On 8/19/2017, Ron sent me an email detailing a cash-secured put trade he initiated in a virtual account. I saved the email to use in an article because I felt it would be instructive on several fronts.
Ron’s trade with Abiomed, Inc. (NASDAQ: ABMD)
ABMD Price Chart for August 2017
- 8/10/2017: Sell August 17 $155.00 put (sale price not disclosed in email but not relevant) highlighted by the red line
- 8/10/2017: ABMD trading at $155.85 making the $155.00 put slightly out-of-the-money
- 8/12/2017: Share price moved below the put strike
- 8/15/2017: Share price moved up to the put strike price
- 8/17/2017: Share price moved above the put strike which was once again out-of-the-money
- 8/18/2017: Option exercised and shares put to Ron at the end of the trading day
Ron’s questions
- Why didn’t the option holder exercise on 8/12 or 8/13?
- Why didn’t the option expire or get exercised by the day’s end on 8/17?
- Could I have bought back the put on 8/18 to prevent exercise?
Solving the mysteries of this put trade
Early exercise is rare
Even when a put strike moves in-the-money, exercise will only capture intrinsic value. The option holder would make more money selling the option by capturing both intrinsic value + time value.
Was it really an 8/17 expiration date?
No, it was 8/18. This is a common error made by retail investors and why Ron is so smart using virtual trading initially. The options chain showed 8/17 but the “17” represents the calendar year 2017. Expiration Friday in August 2017 was on the 18th. This is why the option did not expire or get exercised on the 17th.
Buying back options to prevent exercise
The general rule that applies just about all the time is that any option can be bought back prior to 4 PM ET on expiration Friday to avoid exercise. In this case, Ron had until 4 PM on the 18th but thought the option exit strategy opportunities ended a day earlier…lesson learned.
Discussion
***Many thanks to Ron for sharing this trade with the BCI community
For more information on selling cash-secured puts:
Upcoming event
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Sunday July 22nd 12:30 PM – 1:15 PM
“How to Select the Best Options in Bull and Bear Markets”
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Market tone
This week’s economic news of importance:
- Factory orders April -0.8% (-0.5% expected)
- Markit services PMI May 56.8 (55.7 last)
- ISM manufacturing index May 58.6% (58.0% expected)
- Job openings April 6.7 million (6.6 million last)
- Trade deficit April -46.2 billion (-48.8 billion expected)
- Productivity Q1r 0.4% (0.6% expected)
- Weekly jobless claims 6/2 222,000 (225,000 expected)
THE WEEK AHEAD
Mon June 11th
- Survey of Consumer Expectations
Tue June 12th
- Consumer price index May
- Core CPI May
- Federal budget May
Wed June 13th
- Producer price index May
- FOMC announcement
Thu June 14th
- Weekly jobless claims through 6/9
- Retail sales May
- Business inventories April
Fri June 15th
- Industrial production May
- Consumer sentiment index June
For the week, the S&P 500 moved up by 1.62% for a year-to-date return of 3.94%
Summary
IBD: Confirmed uptrend
GMI: 6/6- Buy signal since market close of April 18, 2018
BCI: Favoring 3 out-of-the-money calls for every 2 in-the-money calls. Politics, as it relates to the global economy, is my main concern.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a neutral to slightly bullish tone. In the past six months, the S&P 500 was up 4% while the VIX (12.15) moved up by 25%.
Wishing you much success,
Alan and the BCI team
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 06/08/18.
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 BCI Team
barry@thebluecollarinvestor.com
Jay,
Spreads:
Should mentioned in the blog last week you sometimes trade Vertical spreads and preferring credit spreads when volatility is high and debit spreads when volatility is low. I understand the relationship. How far out (months) in expiration date do you generally go out?
CSPuts:
Regarding CSPuts, I need to check their Returns when I look at a Covered Call Return as well. When a stock is not trending up and is relatively low in volatility and am not considering an OTM Covered call, a CSPut may be perfect thing to use. Just need to check the return.
Another perfect time for it, as you have previously stated since you do not prefer to invest in covered calls for stocks you do not own, is to wait for a dip in the market, and then place a CSPut, since the security is most likely to go higher as the market goes recovers back up, which will give you additional downside protection to the Strike. I would add that an OTM call will also be appropriate since the stock will rise and give you share appreciation. A third option, is to buy long and then add the option leg at the higher price.
