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Timing Our Covered Call Trades: Lost Opportunity to Generate Cash with Facebook + Black Friday Discount through Monday

Our covered call options should be sold simultaneously with the purchase of our stocks. If we have evaluated a stock and have a bullish assessment for our covered call portfolio, we next check an option-chain to see if the initial time-value returns meet our goals ( for me, it’s 2% – 4% per month). By waiting to sell an option, share price will likely change and possibly in an unfavorable direction. This, in turn, could eliminate exit strategy opportunities. In June 2019, Mazin shared with me a series of trades he executed with Facebook, Inc. (NASDAQ: FB) that highlighted the risk of trades not ideally timed.

Mazin’s trades     

  • 5/24/2019: Buy FB at $181.92
  • 6/5/2019: Sell-to-open the $165.00 at-the-money call (FB price declined to $165.00) for $5.92
  • 6/25/2019: FB now trading at $188.90
  • 6/25/2019: Cost-to-close the $165.00 call is $24.15

Mazin was considering rolling out-and-up but I want to focus in on a lost opportunity in this article

Price chart for Facebook from May to June 2019

timing covered call trades

FB: Price Chart

When Mazin sold the $165.00 call, a stock loss of $16.92 was locked-in ($181.92 – $165.00). When share value accelerated substantially there was an inclination to re-capture this loss by rolling the option out-and-up. We would now have to pay our hard-earned money to make up for the share loss because the option was sold at a later than ideal date. Let’s assume for the moment that the call option was sold on 5/24 when the shares were purchased. Had we sold an at-the-money or out-of-the-money strike, the most likely outcome on 6/5 would have been an opportunity to close the short call using our 20%/10% guidelines. A week later, as hare value recovered, the same option could have been re-sold, thereby using our “hitting a double” exit strategy. The yellow field in the screenshot reflects that exit strategy opportunity lost.

What if share price moved up between 5/24 and 6/5?

In this scenario, we would have benefitted. However, we are adding additional risk to a low-risk strategy. When the share price declined, selling the $165.00 (then) at-the-money strike did generate capital but also locked in a loss. We were playing catch-up” rather then creating opportunities to mitigate losses or enhance gains.

Discussion

The timing of our covered call trades is a critical aspect to maximizing our returns. When we locate a security that meets our system criteria and our initial time-value return goals are met, share purchase and option sale should be executed simultaneously. This will eliminate the risk of share value decline and having to sell a lower strike which may lock in a loss on the stock side.

BLACK FRIDAY DISCOUNT VIDEO:

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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, 

Thank you so much for your valuable advice and prompt response. Of all the mentors I have come across to date, you are undoubtedly the best. Shall surely be in touch.

Thanks again,

Anil (Chartered Accountant, India)

Anil

Money Answers Radio Show Interview

Alan will be interviewed this Monday, December 2nd from 3 PM ET (12 PM PT) to 4 PM ET (1 PM PT). Click here to access the live discussion:

Upcoming events

November 2, 2019 @ 3 PM ET

Money Answers Radio Show:

I have accepted an invitation to be interviewed on this program on Monday December 2nd at 3 PM ET – 4 PM ET. To access live, click here.

February 6th – 9th 2020 Orlando Money Show

3- Hour Masters Class Saturday February 8th 1:45 – 4:45 PM

BOOTH 306

Information to follow

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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.

53 Responses to “Timing Our Covered Call Trades: Lost Opportunity to Generate Cash with Facebook + Black Friday Discount through Monday”

  1. Sagar November 30, 2019 1:01 am #

    Hi Alan,

    When we buy back the option early in the contract cycle trying to hit a double, how long do we have to wait before selling another option?

    For example, we buy back the option with 3 weeks to expiry and we are waiting for the stock price to rise. Let’s assume that the stock doesn’t rise much in the next week or so. Now, with just 2 weeks to expiry, should we roll down the call option or wait further?

    Thank you,
    Sagar

    • Alan Ellman November 30, 2019 12:53 pm #

      Sagar,

      Yes, you have your time-frames spot on. Looking to “hit a double” is a strategy favored on the first 2 weeks of a 4-week contract and the first 3 weeks of a 5-week contract. Rolling-down is favored in the 3rd week of a 4-week contract and the 4th week of a 5-week contract. There are times where we can generate some time-value in the last week of a contract.

