When instructing our online discount broker as to the actions we want taken, we submit a customer order. These orders can take several different forms depending on our investment strategies and objectives. We can buy or sell; request a specific price or simply the best available price; we can stipulate an action given a particular circumstance; and we can use combinations of orders. Let’s look at the most common of these orders and the situations when we may utilize them.
Market Order:
This is the most common of customer orders where we ask the broker to buy or sell a stock at the best available price. It is also called an “unrestricted order” and will always be executed.
Limit Order:
This is an order to buy or sell a specific number of shares at a certain price or better. A buy limit order can only be executed at the limit price or lower. A sell limit order must be executed at the limit price or higher. These are particularly useful on low-volume or highly volatile stocks.
Stop Order:
An order to buy or sell a security when its price surpasses a specific price called the stop price. At that point the stop order becomes a market order. A sell stop order is placed below the current market value of the stock and is used to prevent or limit a loss or to protect a profit on a long stock position. For example, you may have purchased a stock for $20 per share and it has appreciated to $30. A sell stop order @ $25 will guarantee at least a profit of $5 per share (barring a gap-down in the price of the stock). A buy stop order is always placed above the current market price of the stock. It is typically used to protect a profit or limit a loss on a short sale (selling a stock you didn’t own by borrowing it). For example, if you sell short a stock @ $30 expecting to buy it back at a lower price but it starts going up in value instead, a buy stop order can limit your loss. It may kick in @ $32 thereby minimizing losses to $2 per share. Once the buy stop price is reached, the order becomes a market order.
Stop Limit Order:
This is a combination of a stop order and a limit order. Once activated, it becomes a limit order which means that it can only be executed at a specific price or better. The benefit is that the trader has precise control over when the order should be filled. The disadvantage is that it may never get filled. A sell stop-limit order is always placed below the current market price of the equity and is used to limit the loss or protect the profit on a long stock position. Once activated, it becomes a limit order. A buy stop-limit order is always placed above the current price of the stock and is used to limit a loss or protect the profit on a short stock position. Once activated, it becomes a limit order.
Trailing stop:
A trailing stop adjusts the stop price at a fixed percent or number of points below the market price of a stock. The purpose of the stop is to protect against a move by the stock or option price in the opposite direction than what you expect. When the price of your stock rises, the trailing stop rises with it, helping to protect you against a larger loss and eventually capturing a portion of your profit. With a trailing stop, you continue to hold the stock so you still receive the dividends from the stock, if they are paid. Should the stock plunge past your stop, your shares are sold at the next available price, not necessarily the stop price, assuming you have not placed the stop order with a limit price.
Summary of Orders entered Above the Market:
- Buy Stop-Limit
- Buy Stop
- Sell Limit
Summary of Orders entered Below Market:
- Buy Limit
- Sell Stop
- Sell Stop-Limit
- Trailing stop
Covered Call Trade Orders:
Most writers of covered calls place their trades by legging in. This where a market or limit order is placed to purchase the equity and once executed, a second order (limit) is placed to sell the option. For maximum profits, these two legs should be executed simultaneously (Buy the stock and immediately sell the option. Do not buy the stock, go to the mall and then come back home to sell the option). Another methodology permitted by some online discount brokers (not USAA, the one I use) is to place a net debit order. This is where you buy the stock and sell the option at the exact same time, not for specific corresponding prices but for a limit net debit. For example, if a stock is selling for $20 and the A-T-M call is selling for $1.50, the net debit or amount we would owe is $18.50 ($20 minus $1.50). This way, even if the price of the stock and option change, the order can still be filled if it meets the requirements of our debit order. These orders are executed via buy-write combination forms. This would be particularly useful for investors who can’t be in front of their computers but want to execute a covered call trade. As stock investors and covered call writers it is critical to know and understand the different types of customer orders and the appropriate time to implement them.