Mario
Barry, A little computer funny this afternoon: this machine was in a Windows 10 update so I was using another to reply to Mario. I don’t think either of the notes I sent went through. But if you suddenly see 3 notes from me you can delete the other two. I am back on the laptop I normally use.
Joanna, in this confusion I did read your and Alan’s exchange. Congratulations, you can ditch those training wheels now. You have hit a double in the Major League :)!
Mario, thank you for the follow up about my hobby spread trading. I want to emphasize that is all it is. I put less than 1% of just one of my IRA’s at risk in each of those trades and rarely have more than half a dozen trades open at any one time. When I am on a roll I always think I should bet bigger! I remind myself it is trading for fun and intellectual challenge. Some retirees do crossword puzzles, I trade options spreads :).
I go 6 weeks to 2 months out on debit spreads since even though I have a sold option my lead directional option is a buy subject to rapid theta decay close to expiration. I pick a market direction first, them a sector then a lead stock. I sell the 60 delta call or put then back it up with the 40 delta to help finance the trade and dampen Theta. Higher Delta more ITM is less risky and lower Delta OTM has more bang for the buck if I am right.
I find using the 60/40 Deltas creates about a $5 to $10 width spread depending on the stock and I am usually starting in the middle. Most work if I get the main market direction right for that time period. So thank you for asking!
I set a stop at about 40% loss since anything past that takes a 100% reversal to break even and I take profit once over 80% possible gain since there is little left in it but risk at that point. I have yet to hold one to expiration.
You know my tactics on CSP’s and CC’s so thank you for the accurate summary – everyone has their own way to get this done.The market trends but is not linear day to day. I think there is value in using the volatility to select entry points. Jay
It is just not my day with the computer! I meant to say I “buy” the 60 Delta option on a debit spread and I sell the 40 Delta to back it up. – Jay
Totally hit a double on etfc this week! Booyah!
On 5/21, I did a buy/write of 200 shares of ETFC and sold 2 June 15th options at the strike of 68.5 – premium of 0.51 each, capturing a total premium of $102. I bought back the 2 options on 5/31 when it was close to being 20% of the original value at 12 cents. Granted, I could have waited until it reach the “true” 20% price of ten cents, but I just wanted to see if I could hit a double anyways….(still have my training wheels on…what can I say?) Then on 6/6, I sold 2 June 15 options at a strike of 66.5 to capture a premium of .46 each. Yes, it was only a total premium return of $170.00, but it’s more than I would have made if I didn’t try going for it. Is there anything I should have done differently?
Joanna,
Congratulations, great job.
It appears from the price chart that the stock is trading approximately at the purchase price. The option premiums then represent a 1.2% – 1.3% 1-month return barring any additional exit strategy maneuvers and price changes.
This is the classic example of when we can generate additional cash flow by “hitting a double”
Note the classic V-shaped price pattern highlighted in purple.
Keep up the good work and let us know how the trade is concluded.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Cash allocation:
I understand that a $50K portfolio will be suited for about five stocks and a $10K portfolio will be suited for 3 ETF’s.
– How do your determine how stocks and ETF’s will fit your portfolio beyond $50K and $10k for stocks and ETF’s respectively?
– Can you please also give some examples?
Thanks,
Duminda
Duminda,
The number of positions we hold as our portfolio size and value expands depends on the comfort level of each investor. For me, it’s 15 – 25 positions and 50 – 100 contracts. As a guideline, see the screenshot below taken from page 137 of my book, “Stock Investing for Students”
Let’s say we have $300k and are targeting 20 positions:
• Divide $300k by 20 = $15k per position
• Divide the price-per-share into $15k and round off to the nearest 100 to determine the number of shares to buy and the number of contracts to sell.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Hi Duminda
It also depends on time available for trading.
For example, in my case at the moment I am very busy and only have about 2 hours a day to dedicate to my trading.
So I can barely manage 10 positions each month, and I do only monthly covered calls for cash generation.
Another limitation is finding stocks which meet all the conditions that the BCI methodology recommends, and that fit my goals and risk tollerance.
Therefore, if my total account value incdreases, I prefer to increase the number of contracts or include higher priced stocks.
Roni
Alan and Barry,
Spent most of the afternoon analyzing the stock in bold on the Run List for 06/08/18.
I have an observation to make.