      For detailed information with specific examples:

      Complete Encyclopedia-classic: Pages 245 – 302

      Complete Encyclopedia- Volume 2: Pages 243 – 272

      Alan

    • Sagar December 1, 2019 6:16 am #

      Thanks Alan for the reply.

      Happy holidays,
      -Sagar

  2. Barry B November 30, 2019 9:46 pm #

    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 11/29/19.

    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

    Since we are in Earnings Season, be sure to read Alan’s article, “Constructing Your Covered Call Portfolio During Earnings Season”. You can access it at:

    https://www.thebluecollarinvestor.com/constructing-your-covered-call-portfolio-during-earnings-season/

    Best,

    Barry and The Blue Collar Investor Team

    [email protected]

  3. Marsha December 1, 2019 2:33 am #

    Alan,

    I have 2 portfolios, 1 for covered call writing and 1 for just buying and selling stocks. In the covered call, I use the 20/10 guideline since I read your Complete Encyclopedia (I’ve read both). This has worked out well and I feel confident managing my covered call trades.

    I was wondering if you have any rules about when to sell stocks in my other portfolio. Any suggestions are appreciated.

    Thanks for all you do.

    Marsha

    • Alan Ellman December 1, 2019 7:08 am #

      Marsha,

      Yes, I address this matter in my book, “Stock Investing for Students” I favor the “trailing stop-loss order” in stock-only portfolios. This is an instruction to our broker to sell our shares if the price drops to a certain level, usually a % below the highest price point. In the book, I use 10% which can be adjusted up or down.

      Let’s say we buy a stock for $30.00 and place a 10% trailing stop-loss order. This means that the sell point will be at $27.00. However, if share price moves up to $35.00, the new sell point becomes $31.50 (10% below $35.00). This way, the upside is not capped but the downside is protected.

      For more information on this topic, see pages 140 – 142 in “Stock Investing for Students” The screenshot below shows an example of a brokerage trade execution form with the place to enter the trailing stop-loss trade execution order (Figure 39, #6).

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

      Alan

    • Jay December 1, 2019 2:12 pm #

      Hey Marsha,

      Yours is a great idea to have one account exclusively for covered call writing and another for “simple” stock trading and holding longer term investments. It makes it easy to compare results between the accounts and against SPY.

      Your question when to sell stocks is great as was Alan’s suggestion about trailing % stops. Lot’s of opinions out there on this as I am sure you know! Groups like Oxford Club and AAII have suggested 20% stops so you don’t get caught in whipsaws or normal corrections. 20% is the accepted definition of going into a bear market. I think IBD says 10%? 10% is accepted as a correction and 5% a pullback for indexes like SPY,DIA,Q,s and IWM.

      A thought for setting stops on investment stocks you don’t want to knee jerk sell on market movements they get caught in without a fundamental issue of their own is look at their earnings report volatility over the last couple years. If it’s a great stock with a higher beta and a volatile earnings record up or down more than 10% sometimes that’s probably not the best trailing stop. You’ll get bounced out at the worst moment when you should be adding more! If earnings extremes are around 12% than maybe a trailing stop with wiggle room past that would be best for those ponies :)?

      I think the formulaic trailing stops are best for index ETF’s but should be tailored stock by stock depending on it’s volatility history. You could also look at it’s chart and draw a trend line below it. Set a trailing stop below where support has usually kicked in should that fail next time.- Jay

      • Marsha December 1, 2019 4:18 pm #

        Alan and Jay,

        I greatly appreciate your feedback. I love the idea of a trailing stop because the upside isn’t restricted and the change to the downside is automatic. Thanks for sharing your experience. I have learned so much on this site!

        Marsha

        • Jay December 1, 2019 7:04 pm #

          Thanks for your kind words Marsha. The flip side of your question can be equally interesting. I suspect folks don’t think about it as much as they should: where do you place “stop gains” orders and take profits on investments :)?

