Flow
Option Basics and Practical Application
Saturday June 20, 2020
10 AM
Login information to be sent to registered members (club and premium members)
This presentation will include the basics of trading option, an overview of covered call writing and 4 practical applications of the strategy.
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Market tone data is now located on page 1 of our premium member stock reports and page 8 of our mid-week ETF reports.
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Alan,
Question: in terms of choosing options why can’t one go to the “20 Most Active Stock Options” section in “Investors Business Daily” and choose one of the those stocks? Or look at the “Options Total” section of IBD and choose stocks from there ?
Thank you.
Georgia
Georgia,
The BCI methodology screening process is specific for short-term option-selling although it can also be used for stock selection. Other vendors screen just for stock selection.
The BCI screening process includes:
1. Fundamental analysis
2. Technical analysis
3. Common-sense principles like minimum average trading volume
We screen from a database of the IBD 50, IBD Big Cap and CANSLIM Select as well as our own database of stocks we have identified as potential short-term option-selling candidates. From these stocks, we go through the rigorous screening process and those that remain become “eligible” candidates on our premium stock reports.
Using actively traded stocks are okay as long as they pass all our screens. This may not be the most time-efficient approach to the screening process.
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 06/05/20.
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
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan,
When gather Sector performance on the SelectSector SPDR Tracker I assume you use the one month Time Frame in determining the best three Sectors to choose. My assumption is based on your preference for one month Covered Call Option Trades.
Thanks
Steve
Steve,
My preference is for 1-month option expirations. Weeklys will work as well.
For ETFs, I use a 3-month charts to view a recent price trend. For individual stocks, I use a 1-year chart with 20-day and 100-day exponential moving averages to identify trend.
Alan
Alan,
I’m interested in knowing the sequence to building a portfolio for diff tiers of investment capital – 100-200K and how best to
a. select the stocks with the help of your website
b. then write covered call.
i have seen some videos here and there on how to pull but wondering if you have a playlist or documents similar to that.
Also do you have any articles on how to approach stock market when it’s frothy or extended. thanks any help is appreciated as i’m just starting to deploy my investment which is in CASH. Thanks
I understand you are not liable for any of actions based on your guidance. Thanks
Regards
Raam
Raam,
For premium members, we first decide which of the watch lists we provide to our members best align with our trading style… stock, ETF or Blue Chip. Using a combination is certainly acceptable.
We factor in diversification, asset allocation and stocks that will meet our initial time-value return goal ranges.(2% – 4% for me).
With $100k to $200k available for stocks, 7 to 15 securities are reasonable depending on where in that range we are.
Let’s say we have $150k and decide on 10 positions, we allocate $15k per position (can’t use stocks priced higher than $150 per-share or use less positions). Divide the price-per-share into $150k and round to the nearest 100. That’s the number of shares we purchase and then sell the corresponding number of call options. When structuring our monthly (or Weekly) portfolios, we make sure there is adequate cash reserve for exit strategy opportunities (2% – 4% of portfolio net worth).
The overall market assessment (bullish/bearish) will dictate the “moneyness” of the options we sell. Chart technical analysis plays a roll here too. ITM for defensive position and OTM for more aggressive positions. We generally use a combination which I refer to as “laddering strikes” in my books/DVDs.
Here are 2 articles I previously published on these topics:
https://www.thebluecollarinvestor.com/evaluating-an-initial-covered-call-writing-portfolio/
https://www.thebluecollarinvestor.com/strike-price-selection-a-critical-covered-call-decision/
Alan
Alan,
Thank you for conducting the recent seminar. It was very informative.
I have a question (thought of it after the meeting) about payment of dividends.
Does the seller of option still get the dividend as long as the option is not exercised?
Which is the date used- ex- dividend or payment date? Having a significant position in T and utilities, want to make sure to get the dividends.
Thanks in advance for your response.
Jeff
Jeff,
Yes, the covered call writer (also the share holder) does receive the dividend as long as shares are owned on the ex-dividend date. Even if shares are sold after the ex-date, we still receive the dividends.
If dividends are an integral part of a strategy, we should not have an option in place that expires after the ex-date despite the fact that early exercise is extremely rare. Sell the option the day of or the day after (or later than) the ex-date.
We can also use Weekly options and circumvent the week of the ex-date. Lots of ways to avoid early exercise due to an ex-date.
Alan
Jeff,
Just to make it clear, from another point of view, if you own the stock through closing on the day before the ex-dividend date, you get the dividend. If you buy the stock on the ex-dividend date, you do not get the dividend for the period before the date.
Mario
Good morning Alan, Barry and the BCI community,
Hope you are all doing well.
I would like to ask a question regarding portfolio overwriting: I am selling covered calls on 3 long term holdings underlyings, 100 shares each, SPY/TLT/GLD.
