Selling options (covered calls or cash-secured puts) is as much an art as it is a science. There are several principles that must be adhered to in order to achieve the highest levels of returns. In this article, the 5 most common mistakes made by covered call writers will be analyzed.
1. Starting without adequate education
There are 3 required skillsets we need to master in order to achieve the highest levels of returns. It will take most beginners 3 – 4 months to get there:
- Stock selection
- Option selection
- Position management (exit strategies)
Take the time to master all 3 … 1 or 2 is not good enough.
2. Selecting high implied volatility stocks
Extremely volatile stocks will return enticing option premiums. We must understand that high implied volatility (IV) stocks also come with greater risk. We must locate securities that align with our personal risk-tolerance and initial time-value return goal range (2% – 4% per-month, for me).
3. Not considering earnings reports (ERs)
Covered call writing is a conservative, low-risk approach to trading options. Earnings reports can impact share price in a major way, both good and bad. Why take the risk? We know the date of the ER, so let us take this risky event off the table. Always avoid earnings reports.
4. Not factoring in diversification
If we are top-heavy in one industry, let’s say computer hardware, and that industry takes a dive, our entire portfolio is impacted. If we are properly diversified, we will have the opportunity for the other industries to counteract the loss.
5. Not factoring in cash allocation
In addition to being well diversified, we should also allocate similar amounts of cash to each position. It will never be exact but will offer a significant amount of protection should 1 position under-perform.
Diversification & Cash Allocation Spreadsheet
The BCI Portfolio Setup and Results Spreadsheets will assist us in achieving appropriate diversification and cash allocation:
- With $102,217.00 cash available, the spreadsheet allocates $20,443.00 per position
- The final spreadsheet calculations show the # of shares to be purchased, and contracts sold
- It reflects a final cost of $99,623.00
- There is a cash reserve of $2,594.00 (red arrow) for potential exit strategy opportunities
- The blue column to the left shows appropriate industry diversification
Discussion
Avoiding any 1 of these pitfalls will enhance our portfolio results. Avoiding all of them will have a huge positive impact on our financial fortunes.
The Blue Collar Investor’s Guide to:
Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts
This book will detail how to enter, manage and calculate trade adjustments for all market conditions. After we select the underlying security and sell the corresponding option, we immediately move into position management mode. There are over 20 exit strategies defined, as well and when and how to implement these plans.
The BCI Trade Management Calculator facilitates the analysis of each exit strategy by showing initial trade entries, initial trade calculations for each individual trade as well as that of the entire portfolio. From there we learn how to enter our trade adjustments and finally to calculate trade and total portfolio post-adjustment results.
Click here for more 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 publish several of these testimonials in our blog articles. We will never use a last name unless given permission:
Hello Dr. Ellman,
Upcoming events
1. Long Island Stock Investor Group Part I
Zoom
February 13, 2025
7:30 – 9:00 ET
Private investment club
Covered Call Writing Dividend Stocks
2. 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
3. Long Island Stock Investor Group Part II
March 13, 2025
7:30 – 9:00 ET
Private investment club
Cash-Secured Puts: 2 Outcomes
4. 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
Details to follow.
5. Money Masters Symposium Miami 2025
Thursday May 15, 2025
Details to follow.
6. BCI Educational Webinar Series
Thursday June 19, 2025
8 PM ET – 9:30 PM ET
Topic and registration details to follow.
Hi Alan,
I’ve already read your books, emailed you, and benefited from your expertise in the past.
I’m currently facing an issue with filling covered call orders. Could you kindly advise on how you set up your orders to achieve better fills at a fair price?
Thank you in advance!
Keith
Keith,
First, make sure the option has adequate liquidity, so we get favorable trade executions.
The BCI guidelines are at least 100 contracts of open interest and/or a bid-ask spread of $0.30 or less.
If the spread is > $0.10, we leverage the “Show or Fill Rule” to negotiate a better price with the market-maker. Always use limit orders, not market orders for options.
Information on this SEC rule can be found on pages 227-229 on the Complete Encyclopedia- classic and pages 122-124 on The Complete Encyclopedia-Volume 2.
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 02/07/25.
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
Hi Alan,
I will start trading CEO strategy this month.
Checking monthly options I have noticed that some sectors don’t have all monthly options.
For example XLB has March options and then next monthly contract is June contract.
What do you do in cases like these?
How do you use weekly options and what do you do if ETF does not trade weekly options and has no active monthly options for that month?
Thanks,
Marin
Marin,
All Select Sector SPDRs have monthly options for every month.
In the case of XLB, current option chains show monthly expirations for February, March, June & September. There are also LEAPS options available.
Once the February contracts expire, you will see the April contracts appear in the option chains.
Typically, there will be availability for the current month, the next month + 2 more months depending on the option cycle that particular security resides.
All the Select sector SPDRs have weekly expirations except XLB and XLRE. For those, we use monthly expirations or a weekly in the last week of a monthly expiration.
Alan
Alan,
I finished reading the CEO book last week Friday. I think that there’s
something that I’m missing something. How exactly are the shares
protected from a sudden decline?
There are exit strategies yes, yet, it seems like the strategies only apply
to the options themselves? Don’t brokerages restrict access in falling markets?
Or do I buy the the shares with a stop-loss in place? I’m reading your
‘Encyclopedia for CCW’ but something is eluding me.
Tjijandjewa
Tjijandjewa,
When we are in a covered call trade, the long stock protects us from being in a dangerous naked option position.
If we were to sell the stock before closing the option (brokerages won’t allow most retail investors to do this), we would be in a highly risky trade.
Therefore, when we adjust our covered call trades, we always close the short call first. This is why we always have our 20%/10% BTC GTC limit orders in place. This protects us from significant share price decline.
We also have our 7% guidelines to assist in when to sell the shares after the short calls are closed.
Bottom line: When share price declines, the short call must be closed first before taking next-step action.
Alan
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