          In your cc account that’s pretty easy. If the stock takes off and you are ITM your broker will call you after a good trade. You likely won’t want to ante up big dollars to buy back a now expensive call. Let the buyer sell it and enjoy the moment!

          But in your longer term holding account it’s helpful to have some idea of where you might want to take profit and build cash for the next dip. Particularly in an IRA without immediate tax impact.

          My friends know this stuff is in my blood. They love to tell me about their latest success with stock XYZ! I always congratulate them and ask when they plan to take some profits and build a little cash for a rainy day buy back of XYZ at a lower price?

          I usually get puzzled looks with that one. They seem to assume great stocks go up forever! In they end they probably do. But never in a straight line. I am not suggesting they liquidate or buy short ETF’s :). Just nothing wrong with garden trimming when it gets a little over grown only to plant again later.

          It’s likely a great moment to introduce the concept of csp’s to them but one step at a time :). – Jay

          • Marsha December 3, 2019 7:26 am
            #

            Jay,

            That’s my next project… csp.

            Thanks again,
            Marsha

          • Jay December 3, 2019 11:27 am
            #

            Sounds great, Marsha!

            You will thank – and pay – yourself for adding csp’s to your toolbox. They are particularly good when you might be hesitant about buying but you don’t want the cash to sit in money market either. Like right now maybe :)?

            I sold a couple underneath the market yesterday and may do it again today. Best regards, – Jay

  4. John December 2, 2019 10:55 am #

    Alan,

    Q if you buy an ITM call or Put what stopping anybody exercising it immediately as its in the money or do they have to wait until the expiry date?

    Regards

    John (from the UK)

    • Alan Ellman December 2, 2019 1:12 pm #

      John,

      If we sell an ITM strike, the option buyer can exercise at any time but it makes no financial sense to do so. ITM strikes consist of time-value + intrinsic-value. By exercising, intrinsic-value is captured but time-value is lost.

      Early exercise is extremely rare and when it occurs, is usually associated with an ex-dividend date.

      Alan

    • Jay December 2, 2019 5:50 pm #

      Hey John,

      As a build on Alan’s great reply I buy loads of options here in the US in my trading account. I have never exercised a single one and doubt I ever will. I hope to sell the option for a gain. I have zero interest in acquiring the underlying. If I did I would either buy it outright or sell a cash secured put to get a better price and be paid to wait.. – Jay

      • Hoyt T December 3, 2019 8:28 am #

        Hey Jay,

        Glad to see you survived the NO shooting.:)

        I am in the same boat as you. In all my years of option buying I have never exercised an option.
        I think we have covered in the past where there is only one reason to exercise early and that has to do with an ex-dividend date. I am sure Alan fully explained that somewhere. Seems like maybe the dividend is greater than the time value. Maybe not.
        Anyway, for simplicity sake your approach is exactly the correct one.
        BTW, the last two days have been disastrous for me and it looks like today is going to be the same. At 3:00am the futures were up around 40 and now down 221 as I write this. All because Trump says he may wait until after he wins the 2020 election before making a China deal.
        All this when I had just thought it was safe to get back in the water.:)
        Take care,
        Hoyt

        • Jay December 3, 2019 12:11 pm #

          Hey Hoyt,

          It’s a shame when New Orleans makes the news for gun violence when the city is so much richer than that. These incidents happen too often nationwide these days, I am afraid.

          Thanks for the confirmation on not exercising options. If one has any gambler blood in them they need to buy options. I do it speculatively either on their own or as parts of spreads with trading capital on both calls and puts. But clearly with investing capital we want to be on the sell side with cc’s and csp’s.

          Please don’t feel like the Lone Ranger, and I know you don’t, with this news driven dip. We all feel the pain :)! Interestingly it was coincident with traditional seasonal weakness between now and Dec 20th when the Santa Rally usually begins. But each year stands on it’s own. Happy trading! – Jay

        • Roni December 3, 2019 5:01 pm #

          Hello Hoyt,

          yes, yesterday was really bad for me too.

          But as a CC only trader, I was able to buy back 2 Deecember 20 option trades at aprox. 20% of the original premium, and held the stocks to see if they would recover (and they did today, but are still losing).