BCSI Update:
Some of our members held this stock through the May 27th and August 19th earnings reports. Unfortunately, neither report satisfied the institutional investors and the price dropped from $35 to $17…ouch. As a result, many requested that I write an article on the topic of managing stocks that have gapped down. I did so on June 19th and noted that at the time BCSI was in a trading range and seemingly outperforming the market in general. The stock fell further after the August report. Since that time, BCSI has been the subject of takeover rumors and still remains a strong company as the institutional investors are moving back into this equity. There will be a shareholder meeting next month and another ER due out on November 19th that could affect the price in either direction. Here is an updated chart for this stock:
BCSI as of 9-17-10Note the following significant points:
- The red arrows represent the most recent earnings reports with the gap downs.
- The green lines show the sideways trading after the first ER.
- The blue arrow shows the impressive uptrend since the last ER.
- The red oval shows a positive MACD
- The blue oval depicts an overbought situation but holding firmly above the 80%.
- The orange oval shows that these positive events occurred on higher than average volume.
- Still negative, is the 20-d ema trading below the 100-d ema but the gap is closing
Many of you have been selling calls on the stock as it has been nurtured back up from $17 to the current $24. Much can be learned from this stock and its recent history. Decisions about holding a stock through an ER, a much more aggressive strategy, must be determined based on your risk tolerance. As I have mentioned previously, a stock can gap down for other reasons and a management technique should be in place. If the stock still remains a great company in your assessment and if the chart is favorable post event, selling calls on the way up may be a good solution.
Blog commentary:
Many thanks to our members who have contributed great questions and commentary to our site. It has greatly enhanced the quality of information we share with each other. For those who read the weekly articles only, I encourage you to visit the site every day and read, contribute and join in the tremendous wealth of information our members provide to each other. Whether you are a beginner or a savvy investor with decades of experience, we can all learn from each other. Here is a link to last week’s commentary:
/blog/the-cboes-volatility-index-vix/#comments
Market tone:
The recent trend continues as economic growth proceeds but at a slower pace than hoped for:
- Producer Price Index rose 0.4% in August mainly due to a rise in gas prices
- Consumer prices rose 0.3% in August once again gasoline being the main culprit
- Business inventories rose a better-than-expected 1.0% in July, a positive
- Industrial production slowed to + 0.2% from July’s figure of + 0.6%
For the week, the S&P 500 (plus dividends) rose by 1.5% for a year-to-date return of 2.4%.
Summary:
IBD: Market in confirmed uptrend
BCI: Cautiously bullish selling an equal number of I-T-M and O-T-M strikes.
My best to all,
Alan ([email protected])
PREMIUM MEMBERS:
This week’s “Weekly Stock Screen and Watch List” has been published on your premium site. The ETF report was previously uploaded on Friday.
Alan
Alan,
Surprised that you would use a broker that does not provide simultaneous buy/write combination orders. Could you explain why you use them? Also, would you advise your readers to use them instead of the many brokers who do provide that capability?
Jeff,
My guess is “don’t fix what ain’t broke”. Alan has a wonderful record of success he sees no reason to change. Honestly, there is probably very little difference between a net debit buy-write order and two leg in orders. Unless the market is particularly volatile for that stock that day the difference may only be a few dollars, at most. Besides, if the stock is on an upward trend, it’s most likely that the option premium will climb while you are executing the stock order and entering the option order.
If you were trading 10,000 shares I would probably use the buy-write order system, but for 100 shares, I don’t think there will be a huge amount of difference financially. As Alan stated above, the time savings may be more important than the execution values.
Jeff,
Owen framed it quite well but let me expand:
1- Both “legging-in” and “buy-write combination forms” are acceptable ways of executing cc trades. What’s best for one investor may not be best for another.
2- I have arranged my weekly schedule such that time is set aside during market hours when I can fullfill and monitor my trades.
3- ***When I decide on a covered call trade I want it executed right then and there. It will takes 2-3 minutes at most even if “playing the bid-ask spread”. This is important to my trading style.
4- If I didn’t have the ability to be available for trading during market hours I would switch brokerages to one that offered the buy-write trading platform.
5- As Owen conjectured, it is difficult to change a system that has worked so well for me since the late 1990s.
6- With USAA I receive great trade executions, low commisssions and outstanding phone service if needed. There are many fabulous online discount brokers, perhaps some even less expensive than USAA with equal or better support. If I can draw an analogy it’s almost like going to the dentist…if you are comfortable and have had great experiences, why change?
7- There is no difference when selling an option on a stock you already own or when executing a rolling strategy.
