On 10/20/2023, a BCI premium member shared with me a cash-secured put series of trades executed with Charles Shwab Corp. (NYSE: SCHW). Over the course of 9 months, SCHW dropped in price from approximately $83.00 to $50.87. This series of trades started by selling out-of-the-money (OTM) cash-secured puts which were exercised. The next 7 months involved writing (OTM) covered calls to help mitigate the severe share price decline. I was asked to analyze the trades and if continuing to write OTM covered calls was a viable solution to this losing scenario.
Overview of the SCHW trades
- 1/13/2023: STO 2 x 3/17/2023 OTM $80.00 puts with SCHW trading at about $84.00
- 3/17/2023: SCHW trading at approximately $57.50
- 2 x $80.00 puts were exercised, and shares purchased at $80.00
- Over the next 7 months OTM covered calls were sold on SCHW
- On 10/20/2023, SCHW was trading at $50.87
Price chart summary of the SCHW trades
What is the BCI 3% guideline as it relates to selling OTM cash-secured puts?
If share price drops 3% or more below the OTM put strike, we close the put position and avoid the pain of further price decline. Of course, share price can recover, but do we want to take the chance on a security already under-performing our expectations? I submit, no. In the case of the original SCHW put trade, the threshold to close the put trade was $77.60 (3% below $80.00). This price point is 8.8% below the original price of the security ($84.00) when the put trade was initiated. Time to protect ourselves (aka bail).
A picture is worth 100 words: Comparison chart of SCHW versus the S&P 500
Of course, we are all much smarter looking back, but the graphic shows the type of scenario the BCI 3% guideline protects us from. Will this or any exit strategy benefit us 100% of the time? No, nothing works 100% of the time. However, it will protect us from catastrophic losses.
Discussion
The BCI 3% guideline is an excellent tool in mitigating substantial share price decline when selling OTM cash-secured puts. A plan must be in place prior to entering every trade, as to how to take advantage of all exit strategy opportunities, whether it’s to mitigate losses or enhance gains.
Covered Call Writing Online Video Course with Downloadable Workbook
Our objective was to create the most complete and comprehensive video program on covered call writing found anywhere. The 4-set video curriculum takes us through the three required skills: stock selection, option selection, and position management. The fourth section highlights special circumstances like writing calls against long-term buy-and-hold portfolios.
You Will Learn:
– How to locate the greatest performing stocks for option-selling
– Which Is the best option to sell
– How To calculate your returns
– How To utilize exit strategies – Decrease losses & enhance gains
The program is based on 25 years of actual trading options, not on computer models. All the rules and guidelines presented are based on these real-life experiences. This series will benefit both beginners and more experienced investors and addresses all scenarios that can arise before, during and after trade executions.
Click here for more information.
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Morning Alan,
Thanks for your clarifications. I have the Encyclopedia already. Great resource! I review sections often and sharpen my understanding of how to be CEO of my own money.
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Upcoming events
1. BCI-Only Webinar (Zoom)
July 18, 2024
Exit Strategy Choices After Exercise of Cash-Secured Puts
When we sell cash-secured puts, we are undertaking the contractual obligation to buy shares at the strike price by the expiration date. Typically, we only sell puts on elite-performers that we would be agreeable to own in our portfolio.
This presentation will analyze 4 potential exit strategy opportunities to consider should the put option be exercised. Information on the following strategies will be highlighted:
- Selling the stock
- Holding the stock in our long-term buy-and-hold portfolio
- Write a covered call (PCP or “wheel” strategy)
- Implement the Stock Repair Strategy
In addition to these strategies, the following topics will also be included in the webinar:
- Option basics for selling cash-secured puts
- Option basics for covered call writing
- Real-life examples
- Calculations using the BCI Trade Management Calculator (TMC)
- Event super discount offer
There will be information offered to all levels of options trades, from beginners to advanced.
A live Q&A will follow the presentation. Attendees can ask any questions related to covered call writing or selling cash-secured puts.
2. Investment Masters Symposium (live, in person event)
August 1, 2024
Presentation #1: 8:45 AM – 10:45 AM
Paris Hotel, Las Vegas
Covered Call Writing & Selling Cash-Secured Puts to Generate Consistent Cash Flow
Basic & advanced principles for trading low-risk stock options with capital preservation in mind
This presentation will detail stock selection, option selection and position management, the 3 required skills to become elite covered call writers and put sellers. It will also include ultra-conservative approaches to these strategies using Delta and implied volatility to create statistically beneficial trades. Rules and guidelines will be discussed to take the emotions out of our trades resulting in high-probability positive outcomes.
Detailed analysis will be provided regarding how to craft our trades to the current market environment, personal risk-tolerance and strategy return goals.