          Today was also kind of tough, and I bought back one more position at 20%.

          Let’s see what the situation will be tomorrow.

          Roni

  5. Carlyle December 2, 2019 2:54 pm #

    Alan,

    I have read the first book (Encyclopedia of Covered Call Writing) and I’m planning on completing the second edition. I will be injecting about $50K of capital into my trading account to start my covered call journey. Do you recommend I do anything else in terms of preparation?

    Regards,

    Carlyle

    • Alan Ellman December 2, 2019 4:57 pm #

      Carlyle,

      I would include at least a month or two of paper-trading (practicing with a hypothetical account) before starting with hard-earned money.

      Alan

    • Steve December 3, 2019 10:46 am #

      From a fellow newbie definitely listen to Alan on this one. Personally I couldn’t focus on the paper trading because there were no real consequences, so I’ve been practicing with amounts big enough to hurt when things go wrong, but not really hurt. Example, a big mistake costs me a day’s pay so I kick myself for a while and learn my lesson. But I certainly got hammered percentage wise earlier on, multiple times.

    • Mario December 5, 2019 12:05 am #

      Carlyle,

      When I started with Alan, I also read other Option books I could check out of my local library to round out my knowledge of Option Inverting. Spent about 4 months on the books. Encyclopedia Vol. 1 complete study.

      It was a big day when I bought my first covered call (buy stock, sell option). Exp. Friday was a heavy pressure day since I had to make decisions. Sort of felt overwhelmed despite all the study. The real thing is different. I actually needed 1/2 hour or more per symbol to roll an option ITM at Exp. Friday.

      Mario

  6. Steve December 3, 2019 10:15 am #

    Hi everyone,

    So I’ve been investing using Alan’s system for a few months and it’s going great! Recently I was contacted by the local office of my broker (TD), the guy was saying things like he wants to help me succeed, if I do well they do well, things like that. He wants me to go into his office and show him the process I’m using, and sign me up for training classes based on what I’m trying to do. Now I’ve heard the rumors that your broker actually wants you to lose all your money because they’re trading against you. Should I be wary of this guy and/or keep information from him? Should I be trying to impress him? I’m not sure what’s going on here, thanks for any insights.

    • Jay December 3, 2019 1:12 pm #

      Hey Steve,

      Wow, this is a tough one :)! A long time ago in a galaxy far away I was a broker at Merrill Lynch. I knew just enough after getting my various securities licenses to be dangerous to clients :). This was long before on line trading so if you wanted to make any transaction you literally had to pick up the phone and call a broker.

      At that time my primary purpose was to seek and gather assets into the firm’s custodianship. I suspect that has not changed so expect questions about accounts you may have outside TD.

      I would not say ignore the guy at TD or blow off his offer to meet. They are a good house and you do business there. Just be ready for a sales pitch and an attempt to get you to consolidate assets there.

      They also have a service called “TradeWise” anyone can subscribe to but account holders with options clearance can have it automated in their accounts. It buys and sells options and spreads. So they will push that. I would not go there. Also expect inquiries into your life insurance. They sell that too.

      Be extremely leery if they suggest they can trade “for you” in anything you are doing now. Even if as basic as portfolio overwriting. It will be positioned as trained professionals who can save you time, effort and costly mistakes. The only costly mistake would be believing them :)!

      Alan’s trademark line is be CEO of our own money. We all need reliable and cost competitive on line brokers to do that. You have one already. Use your horse sense if you meet with the TD guy about who’s agenda you think he is pushing: TD’s or yours. – Jay

      • Steve December 3, 2019 1:33 pm #

        Thanks Jay I appreciate you sharing your inside knowledge. I had a feeling I should be nice to him/TD since I like using their trading software. It looks like I’ll be meeting with him so I’ll definitely keep what you said in mind, thanks again.

        • Jay December 3, 2019 4:06 pm #

          Great Steve, thanks for your kind reply!

          I would not go in expecting anything or feeling like you owe TD anything. And you absolutely don’t need to try and impress him with what you know about options already. Most retail brokers know very little about options. They are paid to open new accounts, add to current ones, then sell life and disability insurance. He could be genuinely interested in what you are doing for his own education? But his main job is sales.