To sum up:
If your brokerage offers a buy-write trading platform, execute your trades both ways until you have made an informed decision as to which approach is best for you.
Alan
Hi Alan,
I had written some commentary on buy/writes, and had some replies. I missed my daily blog reading yest due to necessary travel, hence missed any further comments. Is there a way to read the old blogs when the weekly subject matter of the articles change? In the past I have noted and regretted the changeover of the blogs each week. Thanx kindly.
Don B
Don,
All articles and commentary are saved and archived for your review. On the left side of this page you can reference articles and the associated commentary by:
1- Recent posts
2- Categories
3- Month and year
There is also a link in the above article to the commentary from last week’s discussions.
Alan
Good Morning everybody,
another day, where we have to send our soldiers out to battle the money battle. . .:>)
What do you think about TBIX?
There is an ER coming in the 23rd.
In your experience, does this date, which is a week after the expiration Friday, affect the stock very much?
Cheers
Dirk
There is a big selling on SLW going on.
The 20 EMA crossed the 100EMA at 9:42
Any opinions on that?
Cheers
Dirk
Hi Dirk –
In your #8 – my reading of SLW is quite different than you report. ?? Looks to me like today the volume is about half the average. I see the 100 day Ema quite a bit below the 20 day EMA. This on a rising stock price. Hope this helps somehow!
Don B
Hi Don,
Maybe we are talking about different times.
The heavy selling was between 9:32 and 9:42 and the price dropped from $25.25 to 24.69. . .
The 20 below the 200 was on an intraday chart.
On the monthly chart it still looks good.
That’s probably the one you have been looking at.
Do you have any opinion on my #7?
Cheers
Dirk
Hi Dirk –
Thanx for the clarification on SLW. On your #7, truthfully I have not looked at the stock.
On the other issue, just a guess, but I personally go ahead and write when there is a week time left after expiry.
Wishing you good trading!
Don B
Laddering Strikes:
I’ve had a few offsite inquiries as to what I mean by selling an equal number of I-T-M and O-T-M strikes which is my current position based on market assessment and my conservative nature. Here is an example:
On Friday I purchased 400 x FFIV @ $100.97. I sold 2 x October $95 and 2 x October $105. Both gave me an initial return of 3% for the month. The I-T-M strike also provided me with a 5% downside protection while the O-T-M strike set me up for an additional upside potential of 4%. Had the market been more defined in one direction ,up or down, I may have opted for all I-T-M or O-T-M strikes.
Today the stock was up in value by $3.66 so the protection of the $95 call is huge and the upside potential of the $105 call is heading in the right direction. We have a long way to go in this cycle so the final result is yet to be determined but this is some of the thinking that goes into these decisions.
Alan
@ Alan,
could you please enlighten me/us, why you are selling the call right when you purchase the stock?
What is the advantage except time saving?
Do you rather trade in the volatile morning hours or more in the afternoon?
I found it quite exiting and lucrative to watch the market, buy the stock on a low and sell the call for a higher price later-on, even sometimes the next day. . .
Cheers
Dirk
P.S. @ Alan,
would it be possible in the future to include the PM option here?
And could there be a feature for the participants included to upload pics or screen cutouts?
Cheers
Dirk
Dirk (#7),
A stock due to report in the early part of the next cycle will have a slightly higher premium return due to the increased implied volaility. My experience has been that if the stock has been meeting our system criteria in the current period, the upcoming ER in the next cycle should not discourage us from entering that position. The major risk is owning the stock through the ER which is what happened with BCSI I alluded to in the current article. As a matter of fact, many times I will close my position in the current cycle and enter a new one after the ER passes early in the next one.
Alan
Dirk (13 and 14),
When I make a decision to buy a stock and sell an option, it is based on the calculations I did at that point in time. In other words, I love the “deal”. Now, if I buy the stock and it goes up in value and sell the option at that later date, I have made out even better. But what if the stock declines in value. Now the option value is less and the percentage return has declined. So the issue is all about market timing and is it possible in the short run. I wish I had that skill but I don’t. What I do is consistently throw the odds in my favor. If I feel that the stock has a good chance to appreciate in value I will account for this by selling an A-T-M or O-T-M strike. But I will generate and pocket that great initial return first.