A multi-tiered option-selling strategy which combines both covered call writing and selling cash-secured puts will also be examined. It is known as the PCP (put-call-put) or “wheel strategy.”
Attendees will be introduced to a one-of-a-kind trade management tool, the Trade Management Calculator, which is used to enter, manage and generate final realized and unrealized trade results.
The course is structured to benefit both beginner and advanced option traders, using real-life examples to enhance the learning process.
Presentation #2: All Stars of Option Trading Event
3. Mad Hedge Investor Summit
September 10, 2024
11 AM ET – 12 PM ET
Zoom webinar.
Tuesday September 10, 2024
11 AM ET – 12 PM ET
How to Generate Greater than Maximum Covered Call Writing Returns Using Exit Strategies
Incorporating the mid-contract unwind (MCU) exit strategy into a 12-day trade
More information & registration link to follow.
4. Stock Traders Expo- live event in Orlando Florida
October 17 -20
Details to follow.
5. American Association of Individual Investors/ Los Angeles Chapter
November 9, 2024
12 PM ET – 1:30 PM ET
Private webinar for members of this AAII investment club
Alan,
I sell mainly cash secured puts. What is the best way to use the TMC to determine my results if I close a trade before expiration (buy back the put)?
Appreciate any feedback.
Carol
Carol,
This is easily accomplished by:
1. Entering the cost to buy back the put in the “BTC Entry Option Price” column.
2. Enter current stock price in the “Current Stock Price Basis” column.
If, based on these calculations, a decision is made to close the trade, the date is entered, and a note can be entered in the Put Trade Journal as to why the decision was made (elective).
If closed, the cash is now available to secure another put trade.
The screenshot below provides an example of a winning and a losing trade, if closed mid-contract.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
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 06/28/24-RevA.
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:
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Barry and The Blue Collar Investor Team
Alan,
I’m reading your latest book on exit strategies. You really opened my eyes as to how much control we have over our trades.
Can you clarify for me the best time to use the mid contract unwind (mcu) strategy? It looks like this one can be used quite often?
I’d appreciate your guidance.
Henry
Henry,
The MCU exit strategy implementation guideline is:
Consider using the MCU strategy when we can generate at least 1% more than the time-value cost-to-close by contract expiration.
The “Unwind Now” worksheet tab of our Trade Management Calculator (TMC) will accomplish all the math for us.
MCU opportunities occur mainly early-to-mid contract, but can also apply late in the contract cycle, especially in volatile market conditions.
Alan
Alan,
I’m getting this figured out and am doing okay.
The challenge, as you know, is when to exit when the trade goes against you.
Any guidance?
Mark
Mark,
We must be sure to always have our 20%/10% guidelines (BTC/GTC) limit orders in place (for covered call writing). This will partially automate the exit strategy process and protect us against share price decline.
If the limit order is executed, we can then:
1. Wait to “hit a double”.
2. Roll-down.
3. Sell the stock.
Guidelines for selling the stock include:
1. Under-performing the S&P 500 significantly.
2. Share price decline of 7% or more from the price of the underlying at the time the trade was initiated.
These guidelines will greatly assist in mitigating scenarios when stock price declines.
Alan
Hi Alan,
Thanks for the following video, it is a great help in understanding the process.
The question is how do you implement 7% Stock Exit Guidelines. Do you automate this or do you review the portfolio everyday and whenever the price is below 7% you sell the stock and close the position? If you automate this please advise the process to automate.
Onboarding Video #5: Executing Our First Covered Call Trade
https://www.youtube.com/watch?v=NAooccDbIMQ&ab_channel=AlanEllman
Anees
Anees,
When we adjust our covered call trades, the short (covered) call must be closed first, before considering selling the stock. If we were permitted to sell the stock first, we would find ourselves in a highly risky naked options position. This requires a much higher level of trading approval than appropriate for most retail investors.
Therefore, we cannot automate the 7% guideline. We can automate the 20%/10% guidelines and should do so with each and every trade.
That said, our Trade Management Calculator (TMC) will calculate and archive the 7% guideline for all our trades as highlighted in the screenshot below.
If we check our portfolios at least once a day and see that the 7% guideline has been breached, we view this as a red flag where closing both legs of the trade (short call first) is a reasonable consideration. Keep in mind that this is a guideline, not a hard rule.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Alan,
Loved your podcast about VOLQ, but is the VOLQ still published?
Happy 4th
Charlie
Charlie,
I was a fan of VOLQ because of its emphasis on ATM strikes.
However, Nasdaq stopped publishing VOLQ stats in September 2023.
The good news is that we can use ATM implied volatility stats in its place to calculate trading ranges for QQQ and QQQM when crafting our covered call writing and put-selling trades.
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
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https://www.thebluecollarinvestor.com/member/login.php
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Alan and the BCI team