Due to the potential downside risk on stocks at the current valuations, I was wondering if it would make sense to sell also ATM and ITM strikes for downside protection, at least on SPY.
Thank you very much and kind regards
Francesco
Francesco,
For traditional covered call writing, I would definitely consider using ITM strikes to some extent depending on how defensive we are comfortable with.
Portfolio overwriting implies that retaining the underlying security is critical to our goals and therefore OTM strikes are favored.
Whether we are using ITM or OTM strikes, the initial time-value return goal range must be acknowledged.
Alan
Update:
I am still 100% in cash, since early March, and waiting for the next earnings season results before returning to trading.
Stay home – Roni
Hey Roni,
Great to hear from you.
I am reading terrible things about COVID-19 in Brazil and the government’s reaction and the possibility of social unrest
Stay safe, my friend.
Hoyt T
Thanks Hoyt,
We are very careful.
The government here is really in bad shape, but social unrest is not in the cards. The media is always searching for sensational news.
I have sold my company today at a reasonable price, and will have more time for trading when the market settles down.
You too stay safe,
Cheers – Roni
To all,
while you must stay at home, watch this :
https://youtu.be/6EvuteB0wyU
Roni
Thank you, Roni. Enjoyed it. My Father was a big band Director and Pianist in the 40’s in Puerto Rico. Sandy and I are lucky to have a popular ballroom (Goldcoast Ballroom) nearby in Coconut Creek,Fl. and we have taken lessons and danced there and in the area for many years for all types of music. We particularly like Country West Coast Swing and Latin styles. Keeps your heart active.
Mario
Trading Experiences 6/11/20 (With BCI 4 years):
Calculating the Buy To Close Requirements on 6/10:
On 6/10/20, Wednesday, with the market at its peak, I calculated my BTC (Buy to Close) requirements for Expiration Friday 6/19/20 for Rolling Out or Rolling out and Up. Alan has a guideline of 2-4% of Account Value.
For my 5 accounts (2 individual, 2 IRA, 1 Joint Trust), with Fidelity and Etrade:
* Max BTC cash requirement was 2.4%
* Minimum BTC cash requirement was 1.1%
* Totaling all the account values, average cash requirement was 1.8%.
* For the above the total Covered Call trades for all accounts was: 15
* In addition to the covered calls, I have 17 long positions over the 5 accounts.
To make the trading easier, I generally trade the same symbols and shares repeatedly over the 5 accounts. I have been trading ETFs only in the past to avoid the Earning Reports issue but lately I have also bought long positions in QLYS, GLOB, TER, MS, and ENTG. I like ETFs (currently own SOXX, SMH, XLK, VNQ, XLRE, GDX, SIL, KWEB. XOP, XLE) also since if the market turns south, and I decide to keep a position, I don’t have to unwind it with an upcoming Earning Report date.
Lately in the first 2 weeks of a cycle, I have been mixing my Covered call trading with using the Buy and Wait philosophy for my covered calls (Buying Long, then waiting for rise in price for Selling a short call). For the 3rd week (or earlier), I will overwrite with a Sell to Open. With the market appreciating lately I feel that is a good strategy since it increases my ROO% and also improves my downside margin.
** So Alan is right on the money with the 2-4% guideline.
Trading on 6/11:
Trading with Market 6/11 DJIA ending 6.9% down (1861.82) at closing bell.
By a coincidence on 6/10 Wednesday late afternoon I sold 600 shares of GDX to raise some Buy To Close Cash so I had 22K of cash for trading on 6/11, when the market went down.
Early 6/11at 10am with the market down 800, I noticed on my Finviz portfolio that TER was down 4% and I bought 200 shares of TER. I then noticed at 11:45 am that 2 Real Estate ETFs (XLRE – run list 3/10/20) and VNQ (run list 6/19/19) were down over 5%. TER had gained 1% in 1.5 hours since I bought it, so I sold TER and bought shares in XLRE and VNQ, a safer bet for me, leaving me with a good cash reserve.
I plan to overwrite the long position with a Sell To Open today 6/12 or next week (Week 5 of 5 Expiration 6/19) if I can get 1% or better in cash. I all helps.
Hope some others will comment with their strategies for the market 1861 point downturn on 6/10, if any.
Next week or so I intend to comment in the log my documentation methods in what I think is a smooth working procedure combining Fidelity Watchlists, Finviz portfolios and a manual log of my trades with 3 forms.
My earlier years were not as smooth and efficient as I was learning the BCI methodology, brokerage account policies, procedures, and understanding the ins and out of Option trading, intrinsic and time value (extrinsic value), selection and management of the positions. This stuff takes time.
Mario
Mario,
wow, fantastic, what a wonderful place!!!!!
I just visited the site, and watched some samples.
Wish I was able to go there.
My wife and myself were great amateur dancers when we were young and beautiful.
We used to go dancing every Friday and Saturday.
You are really very lucky.
Roni