          If they have complimentary training courses in the office that might be fun and a chance to dialogue with others with our options disease :)? But if you read Alan’s stuff and hang around this blog they may ask you to teach the course :). – Jay

        • Hoyt T December 3, 2019 4:51 pm #

          Hey Steve,

          Heed Jay’s advice. It is dead on.

          A relative new “package” most of the discount online brokerages are pushing is what they call “Wealth Management”.
          This is not your grandfather’s “Wealth Management” we grew up understanding. They are not going after the very wealthy but anyone they can get where $1,000,000.00 or more in consolidated assets can be attained. They want to handle everything insurance, wills, living wills, trusts etc. The pitch is as Jay described “trained professionals who can save you time, effort and costly mistakes”. At around $1,000,000.00 the fee is 1%. That’s $10,000.00 and that’s 1% per year. It will probably involve a contract.
          More likely than not they will be unable to generate any better returns than you are currently getting with cc’s. Any other strategy will involve more risk and, of course, a fee for their service. Portfolio overwriting can be automated based on info they get from you to determine your “risk profile”. Here again you will not know whether or not you could have done better.
          The people I know at E-trade are nice guys but they have to make a living and they have bosses who are pushing them to perform. Some are traders who lost a lot of money borrowed from the company and are working off debts.
          I would go to the meeting. You never learn less. Just listen and learn. Take time to think out their pitch. As to the “training sessions for what you are doing now”, you might learn something in the area of organization and discipline but be careful and don’t let the surroundings seduce you.
          Remember the BCI methodology is the most conservative approach and if you are a premium member then the hard and timely work has been done for you. All they can do is add complexity which can only marginally add to your returns(even though they may think otherwise).
          TD Ameritrade is being acquired by Charles Schwab. A lot of people at both firms are going to be out of jobs. People will be trying really hard to prove they deserve to be retained.
          Let us hear how it goes and we all can learn.
          Hoyt

        • Steve December 5, 2019 10:09 am #

          Wow I didn’t expect so much useful information about this, thanks a bunch to everyone who replied! In a very strange coincidence I just picked up a book on technical analysis (hope to improve my chances with selling OTM calls) and the author is talking about this exact issue in the intro. He’s saying that firms are hiring people with no relative background to sell their stuff. The meeting is tomorrow and I’ll be sure to let you all know how it went.

          • Jay December 5, 2019 1:41 pm
            #

            Hey Steve,

            You probably just hit a nerve with all us “Do it your selfers” :)!

            Have a great meeting at TD and please get back to us.

            They are a reputable firm and my hunch is they truly do wish you success and believe sincerely they can help you towards that goal. They just may not be expecting you now that all your friends have loaded you up with every warning in the world :)! – Jay

    • Roni December 3, 2019 5:18 pm #

      Hi Steve,

      I would not go to meet this guy.

      It is obviousely a scam.

      As Jay said, and Hoyt confirmed, this guy wants to ripp you off and sell you some worthless stuff they call “products”.

      Send him a finger.

      Roni

      • Jay December 3, 2019 9:24 pm #

        Hey Roni,

        Hope all is well in this topsy turvy market week for you :).

        For clarity and fairness I do not know or suspect that Steve’s TD guy is untrustworthy or trying to scam him. I simply wanted to give him a heads up that when he walks into their office they will try to sell him things just like in any other store on earth :)! – Jay

        • Roni December 5, 2019 4:44 pm #

          Hi Jay,

          Thanks, all is well, despite these “red” days. I am using Alan’s guidelines by the book.

          I understood your post to Steve perfectly, and agree with you 100%.
          But I could not refrain from posting my negative opinion of these “banksters”.

          • Jay December 5, 2019 4:58 pm
            #

            Thanks Roni,

            I know exactly how you feel since I suspect the “banksters” too :)!

            Steve sounds like a level headed guy. But it’s funny and I suspect he never expected the pile of advice we all gave him :)? – Jay

  7. Gilbert December 3, 2019 11:26 am #

    Alan,

    What do you think of covered call etfs like QYLD?

