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Should Good News Discourage Us From Entering a Covered Call Trade?

We examine the BCI on the Sunday May 23, 2021, after expiration Friday, for our Monday trade selections. One of the securities we choose is Applied Materials, Inc. (Nasdaq: AMAT). On Monday morning, May 24th, AMAT gaps up well above the price movement of the S&P 500. Is AMAT now too expensive? Should we still consider this stock or look for an alternative? This article will investigate the factors that caused the price gap-up and make some common-sense conclusions regarding the next-steps.

 

What caused the gap-up?

On Friday 5/21/2021 AMAT announced a stellar earnings report resulting in the gap-up as the May contracts expired. There was a 5.2% earnings surprise and a 3.2% revenue surprise as shown on the site www.earningswhispers.com:

AMAT: Positive Earnings and Revenue Surprises

 

There’s more

On Monday May 24th, IBD named AMAT its Stock of the Day further enhancing the gap-up in price:

AMAT Named IBD Stock of the Day

 

Price chart of AMAT pre- and post-earnings

 

AMAT Price Chart May – June 2021

 

After the 2 gap-ups, AMAT moved to a consolidating chart pattern, out-performing the price movement of the S&P 500. We now know that the gap-up was based on outstanding corporate fundamentals. We ourselves if we would buy AMAT today at the current price. For me, good news is a positive and would encourage me to consider this stock. I may wait a day or so for the price to settle but the overall picture for AMAT was only enhanced.

 

Discussion

Good news should not discourage us from incorporating a stock into our portfolios. Researching the cause of one or more gap-ups does make sense. If the gap-up is based on sound fundamental data, all systems are “go”. Stock prices go up and down and this is the risk we are willing to take in return for beating the market on a consistent basis. More often than not, there will be a reversion to quality, the type of securities identified in our BCI reports.

 

No price increase for premium members

On November 1, 2021, BCI will be raising membership rates for new members only. This will not apply to current members. It’s been 4 years since we had a rate increase. In that period, we have added dozens of training videos, additional downloads and resources and more quality data to our stock and reports. We are fortunate to have such a robust and expanding membership and strive to provide the best high-quality information and tools at the lowest industry prices.

This price increase will not apply to current active members as you are grandfathered into the current rate for life or as long as your membership remains active. This is our way of showing our appreciation to our long-term members.

The increase for new members will go into effect on November 1, 2021 as follows:

Monthly: $19.95 for the first (trial) month and $57.95 each 30-days thereafter (currently $49.95).

Annual: $657.40 for the first 13 months (includes a reduced first month and a free last month) and then $695.40 every 13 months thereafter (includes 1 free month). Currently $569.40 and $599.40.

All new members who subscribe between now and 10/31/2021 will be grandfathered into the current rate and will see no price increase on 11/1/2021.

Thanks to all our loyal members for your support over the past 14 years and for putting on the financial map.

Premium membership information

 

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:

Alan,

I have been subscribing to your service for many years and I notice the many improvements you have made in your publication over the years. I am grateful for the covered call knowledge you have taught me.

Some twenty years ago the covered call knowledge you taught me enabled me to make profits that made it possible to send my daughter to attend Smith College for four years.

Sincerely yours,

Stephen

 

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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.

14 Responses to “Should Good News Discourage Us From Entering a Covered Call Trade?”

  1. Lenny October 23, 2021 8:54 am #

    Alan,

    I hope it’s ok to ask a question off topic. I am interested in the poor mans covered call and want to ask about how deep in the money we should go for our strike choices. There are usually a lot of strikes and I was hoping you could guide me how to make that choice.

    Thanks a lot.

    Lenny

    • Alan Ellman October 24, 2021 8:15 am #

      Lenny,

      The strikes we choose for the PMCC strategy must be based on our required initial structuring formula and our initial time-value return goal stated range.

      When establishing our trades, the difference between the call strikes + the initial time-value premium generated must be > the cost of the LEAPS. The short call premium must meet our stated goals.

      The key is to watch the time-value component of the :LEAPS. If too high, the formula requirement will not be met and we look to a deeper in-the-money strike with lower time-value.

      Using the BCI PMCC Calculator (1st tab, in this case) will assist with all these calculations and guide us to the best strikes.

      Alan

  2. Roni October 23, 2021 10:58 am #

    Alan,

    This article really hits the spot.
    The gap up of an underlying stock on Monday, right after expiration Friday, and right after it is bold Weekly Stock Screen is very common and makes it very hard to decide about placing a monthly CC trade.