CADE(NYSE) and STBZ(NASDAQ) , two banks, have announced a merger. No date given yet that I can find. Terms are each STBZ shareholder to get 1.16 shares of CADE.
SunTrust Robinson Humphery(ATLANTA) has lowered STBZ(ATLANTA) to hold from buy, as has Gabelli and Co.
Both have been in strong up trends. STBZ is now tied to CADE at 1.16 times CADE unless deal falls through.
Two vulture law firms have announced investigations into the merger. While this is not unusual my experience with stock that are under a cloud has not been good.
Of course it could lead to a higher bid by CADE or someone else.
Just my observations.
By the way both charts look strong on their own.
Hoyt
Hello Hoyt,
Thank you for the update on the news, re: CADE and STBZ. It is obvious that you understand the details of the BCI methodology. Our process starts with our 15 step screening process that helps us identify, as Alan states, “…the Greatest-Performing stocks…” Once we identify those stocks each week, the second part of the process is for our subscribers to then review those stocks to select the stocks that meet their personal risk and trading profile. As you have identified, this includes reviewing the current news to make sure there are no factors that might eliminate that specific stock from final consideration.
We have found that one of the best sources for detailed news about any stock is the FinViz (www.finviz.com) website. This free site has the most complete news details about specific stocks that we have been able to find.
In some cases, the chart analysis step of our screening process gives us indications that there may be issues with the stock. This triggers a review of the recent news for the stock in question. If there are issues that we identify, we indicate those issues in the comments column of the “Watch List”. In the case of CADE and STBZ, their charts, as you found “…looked strong on their own…” so we didn’t take a look at the news.
A key take away for our subscribers, as you have identified, is that they review the news for the stocks they are interested in before they initiate a trade. In rare cases, we have found that events over the weekend can impact the outcome of our weekend analysis.
Thank you for your sharing your insight.
Best,
Barry
Barry,
Thanks.
A part of the value of BCI membership is being able to participate in the community of fellow trader’s, whether self described as hobbyist, active traders or addicts like me. 🙂
As a 35+ year trader I have learned much from fellow BCIs both people who are relative new (there are no dumb questions) as well as long timers.
All of us want all of us to succeed. The posts of encouragement are heart warming to everyone. One aspect of being in a community is sharing.
I appreciate and am amazed by the respect shown to all by all.
Keep up the good work.
BTW CADE is 25% off it’s low of the day and STBZ has become a derivative stock. So an option on STBZ is a derivative of a derivative,:)
Hoyt
We have conversed in the past. I have even bought your book a few years ago. I have not taken the plunge into CC.
My hesitation is does it work. I base my apprehension on my UK mutual fund (I am UK resident) which gives a high yield of say 6-7%. However removing the yield the returns over say the last 10 years or so are flat. The fund writes covered calls. Granted 6% yield is not bad but on capital basis there is a loss.
So perhaps incorrectly I came to the deduction about writing CC. So does the strategy really work. If so then why is everyone not doing it? Please clarify if you can.
Thanks
Goswami,
Every covered call fund I have researched has under-performed…stay away. Their approach to covered call writing is basic and applies little on no utilization of the skills required to significantly out-perform the market. Plus, share owners pay a fee. In addition, covered call writing represents only a percentage of their investments.
There is no one strategy appropriate for every investor. It is right for me and my family and tens of thousands of others but not for everybody. That can be said of any investment strategy. Why more investors aren’t using covered call writing is a question I always had and I believe it’s because of a lack of education regarding the strategy. I am doing my best to address this issue.
Does it really work? Rather than a response from me, have a look at testimonials from investors who have purchased my best-selling book on Amazon.com:
https://www.amazon.com/Complete-Encyclopedia-Covered-Call-Writing/dp/1937183068/ref=sr_1_1?s=books&ie=UTF8&qid=1528717627&sr=1-1#customerReviews
Alan
Goswami,
I am just a retail hobby investor like most of Alan’s readers. I can tell you he has taught me more about options than any other single person. I trust him. Plus the rascal got me so thirsty to learn more that investing and options trading is my biggest hobby today enabling me to live off my savings in retirement!
There are likely nuances and differences with you being in the UK that I am not aware of over here “in the colonies” (US!) so I do not want to mis speak. I suggest you open a paper account and “buy” a handful of large cap well known stocks. On the US market I would suggest something like BA, V, AAPL XOM and PG. “Buy” 200 shares of each and sell one contract on each near the money for a few months to just see how the account does versus if you did not write the calls to begin with. Skip earnings reports switching to weeklies but don’t fuss ex-div dates for this experiment. You can be covered during those with a half over write blue chip group.