    Thanks,
    Gilbert

    • Alan Ellman December 3, 2019 12:35 pm #

      Gilbert,

      Covered call writing ETFs can’t come close to achieving the results we can generate using the BCI methodology… they’re in another galaxy.

      Below is a screenshot comparing the S&P 500 to QYLD over the past year.

      CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

      Alan

  8. Quan December 3, 2019 1:10 pm #

    Hi Alan,

    I bought the 100 share of ASXM price at 33.39 and I also sold 1 Jan 17 2020 32.50 call at 12.90 and today, the stock gasp up to 45.40

    the price of the 32.50 call is now at 20.90. Do I keep the option until expiration or I unwind it . If this is your stock, what should you do.?

    Thanks
    Quan

    • Alan Ellman December 3, 2019 2:44 pm #

      Quan,

      Interesting trade with great results so far. The way the trade was structured, there was about a 37%, 7-week initial time-value return which annualizes to 275%. This tells us that there are (were) market expectations of a huge price move prior to contract expiration. Positive news came out about one of the companies pharmaceuticals that caused the gap-up in price and at this point the max return is looking good.

      Now, the cost-to-close is $20.90 but the time-value cost-to-close is about $8.00. That is 2/3 the original time-value profit. can we close and generate more than the $8.00 cost-to-close? Probably not. I can’t tell you what to do but do you want to spend $8.00 and get less in return…. rhetorical question. Or just enjoy the huge return until contract expiration while still monitoring in case an exit strategy would benefit us.

      We all must decide which underlyings are appropriate for us based on our personal risk-tolerance. This stock was volatility personified!

      Glad you made some good money.

      Alan

      • Hoyt T December 3, 2019 5:54 pm #

        Hi Quan,

        As a guy who used to trade options in extremely highly volatile bio-techs I can attest to what Alan says. If you were to look over the vast universe of bio-tech charts you would see a lot of wild price swings. Stocks going from $35 to $140 to $14.

        Look at a 5 year chart of CLVS. See that gap up on June 17, 2017. I was there on a covered call. I have had more that went the other way. I did not chase it.

        IMHO covered calls are not the way to play these equities. You came out good this time and I have had these kinds of returns. I have also had horrible results.

        Remember the risk is always in the underlying not the option.

        Hoyt

        • Barry B December 6, 2019 3:55 pm #

          Hoyt,

          As a personal point of reference… the biggest losses in my trading career have been in Biotechs! FDA announcements, published trial studies, etc, come out of the blue and smack me in the face.

          Just saying…

          Best,

          Barry

          • Hoyt T December 6, 2019 4:15 pm
            #

            Barry,

            The siren song of extremely high option premiums can be seductive unless one has his crew bind his fingers to his chair.

            Apologies to Homer.

            Hoyt

  9. Alan Ellman December 3, 2019 9:29 pm #

    Money Answers Radio Show interview:

    https://www.youtube.com/watch?v=5KdIEZwOLnQ&feature=youtu.be

  10. MarioG December 3, 2019 11:28 pm #

    Joseph,

    You left a message in last weeks blog on Nov. 26 asking how to select which stocks to use in the weekly report. Alan answered you.

    To help selecting the stocks, I also enter the Weekly report stocks in a portfolio at Finviz.com. That way I can see the %change during the day and looks at information / news for the symbols.

    If the list is over 50, I use a second portfolio for the remaining symbols and date the title as 1 of 2 and 2 of 2.

    If you enter the symbols before opening bell on Monday you do not have to enter Fridays Last Price. Instead let Finviz populate the last price with the button Get Todays Price.

    If you enter a stock that cannot be used till after earnings report, I code the SHARE column to identify the date. I code the shares as well for Bold and Not bold (mixed tone) status.

    I do a simlar portfolio for the symbols in the ETF report.

    Hope this helps.

    Mario

  11. Gilbert December 4, 2019 3:51 am #

    Alan,

    Why don’t all hedge funds use covered calls to beat the market?