I generally trade between 12PM and 3PM avoiding the early morning and late afternoon potential volatility.
I will check with my webmaster regarding your other inquiries.
Alan
Dirk,
Re #13, the reason to make both trades at the same time is to avoid the stock moving against your original calculation. Let’s say you buy a stock at $39.75 and sell the next month $40 call for $1.85. You have a 4.6% premium return and a possible .6% upside potential. Now, your exciting and lucrative market watch could turn into a slow motion car wreck if the stock started down. Your break even is $37.90 (39.75-1.85). If the stock drops to $39.00, and the option drops to $1.50, you just gave up $75 in paper losses and $35 in potential gain because the option premium came down. Now, the stock may have to go back to $39.95, for the option to get back to $1.85.
If you decide you want to make a trade for a $49.75 stock, and a $1.85 option, it is because the return meets your goals. I don’t see why you would then “gamble” that you could do better, by buying the stock and waiting.
The premise behind Alan’s trading system is buy the stock and immediately sell the next month call option. There are thousands of other permutations to trading stocks and options. People are free to dabble any way they want, but the bulk of the BCI should just stick to following Alan’s instructions. When dealing with a pricey stock I sometimes use option spreads, but I don’t suggest anyone else use them, and I don’t discuss them here to avoid someone “giving it a try”, unsuccessfully.
The final answer to your #13 question is “because it has worked for years”. Has he missed some gains by not waiting after he buys the stock? Probably. Has he avoided some losses by not waiting after he buys the stock? probably. Everyone is free to add their own trading twist, but they should master the basics, first. Learn how to run to the bag and stop, before you learn how to slide into it without breaking your leg. You have to remember that many of the BCI did not know what an option was until they heard about Alan.
@Alan and Owen,
thanks a lot for your valuable input.
That is exactly why I joined the BCI family: To get this kind of priceless information and input.
In the past, I head people answering me on questions like that: “You can do this and that, if it fits your TRADING STYLE”
Problem is, I don’t have a trading style. . .
My trading style has yet to be formed by outside input, own experience, education and paper trading.
And this can go quickly in the wrong direction!
Therefor, again, I appreciate your input and thank both of you, letting me participate on your long experience.
My hope is, that you are not getting tired of answering the same questions over and over again.:>)
And btw. Alan, please ask your webmaster for a little side window where we can chose our smilies.
Cheers
Dirk
Hi Alan,
Quick question about one of the stocks on this weeks watch list. SINA has gone up in price almost $9 in the last week. Would you still consider buying it at this time or is it too risky due to a possible bounce back?
Thanks for all your help.
Amy
Dirk,
Thanks for the accolades. Your #18 comments are why Alan developed his program. He did it for himself for years. When he mentioned it at a real estate investment club meeting he got so many questions from the members that he decided to give a seminar on how he did it. That was met with such a warm response that he expanded it to teach others, through his books and DVDs.
I think Alan’s method is terrific. I want people to be successful if they choose to trade options, so I am absolutely pleased to answer any question I feel I can, even twice. As I have said before, I don’t expect people to go back and read three years of blogs discussions to see if their question has been answered.
As for a “trading style”, I don’t like the expression. I have some money in banks. I have some in real estate. I have some in “forever stocks”. I have some in covered call writing and some, a very small amount, in option speculation. Your “trading style” should simply be investing in a manner that you understand, in a vehicle that you can control. As you learn more you are free to experiment with whatever you feel comfortable with.
Look, and this note is for everyone reading this comment, Alan found something that works for him. He understands. He is successful with it, so he sticks to it. Warren Buffet has never owned a technology stock. He is worth $46 billion. Bill Gates is worth $50 billion, Larry Ellison, $20 billion, Paul Allen, $16 billion and Michael Dell, $16 billion. The last four only own technology stock, and only ONE stock. So, which one of them is right? They all are. They found something they understand and they stick to it.
Find what works for you. Expanding what works is ok, as long as you aren’t just trying to keep up with someone else, or make up for lost time, or lost money.
Good morning everybody,
would anyone like to comment on Dennis Slothower’s article under the following link?
http://www.stealthstocksonline.com/reports/FreeReport4StealthStocks.pdf
Cheers
Dirk
Thanks for you valuable comment Owen,
my comment about “trading style” was in lack of a better expression.
