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Trade Management: A Real-Life Example with Brooks Automation, Inc. (NASDAQ: BRKS)

Once we enter our covered call writing trades, we immediately go into position management mode. In August, 2018, Mike generously shared with me a series of trades he executed using Brooks Automation, Inc and asked for my evaluation of his management of these trades. This article will detail and evaluate each aspect of the series of trades executed by Mike.

 

Mike’s trades with BRKS

covered call writing trade management

BRKS Trade Chart

 

Trades corresponding to numbers in chart

  • 1: 6/18/2018: Buy BRKS at $36.13
  • 1: 6/18/2018: Sell 7/20/2018 $35.00 call at $2.15
  • 2: 6/25/2018: Buy-to-close (BTC) the $35.00 call at $0.50
  • 3: 7/11/2018: Sell-to-open (STO) the August $35.00 call at $1.40 (rolling out)
  • 4: 7/27/2018: Buy-to-close the August $35.00 call at $0.35
  • 4: 7/27/2018: Sell-to-open the $35.00 call at $0.30
  • 5: 8/17/2018: Buy-to-close the $35.00 call at $0.05

 

Initial calculations

 

covered call writing calculations

BRKS Initial Calculations with The Ellman Calculator

 

An initial time value return of 2.9% with downside protection (of that time value return) of 3.1% is a reasonable covered call writing 1-month goal.

 

Evaluation of trade executions

Initial trade execution on 6/18/2018: This is a great defensive initial trade with a time value return of 2.9% and downside protection of 3.1%

BTC short call on 6/25/2018: This approximates our 20% guidelines for closing short calls early in a contract…well done

STO (rolling out) on 7/11/2018: The net credit is $0.90 or an additional 2.8%. I generally prefer to wait closer to expiration to roll options. This gives us more time to re-evaluate our bullish assessment of the underlying stock. Also, the time value cost-to-close will be lower as expiration approaches and because of the logarithmic nature of time value erosion (Theta), the latter month time value will not be impacted as much.

BTC and STO the August $35.00 call on 7/27/2018: This resulted in a net debit of $0.05. No need to execute either trade.

BTC the August $35.00 call at $0.05 while stock traded under $35.00 on August 17, 2018: This step was also unnecessary. When an option expires out-of-the-money, it expires worthless and exercise while not take place.

 

Should we have rolled into the August contract?

 

rolling out with covered call writing

BRKS Technical Breakdown in Early July

 

In early July, there was a breakdown of the technical chart for moving averages (#1), MACD Histogram (#2) and the stochastic oscillator (#3). I would have considered 
“getting out of Dodge” at that point.

 

The final outcome

I’m pleased to report that in late August, BRKS announced the sale of its semiconductor Cryogenics business which caused a nice pop in share price allowing Mike to close at a $1000.00 profit. Lunch is on Mike!

 

Stock news

BRKS News-Related Price Acceleration

 

Discussion

There are several factors we need to consider when managing our covered call trades which have a critical impact on our final returns. Using our 20%/10% guidelines, evaluating price charts, factoring in time to expiration, earnings reports (not an issue in this case), setting calculation return goals and assessing those calculations and all considerations that need to be implemented in order to become an elite covered call writer.

 

Many thanks to Mike for sharing these trades with our BCI community.

 

Upcoming events

March 29th

Quinnipiac GAME Forum
International forum for college and graduate school finance majors

 

May 8th or 15th

Alan will be hosting a webinar for the Options Industry Council (OIC) on generating income from selling options. I will post the exact information next week.

 

May 14th

Las Vegas Money Show

Bally’s/ Paris Hotel

12:15 – 3:15

Master class encompassing covered call writing, put-selling and the stock repair strategy

This is a paid event hosted by The Money Show

 

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 started employing the covered call writing strategy you teach in the 2nd quarter of last year. I have already realized some nice returns by employing this strategy. I finished 2018 ay 4.6% on my main IRA. I thought that was decent compared to the S&P being down 6-7%.

Thanks for all you do for all of us do-it-your-selfers!

Greg

 

Market tone

This week’s economic news of importance:

  • NFIB small business index Jan. 101.2 (104.4 last)
  • Jog openings Dec. 7.3 million (7.2 million last)
  • Consumer price index Jan. 0.0% (0.1% expected)
  • Federal budget Dec. -$14 billion (-$23 billion last)
  • Weekly jobless claims 2/9 239,000 (225,000 expected)
  • Retail sales Dec. -1.2% (0.0% expected)
  • Producer price index Jan. -0.1% (0.1% expected)
  • Business inventories Nov. -0.1% (0.6% last)
  • Industrial production Jan. -0.6% (0.0% expected)
  • Consumer sentiment index Feb. 95.5 (94.0 expected)

THE WEEK AHEAD

Mon Feb. 18th

  • None scheduled President’s Day

Tue Feb. 19th

  • Home builders’ index Feb.

Wed Feb 20th

  • Housing starts Jan.
  • Building permits Jan.
  • FOMC minutes

Thu Feb 21st

  • Weekly jobless claims 2/16
  • Durable goods orders Dec.
  • Philly Fed Feb.
  • Market manufacturing PMI Feb.
  • Markit services PMI Feb.
  • Existing home sales Jan.
  • Leading economic indicators Jan.