    Gilbert

    • Alan Ellman December 4, 2019 8:05 am #

      Gilbert,

      In my view, covered call writing is a strategy more geared to retail investors rather than multi-billion dollar corporations. Interestingly, this is the strategy that Bernie Madoff pretended to use with a protective put component (the “collar” strategy). The irony is that he could have actually made money for his clients.

      Here are some thoughts:

      1. There will be liquidity issues when selling options on billions of
      dollars of securities. It will also limit the number of available stocks and ETFs.

      2. Hedge funds must overcome the large fees they charge and therefore look to more aggressive (riskier) strategies to accomplish goals of beating the market and collecting their substantial fees.

      3. Despite the challenges of “1” and “2”, maybe they should throw out the old school way of thinking and enter our world of conservative option-selling. Shocking? Who would have thought that trading commissions would eventually be $0?

      Maybe Bernie was on to something… if only he followed through.

      Alan

      • Hoyt T December 4, 2019 8:51 am #

        HI Alan,

        Excellent recap!

        It’s been some time since I viewed one of Bernie’s client’s statements so I don’t remember how much detail he went into.

        But it would fairly easy to write a logarithm that would show a random monthly increase based on the S&P 500 to yield no less than a 10% annual gain. If my memory serves me correctly Bernie had only one IT guy who generated the statements. That’s the guy who knew exactly what was going on.

        I once saw a list of all of his clients. Almost exclusively Jewish including benevolent funds. He created a mystique by “closing” the fund and then only “letting” new clients in after them pressuring him to take their money. What a guy!

        Sad because he had once been a real star on Wall Street.

        I have friends who have large accounts a major brokerages who have given their brokerages permission to use covered calls with their holdings. I have no idea how it’s worked out for them but at gatherings they are proud to state that they, too, are into options trading. I just grin inside.:)

        Hoyt

  12. Hoyt T December 4, 2019 8:16 am #

    Hello Everyone,

    After our discussion about Steve’s upcoming visit to his broker’s office(and I concur with Jay’s last post) I came across this article in The Week.

    https://theweek.com/articles/880718/what-charles-schwabtd-ameritrade-acquisition-means?utm_source=pocket-newtab

    The author’s, Jeff Spross, background has not been essentially business reporting but his history in getting the facts right have been outstanding. He is a Texas boy.:)

    The article, while not as in-depth as I would have preferred, covers what our conversation with Steve touched on. In my opinion we have only scratched the surface of the changes coming in our world of investing. This article gives us a good first glimpse of what is coming.

    We are, indeed, fortunate to have the experience of Alan, Barry and the BCI team, Jay and others to give us insight to what has been and what is coming. I firmly believe our edge as options traders will be even more enhanced because of them and their participation in this blog.

    I am involved in a couple of other “options blogs” and while I do get something out of them, (my theory of never learning less), the BCI blog and methodology remain, in my opinion, the simplest and most conservative of the genre.

    “Wishing all of you the best of good buys”….Paul Kangas(RIP)

    Hoyt

    • Jay December 4, 2019 12:46 pm #

      Good morning Hoyt,

      That is an interesting article, thanks for posting.

      When I retired I knew I would be trading a lot of options as my new “hobby/job” so I chose the broker with the best rates. That was Options House at the time. E-trade since bought them.

      The “death of commissions” has helped me. Now all my stock and ETF trades are free and when I buy or sell options it’s just 15 cents a contract since I am grandfathered at the old OH rates. Likely only a matter of time before that goes away too :)!

      I do not disparage brokers or CFA’s. I once tried to be one :)! It’s just when I talk with them socially I am always startled by how little they actually know about things I am interested in like the options market. I think there is no substitute for educating ourselves and managing our own money.

      If too busy for that here is my one step retirement plan: If you retire on a million dollars put 50% in SPY, 30% in QQQ, 10% in TLT and 10% in GLD. Over write the whole thing every month OTM for 1%.. Buy back on dips and do it again if exercised. That will spin off 10K a month cash flow. Some months it will be income and some months loss cushion. Same as dividends which you will get holding the stock ETF’s :)!

      I am being somewhat facetious but my point is this is not rocket science. We really can be the CEO’s of our own money. -Jay

      • Hoyt T December 4, 2019 7:51 pm #

        Hey Jay,

        Not to monopolize this blog but I do wish to respond to your as always excellent post.