With trading style, I meant it strictly in regards of cc writing not in other types of investing or asset classes.
I absolutely agree to your comment about investing in a manner what I understand and in a vehicle that I can control as much as possible.
That’s what I am here for.
I would like to learn as much as possible in the shortest amount of time about cc writing to develop my style of doing it.
I find Alan’s system fantastic and well thought trough and the safe manner, how you guys approach it, fits me very well.
That’s why I became a premium member.
I think he provides all the necessary tools and support to be successful in cc writing.
And with style I mean my personal risk tolerance, the percentage of my portfolio which I invest in one particular stock for cc writing, if I use a “put insurance” for a better sleep at night etc., etc.
There are probably more things that develop over time what makes up a person’s particular “Style”.
As I said before, I am reading here and in Alan’s blogs and soak it in like a dried out sponge. :>) (still no smilies available:>))
My questions may seem sometimes naive and maybe not fitting into Alan’s system, but that’s what I am here for: To learn! And if something comes into my mind I just go ahead and post it here. . . and the more people jump in then, the steeper the learning curve for me and maybe the lurkers.:>)
Cheers
Dirk
Happy to help, Dirk, and I am sure that many of your questions and comments could have been written by any number of BCI students who just didn’t take the time, or felt uncomfortable entering the comment.
I learn something new from time to time by researching an answer. The 5% stock dividend was a good reminder to me about the adjustment made to the option contract. The end of quarter options on the index ETFs was absolutely news to me.
So, I thank everyone for your questions, and the opportunity Alan has provided for us to share information.
Amy (#19),
This stock from our premium watch list caught my eye also especially after the August 4th ER. At that time a 10% increase in revenues and a 62% increase in net income was announced. This was the company’s second consecutive positive earnings surprise and it has “missed” just two times in the past five years. Needless to say analysts started raising guidance since that report. Valuations are a bit high for this company with a forward PE ratio of 30x and a PEG ratio of 1.6. For those interested in more information on valuation ratios, here is a link to an article I previously published:
https://www.thebluecollarinvestor.com/blog/fundamental-ratios-pe-peg-and-pegy/
When a stock increases in value so much and so fast I am, like you, concerned about profit-taking. I will either opt for a different financial soldier or sell a conservative I-T-M strike to protect my position.
Alan
I have a question I hope Alan can answer.
After hours trading. Where is it? Who is it? How come we can’t get in on it? (Ok, it’s three questions.) Either the stock market is closed at 4:00PM, or it isn’t.
Adobe announced lousy earnings at 4:02. The stock is $28.25 at 5:15PM, down from the “official” close of $32.94, at 4:00PM. That Gap has nothing to do with jeans. Personally, I think we should be able to charge anyone trading after the market closes with insider trading. I think I’ll write Washington.
Any thoughts, Alan?
Owen,
A few years ago I checked into this and here is what I learned at that time:
1- There are very few but some brokerages that offer after hours trading.
2- The trading is usually in large block trades that retail investors rarely will make.
3- Mainly institutional investors are involved in the large block trades.
4- The trading occurs in various privately held ETNs (Electronic Communications Networks) which are not part of the major exchanges.
5- Trades are unregulated.
6- Bid-ask spreads can be huge.
7- “All or none” executions are normally required on these block trades.
8- If you place an order with your brokerage and they are not affiliated with the ETN offering the trade, you are out of luck.
9- This type of trading is extremely risky for the average investor.
It became obvious to me that after hours trading was for the big boys not us. Fair…no. A fact of life…yes. Writing Washington…an exercise in futility?
I do not consider this an area of expertise for me so if any of our readers can offer more information, we’d love to hear from you.
Alan
Seems to me there are indeed times when buying & then holding the stock for a time before writing calls would be the right thing to do. Obviously, one must be bullish on that market. Right now, for instance, the mining shares are ascending, generally speaking. And following the precious metals up. I am on the good side of that trend with SLW now, up over $3 with no call written just yet. Greed? Perhaps, but perhaps just using good BCI methods to study the stock. Hope so, anyway. FWIW. Comments welcome.