    Thank you – Roni

    • Alan Ellman October 24, 2021 8:19 am #

      Roni,

      I struggled with this, as well, earlier in my option-selling career and then a light bulb went off. The simple solution was to ask myself if I would buy this stock today, at this price with the information available?

      It does make sense after a gap-up to wait for any volatility to subside in much the same way we do post earnings reports.

      Alan

      • Roni October 24, 2021 12:20 pm #

        Alan,

        I understand it perfectly and will always do it this way in the future.

        Thanks again – Roni

  3. Barry B October 24, 2021 12:46 am #

    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 10/22/21.

    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:

    http://www.youtube.com/user/BlueCollarInvestor

    On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top 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.

    Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.

    Best,

    Barry and The Blue Collar Investor Team

  4. Bruce October 24, 2021 12:10 pm #

    Hi Alan,

    I have a question regarding stock choices and avoiding earnings. I know that you recommend choosing stocks close to the 30 days to the expiration date. In the case where I really like a stock and there are no weekly options, what is your recommendation? Here is an example:

    INMD is a stock which contributed to my $2800 gain in September. What are your recommendations with an earnings date of 10/26. There are no weekly options available.

    1. The Nov 19 expiration. This seems like a good choice; however, after the earnings on 10/26, there will only be 24 days left to expiration
    2. The Dec 17 expiration. This looks good for an out of the money strike, but the $80 in the money strike has a bid/ask spread of $.60.
    3. Wait another 2 weeks when there will be 30 days to expiration

    Looking forward to another successful month in November!

    Thanks,

    Bruce

    • Alan Ellman October 25, 2021 6:45 am #

      Bruce,

      I have been trading INMD, as well, since it appeared on our list of eligible stocks. with similar success. It, currently, is not in any of my portfolios because of the 10/26 ER.

      As you stated, there will still be 24 days to expiration after the report passes.so there will be some significant time-value to capture with both calls and puts.

      If, after the report passes, we still consider INMD an eligible security (likely), we re-check the option-chain, which will change after the report as implied volatility decreases, and see if the initial time-value return goal range meets our goals.

      Also, re-check the option-chain on the premium for the $80.00 strike.

      Alan

  5. George October 27, 2021 10:15 am #

    Hi Alan, hope all is well!!

    is there a formula to annualize a ROI for investment in a specific period?

    as an example;

    FDX – made 2.2% in 35 days. What is that annualized?

    (needless to say im not a math major , ugh)

    thanks!!!!!!

    George

    • Alan Ellman October 27, 2021 3:09 pm #

      George,

      Glad to help.

      Divide 2.2% by 35 to get a percentage return per-day. Then, multiply by 365:

      [(2.2%/35) x 365] = 22.94%

      Alan

  6. Alan Ellman October 27, 2021 5:51 pm #

    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.

    New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.

    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

  7. Chuck October 28, 2021 2:09 am #

    Dear Alan

    Do you have a blog or video lesson that provides more detail on what triggers closing the entire PMCC position?

    All I could find in the CC Alternative Strategies was on page 164: “We should be prepared to close our entire position if new information becames available that negates our initial bullish assumption on the underlying security.”

    Do you have any guidelines on what would that new information be to trigger getting out of the PMCC?
    o Fundamental trigger?
    o Technical trigger?
    o Common sense trigger?

    Thanks, Chuck

    • Alan Ellman October 28, 2021 6:43 am #

      Chuck,

      Also, checkout pages 117 – 133 on the initial structuring of our PMCC trades. The reason that the required initial structuring formulas was included relates to the scenarios when share price accelerates substantially.

      When this occurs, to keep the trade active, we are forced to buy back the (now, deep in-the-money) short call which could be quite expensive due to the intrinsic-value component of the premium.

      We may not have the resources or inclination to do so. By implementing our PMCC initial trade structuring formula, we are assured of closing at a profit.

      A change in our bullish assumption on the underlying and a substantial price increase are the 2 main reasons we would close both legs of the PMCC trades.

      Alan

  8. Barry B October 29, 2021 10:38 am #

    Premium Members,

    There may be a delay in uploading the Weekly Stock Report this weekend. I just received notification from Schwab that their platform, “StreetSmart Edge” will be down for maintenance from 8:30 PM EST tonight (Friday), 10/29/21, through 8:30 PM EST tomorrow night (Saturday), 10/30/21. This will impact the report since I use that platform for market data.

    We’ll do the best we can to minimize the delay.

    Best,

    Barry

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