        Neither do I disparage brokers or CFAs. CFAs should be fiduciaries. Often I think our views of stock brokers is that of The Wolf on Wall Street and other bucket shop salesmen we have seen portrayed in the movies and on tv. Brokers, who are non fiduciaries, as you know, are only required to suggest products which are appropriate to a person in their clients “situation” not necessarily in their clients best interest. Sort of misquoting Strother Martin in Cool Hand Luke, ” What we have here is a failure for broker/client interests to align.”

        I like your One Step Retirement Plan. Simplicity defined! You have posted that before and I have given it considerable thought. It really does make sense.

        It is not rocket science. In many ways it’s much easier for us individual investors than for the big boys, and girls. For one thing we don’t have to worry about our adding large positions increasing our costs as we build our positions or decreasing our gains we unwind. Our problem is discipline. At least that’s my main problem. I keep going off the reservation. Greed. Greed. Greed.

        Hope the week helps us all.

        Hoyt

        • Jay December 4, 2019 10:46 pm #

          Thanks Hoyt,

          I too feel bad and clumsy taking up too much space on this blog. Alan will probably bring out the hook on us when it is time :)? Thanks for working with me on my typo. I meant “CFP’s” Certified Financial Planners. There may be CFA’s too :)? Those guys are not all bad. You just have to realize they are salesmen first.

          As I look back at all the mistakes I have made they fall into three buckets:

          1. Investing in things I did not understand like derivative funds and REITS before doing my home work
          2. Chasing the hot stocks and funds
          3. Panic selling when the rug got pulled out

          But tomorrow is a new day. I will rise and shine just a tiny bit wiser than when I woke up today for having lived it :)! – Jay

      • Mariog December 4, 2019 11:43 pm #

        Jay,

        One step retirement plan:
        What threshold criteria and exit strategy for the underlying would you use to buy back or unwind on dips for your one step retirement plan.

        Interesting with no commissions now, if you are in the money at Exp Friday, to simplify your work, you now can let your option be assigned and simply buy a new covered call on Monday after. Or you can roll up and out if you feel the gains would be higher that way.
        Mario

        • Jay December 5, 2019 10:34 am #

          Hey Mario,

          Nice to have you back posting on the blog!

          I was being a little tongue in cheek on the simple plan but there is some merit in holding a small number of inherently diversified high liquidity ETF’s and over writing them. One of my problems typically is having too many positions and sometimes losing track of them. That’s not good.

          Alan’s 10-20% buy back guidelines are always handy for sold options. But my thought is if you are not going to exit the market entirely you would always keep things like SPY/QQQ/TLT/GLD and just flex your strike selection with your market view buying back if exercised on down days for them. They are ETF’s so the premium will never wow you but it adds up over time. Jay

  13. Alan Ellman December 4, 2019 5:54 pm #

    Premium members:

    This week’s 8-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists the mid-week market tone stats.

    Also included is the mid-week market tone at the end of the report.

    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

  14. Mariog December 4, 2019 11:11 pm #

    Gary, Alan and Barry,

    Historical note on Weekly Report improvements in 2016:
    Read in last weeks log in a question by Gary that Alan responded that the reason for the second weekly report in the Premium report you create is for the visually challenged. I recall that the big physical difference between the two reports is the mode printed, which resulted in an improved print version of the report..

    I looked up old printouts of the first and second reports from 2016 when I printed them (my – how the year pass) (I do not print them now, kept a few of the old ones) the actual improvement was tremendous with the second report.

    The first report prints in portrait mode and is results in a minuscule font size that I needed (and most members, I believe) a magnifying glass to read the market tone section and listings..

    The new improved second report prints the market tone area and symbol listings in LANDSCAPE mode and automatically results in a larger font size (same font style). No magnifying glass needed.

    I highly recommend to all that if you are going to print out the premium report to print out the Market Tone and Stock listing in the end of the report. I also use on my PC the second report when viewing the PDF file.

    Mario

  15. Alan Ellman December 6, 2019 5:51 am #

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