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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 

Alan will be hosting a webinar for the Options Industry Council (OIC) on generating income from selling options. Time and details to follow.

 

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.

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

  1. 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

    • 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

    • 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. 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

    [email protected]

  3. 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.

    • 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. 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

    • 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

      • 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

        • February 19, 2019 4:08 pm #

          Harry,

          On the option side, we use the 20%/10% guidelines dictating when to close the short calls. Then we use a series of indicators to determine next steps…roll down, sell the stock, wait to hit a double etc.

          I look at the underlying’s chart and performance versus the S&P 500 to decide on when to sell a stock. For those who want to use a percentile, 8% – 10% below the stock price at the time of the trade is reasonable.

          Alan

          • February 20, 2019 11:27 am
            #

            Hi Alan,

            I, too, use a comparison of performance versus the S&P 500 for evaluating whether to buy or sell an equity. I realize that one can get pretty esoteric in any chart analysis. Technical analysis was how I got started in this business. Your comment got me to thinking.
            For someone who doesn’t want to spend all day “working” the market, or really getting “down in the weeds” in chart analysis, but wants to follow your proven method of monthly adjustments following expiration, position management during the month and avoiding earnings reports do you have a simple time frame comparison of S&P 500 performance?
            Thanks,
            Hoyt T

        • February 21, 2019 7:17 am #

          Hoyt,

          For underlyings that have reached the 20%/10% threshold, I use a 3-month comparison chart with the S&P 500 to determine whether to sell the underlying or look to another position management tool (rolling, “hitting a double” etc.). This gives us a perspective of recent activity prior to the current contract month as well as the current month of our open positions.

          For members who have never used comparison charts, http://www.finance.yahoo.com offers a free charting service:

          Type in the ticker GSPC (for S&P 500)
          Click on “Chart”
          Click on “Comparison”
          Put in ticker of stock or ETF
          Save
          3-month time frame

          If the underlying is under-performing the S&P 500 significantly, consideration should be given to selling the long position and initiating a new trade with a different underlying.

          Alan

          • February 21, 2019 9:04 am
            #

            Alan,

            Thanks.

            I am an old “gunslinger”.

            I think that may have been a term you have used in the past.:) I like to tell people that I am a self-made man but that if I had it to do over I would get some help.

            That would certainly have been very appropriate in covered call writing. When I contemplate all of the spreadsheet work trying to get a systematic approach to both being long and short calls, I regret the time lost to other activities because I didn’t know about your system.

            I am truly amazed at the wealth of information available from your organization. I could list many things that are individually worth Premium Membership. The Watchlist alone is worth the membership if one puts any value on their time.

            As in any educational setting the goal is to not just transfer facts but to set the stage for critical thinking. BCI does that. What we learn here is a lot more than just the principles of covered call writing.

            Many thanks to you, Barry and your team,

            Hoyt

          • February 21, 2019 2:22 pm
            #

            Hoyt and all members,

            Without you, BCI would not be possible so thanks to you!

            Alan and the BCI team

  5. February 19, 2019 1:23 pm #

    I bought 100 shares of PYPL on 12/14/18 at 85.91. On 1/31/19, I Sold the 22 FEB19 call strike = 90 for premium of 1.31. Price per share is now around 95.00. My profit at this point is capped at around $510 whether I wait until it gets assigned on Friday or just exit the trade by BTC the option, and sell the 100 shares at market price. The only benefit to closing out now as opposed to waiting until Friday is just a small savings of the assignment fee (around $20). Opinion?

    Joanna

    • February 19, 2019 4:19 pm #

      Joanna,

      Figure out the time value cost-to-close before making a decision. Right now, that would be any amount above $5.00. As 4 PM ET on Friday approaches, that amount will decrease. At that point, we can roll the option, close both legs of the trade or allow assignment.

      I hate assignment fees above the standard commission to sell the stock. I’d call your broker and gently remind then that many brokers do not charge such a fee and you’d prefer to stay with them…ask for an adjustment on assignment fees….can’t hurt to ask.

      Alan

    • February 20, 2019 12:54 pm #

      Hi Joanna,

      I have had success with PYPL also. I have held my shares for a while now. I recently mis-read their earnings date, sold the then OTM 95 calls, realized my mistake and thought “Oh.no, I am covered during earnings, Alan would shoot me :)!”

      So I bought back the calls at a small loss, kept the shares and they have been fine. I like their business model and my significant other uses their service. There is an old saying in investing about buy stocks you use and know and it certainly has worked for the likes of Amazon over the years and seems to be working for PYPL too.

      I’m with Alan, give it until Friday afternoon and see where the $90 call stands. Then you can close, roll, etc.. I doubt you will be called early on that one. – Jay

  6. February 19, 2019 3:57 pm #

    Thank you Alan and Barry.