Fri Feb. 22nd

  • None scheduled

 

For the week, the S&P 500 moved up 2,50% for a year-to-date return of 10.72%

Summary

IBD: Market in confirmed uptrend

GMI: 5/6- Bullish signal since market close of January 31, 2019 

BCI: I am favoring out-of-the-money strikes 2-to-1 compared to in-the-money strikes. 

 

WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US

The 6-month charts point to a greatly improving market tone. In the past six months, the S&P 500 down 3% while the VIX (14.91) moved up by 11%. 

 

Wishing you the best in investing,

Alan and the BCI team

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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.

9 Responses to “Trade Management: A Real-Life Example with Brooks Automation, Inc. (NASDAQ: BRKS)”

  1. Hamish February 16, 2019 5:30 am #

    Hi Alan

    Over the past months, I sold several one-month option contracts against arGEN-X, a Belgian biotech company with great fundamentals and impressive institutional ownership. As I’m also from Belgium, the options listed on Euronext Brussels are very liquid compared to those of the NASDAQ. Short story long, I continued to generate maximum profits of 8% as its technicals remain outstanding.

    Now, the stock has broken its main resistance level, and I asked myself whether to buy back my options contracts and sell calls if the stock starts to move sideways again. Initial time value returns for the at-the-money calls still generate a nice 5%. If I decide to buy back my contracts, I would still generate a maximum profit of 6% on a monthly basis, which is above my targeted range of 3%-4%. But, I don’t want to get greedy as the risk for a correction grows.

    Your thoughts on this?

    Thanks in advance!

    Hamish

    • Alan Ellman February 16, 2019 7:30 am #

      Hamish,

      Let’s start with this: You have executed a series of extremely successful trades, so congratulations for that.

      Now the stock has appreciated significantly to the upside so the question confronting us is: to roll or not to roll…allow assignment or stay with this security?

      Analyzing the stock, we immediately come to the realization that it is a highly volatile stock because only such a security would offer an annualized return of nearly 100% (8% x 12) from selling near-the-money calls. This means that we are as susceptible to the downside as much as we are to enjoying the benefits to the upside.

      We would consider the “rolling choice” if:

      1. We were still bullish on the underlying
      2. The calculations for rolling meets our established initial time value return goals (use the “What Now” tab of the Ellman Calculator)
      3. Our personal risk-tolerance aligns with the danger of the trade
      4. No upcoming earnings report

      Basing our rolling decisions on these factors is a recipe for success.

      Alan

    • Jay February 18, 2019 12:41 pm #

      Hamish,

      In my younger days I had a good friend who was a fantastic water skier. I used to drive the boat for him skiing behind. He always told me “Boring driving makes great skiing. Just pick a point in the distance and go straight for it.”

      I have laughed since wondering if that was also good investment advice :)? We all have our styles and preferences but I would not opt to cover more than half of an exciting stock like your GEN-X if I covered any at all.

      I have found that, like boring ski boat driving, my CC’s and CSP
      ‘s work best and most consistently on Blue Chips and other mid beta large caps. I am hesitant to over write higher beta smaller growth stocks since – in only my opinion – it can defeat the purpose of being in stocks like that unless they go down.

      Yet whenever I get into conversations about options selling with friends the point I always come back to is there is no right or wrong way. It’s about finding what works best for us. – Jay

  2. Barry B February 16, 2019 10:10 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 02/15/19.

    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

    barry@thebluecollarinvestor.com

  3. Manohar February 19, 2019 2:51 am #

    Hi Alan I definitely am very fond of all your videos and the weekly stocks screen. I have also let some of my friends and colleagues know about this. I love doing the weeklies for some reason. Truly thank you once again!

    Manohar.

    • Alan Ellman February 19, 2019 8:00 am #

      Manohar,

      Thanks for your generous email. It’s feedback like yours that motivates me to continue my work for retail investors.

      Alan

  4. Harry February 19, 2019 5:12 am #

    Alan! Reading your book Complete Encyclopedia. Very interesting I am learning a lot. My question do you use a spread sheet which includes your option premiums, stock price at time of purchase, VIX at time of purchase, number of contracts, date of purchase, etc. Or is all of this information in the Ellman Calculator which I have not got to yet.

    Harry

    • Alan Ellman February 19, 2019 8:03 am #

      Harry,

      Much of the information you are seeking is located in the Ellman Calculator. As a premium member, you are entitled to a free copy of the Elite Covered Call Writing Calculator (expanded version of the Ellman Calculator) as well as the Daily Covered Call Checkup spreadsheet. Both are located in the “resources/downloads” section of the premium member site (right side) with their associated user guides.

      The BCI team is also in the process of developing a trade planner which should be available in the near future.

      Alan

      • Harry February 19, 2019 10:39 am #

        Alan do you have a mental point that you would sell a negative position. Assume your option premium is $600 and it is negative. Is there a point like 40-50% loss you would sell?

        Harry

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