I think you will be pleasantly surprised. You will do better should the market go down or sideways and you will have good upside with your uncovered shares should the market get hot. It sure beats waiting on a dividend check when you can overwrite for a couple % a month!
All of that takes more time than simply owning a mutual fund. In my opinion I would not touch a covered call writing fund for the reasons Alan articulated. I have done research and can not find one that beats the index or beats doing it yourself using blue chips, not to mention if you trade trending stocks and tend your crop frequently!. – Jay
Hi Goswami,
First of all I can assure you that the BCI methodology works very well.
I am not an expert, but in the last 12 months I was able to make much better than 6%, and have fun at the same time.
It is fashioned to the American options trading regulations.
And it is not easy to learn the ropes. It takes a couple of years to acquire the skils, but it is certainly worth it.
In my opinion, paper trading is safe, but lacks the emotional part, which is fundamental for the success in trading.
You can only learn from bad experiences, and losing real cash.
Most of the tickers shown in bold on the weekly watch list will meet your goals. Come on board and be a member, it is worth every penny of the subscription fee.
Roni
Roni,
You wrote:
“In my opinion, paper trading is safe, but lacks the emotional part, which is fundamental for the success in trading.
You can only learn from bad experiences, and losing real cash.”
I could not agree more. Paper trades are an excellent way to learn and become comfortable with the process.
I know of people who have honed their research skills using paper trades. I also know more people who never leave paper trades. They just can’t pull the trigger on real money.
My personality is that I must have skin in the game. Having money at risk sharpens my survival skills. I am more alert to my surroundings, metaphorically speaking. I compare it to when I used to sail in storms. The hair on my neck stood up. I could sense any nuance of wind change. I kept my eyes on the telltales and the wind vane, the angle of heel and the white caps, or lack of, on the waves. Dangerous and exhilarating at the same time.
I’m too old to sail into the wind in storms now. But I experience a similar sense of alertness when I research a stock, it’s options, strike prices, expiration dates and , finally pull the trigger and manage the position(sail into the wind).
Position management as taught by BCI is essential. It helps you reduce your losses and enhances your profits.
We all make decisions that don’t work out. The secret is to make more that do than don’t. About 80% of my total profits come from about 20% of my trades. With experience it seems I put more money into the good trades. That’s supposed to be how it works, isn’t it?
Take care.
Hoyt
Yes Hoyt,
this is the real thing.
When I was younger I used to sail too, and have the same rush when the wind was howling.
But the largest boat I ever sailed was the “Star”, and I never faced a real storm at sea.
Also, I was very skinny, and had not enough weight to be competitive. 🙂
Roni
Premium members:
The Blue Chip Report (best-performing Dow 30 stocks) of eligible stocks for the July contracts has been uploaded to your member site. Look in the “resources/downloads” section (right side) and scroll down to “B”
One stock has been eliminated from last month’s report and a new one added (an oldie but a goodie!).
Alan
Hi Alan,
I am a premium member of yours and have purchased your dvd program.
I wanted to open a demo account to get a feel of covered calls and I am a little confused with what I am seeing.
I pull up the stock and I see weekly option exiry for every stock i am searching for. First I thought these must be stocks that have weeklys on them, but I am seeing this for everything.
Can you please explain if I see this in certain broker accounts, what should I do? Should i go out 4 weeks from now or should I stick to the “every 3rd Friday of the month expiry” and just look at them?
Here is what I am seeing in the demo account:
your help would be greatly appreciated
thanks
Natasha
BCI community:
Click on Natasha’s image above to receive a larger image and then use the back arrow to return to this bog.
NATASHA,
There are hundreds of stocks and ETFs with Weekly as well as Monthly options and thousands with Monthlys only. The number of Weeklys is increasing due to demand for options in general. The stocks you are researching happen to have Weeklys. I’m certain you will come across many that do not.
Towards the bottom of the screenshot you will see that some stocks also have long-term options called LEAPS. Here is a link to an article I published on stock expiration cycles:
https://www.thebluecollarinvestor.com/stock-option-expiration-cycles-beware-of-expiration-dates/
Good observations…keep up the good work.
Alan