    This last month (Jan 19) I batted 100 percent on 11 stocks, and after all were called out I had nearly 4% gains (well, 3.8). I am now trying to maximize by being a little more out of the money but carefully so. I had a big setback w/ the stocks I was holding in Oct/Nov of 18 but my covered calls are keeping me in the $$$. Teaching my wife so in case anything happens to me, she can be our CEO. Now my question:

    Optimizing when to cover and roll up or out is probably the hardest part I am now working on. Next will be Cash Secured Puts. What are the best reference items you have for maximizing gains on rolling out or out and up?

    Again, thank you. Enjoying success very much it’s encouraging!

    Glenn

    • February 20, 2019 6:07 am #

      Glenn,

      Congratulations on your recent success. I love hearing stories like yours.

      Exit strategies including rolling options is a major presence in my books and DVDs. Both versions of “The Complete Encyclopedia for Covered Call Writing” (start with the classic edition) have information with detailed examples.

      Thanks for sharing your investing experiences.

      Alan

  7. February 20, 2019 5:47 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 Top-performing ETFs with Weekly options as well as the implied volatility of all eligible candidates.

    New members check out the video user guide located above the recent reports.

    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

    • February 21, 2019 10:24 am #

      Please help me understand the ETF Report.

      In looking at the All Sector Components (SPDRs) there is a bar chart with 3 month returns and a line graph using the past 3 months. The returns do not match. An example is Technology (XLK) +1.9% on bar graph and +9% on line graph. Another example Communication Services (XLC) +6.23% on bar chart and not listed on line graph.

      Thanks;
      Terry

      • February 21, 2019 2:27 pm #

        Terry,

        I noticed this difference years ago and this week it pronounced.

        The difference seems in the starting day of the 3 months and perhaps the number of days considered 3 months (90 days, 91 days, 91.25 days). This is the best explanation I can come up with. We will continue to publish both the comparison charts and SelectSector site information.

        Alan

  8. February 21, 2019 3:45 am #

    Alan,

    I am new Member and just received the ETF report.

    Do you use the same strategy as far as exiting and entering the ETF as the one you have for stocks? I cannot find the rules for ETFs. Please direct me if I am missing anything.

    How much return you look for on monthly basis or every 5 weeks for ETFs? Do you sell in the in the money options on ETFs? I watched the videos on ETFs and showing only out of the money options.

    Thanks in advance for your help!

    Kossila

    • February 21, 2019 6:12 am #

      Kossila,

      The exit strategies are precisely the same for ETFs as for individual stocks. Strike price selection is also the same: ITM strikes are more conservative or defensive.

      I use ETFs in my mother’s portfolio. Since, generally, ETFs have a lower implied volatility than individual stocks, , our initial time value return goals must be lower. 1 – 2%/month are reasonable initial return goals for ETFs.

      Alan

  9. February 21, 2019 6:15 am #

    Good morning Alan,

    Could you please share with me the best 10 stocks for covered call options trading as you mentioned in the beginning training course?

    Thank you,

    Rich

    • February 21, 2019 2:29 pm #

      Rich,

      The top-performing stocks and ETFs for option-selling will vary from week-to-week. This is why we publish new reports each week for our members.

      For those who are not premium members, we teach how to screen for these stocks in our books and DVDs…we are 100% transparent.

      Alan

  10. February 21, 2019 2:38 pm #

    Alan,

    I have an option that expires on March 15,2019.

    If this option is ITM and I have only 20 cents in TIME VALUE, aren’t the chances of being assigned much higher / imminently now with such low Time Value?

    Thank you,
    Mazin

    • February 22, 2019 5:33 am #

      Mazin,

      Since we are dealing with “American style options”, it is possible that early exercise will occur. You are also correct that the lower the time value, the greater the chance of exercise.

      However, the practical probability of early exercise for an option expiring in 3 weeks (without a dividend component) is extremely low. First of all, most option holders would not be willing to sacrifice that $20.00 in time value premium by exercising and also most option buyers do not want to be stock owners but rather option sellers.

      Alan

  11. February 21, 2019 8:54 pm #

    Alan I am trying to understand the 20% rule of buying back your option when the option premium drops by 20% in first two weeks. Is it because the decay drops a great deal after the first two weeks in a monthly option.

    Harry

    • February 22, 2019 5:40 am #

      Harry,

      The 20% guideline states that we buy back the option (in the first half of a contract) when option price drops TO (not “by”) 20% of the original sale price. This will leave us with 80% of the original time value profit. For example, if we sold the option for $2.00, we buy-to-close if option value drops to $0.40 or less in the first half of the contract. Then we decide on next steps (roll down, wait to “hit a double”, sell the underlying etc.)

      The guideline changes to 10% in the latter part of the contract because Theta is eroding the time value associated with our premiums and giving us less opportunity to mitigate losses.

      Alan

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