Don B
Don,
I have that one too but sold the $25 call for a 4.5% profit. I’m very happy with that . Looks like you can get a 6% return on that same call now. Congratulations.
Good luck.
Amy
Check NEM and ABX – gold stocks doing well . Both on Alan’s watch list. SLW looks like the best off the three.
Steve
Amy – and Alan –
The plot thickens. I actually bot at $22.16. Right now, selling the stock itself at 25.96, would bring in $3.80. But doing an STO for Oct at 26 would bring 1.04/22.16 = 4.7% for Call alone. Adding 3.80 + 1.04 = 4.84/22.16=21.8%. In 3-1/2 weeks! Gads, I could do the 27 and receive .63 for the Call. This is 2.8%, or total of 5.47 if called. Even the 28 bids 36 c, or 1.6%, not shabby either considering gains if called. Looking great – AS LONG AS IT HOLDS THIS OR GAINS! Don B
PS to my #30.
Actually bot on 8/26, so that would actually be 7-1/2 weeks in it overall, with the 3-1/2 weeks that I referenced being only the options portion of any trade.
Don B
Risks of after hours trading: taken from the SEC website:
The New York Stock Exchange and the Nasdaq Stock Market—the highest volume market centers in the U.S. today—have traditionally been open for business from 9:30 a.m. to 4:00 p.m. Eastern Time. Although trading outside that window—or “after-hours” trading—has occurred for some time, it used to be limited mostly to high net worth investors and institutional investors.
But that changed by the end of the last century. Some smaller exchanges now offer extended hours. And, with the rise of Electronic Communications Networks, or ECNs, everyday individual investors can gain access to the after-hours markets. Before you decide to trade after-hours, you need to educate yourself about the differences between regular and extended trading hours, especially the risks. You should consult your broker and read any disclosure documents on this option. Check your broker’s website for available information on trading after-hours. As with trading during regular hours, the services offered by brokers during extended hours vary. You should therefore shop around to find the firm that best suits your trading needs.
While after-hours trading presents investing opportunities, there are also the following risks for those who want to participate:
Inability to See or Act Upon Quotes. Some firms only allow investors to view quotes from the one trading system the firm uses for after-hours trading. Check with your broker to see whether your firm’s system will permit you to access other quotes on other ECNs. But remember that just because you can get quotes on another ECN does not necessary mean you will be able to trade based on those quotes. You need to ask your firm if it will route your order for execution to the other ECN. If you are limited to the quotes within one system, you may not be able to complete a trade, even with a willing investor, at a different trading system.
Lack of Liquidity. Liquidity refers to your ability to convert stock into cash. That ability depends on the existence of buyers and sellers and how easy it is to complete a trade. During regular trading hours, buyers and sellers of most stocks can trade readily with one another. During after-hours, there may be less trading volume for some stocks, making it more difficult to execute some of your trades. Some stocks may not trade at all during extended hours.
Larger Quote Spreads. Less trading activity could also mean wider spreads between the bid and ask prices. As a result, you may find it more difficult to get your order executed or to get as favorable a price as you could have during regular market hours.
Price Volatility. For stocks with limited trading activity, you may find greater price fluctuations than you would have seen during regular trading hours. News stories announced after-hours may have greater impacts on stock prices.
Uncertain Prices. The prices of some stocks traded during the after-hours session may not reflect the prices of those stocks during regular hours, either at the end of the regular trading session or upon the opening of regular trading the next business day.
Bias Toward Limit Orders. Many electronic trading systems currently accept only limit orders, where you must enter a price at which you would like your order executed. A limit order ensures you will not pay more than the price you entered or sell for less. If the market moves away from your price, your order will not be executed. Check with your broker to see whether orders not executed during the after-hours trading session will be cancelled or whether they will be automatically entered when regular trading hours begin. Similarly, find out if an order you placed during regular hours will carry over to after-hours trading.
Competition with Professional Traders. Many of the after-hours traders are professionals with large institutions, such as mutual funds, who may have access to more information than individual investors.
Computer Delays. As with online trading, you may encounter during after-hours delays or failures in getting your order executed, including orders to cancel or change your trades. For some after-hours trades, your order will be routed from your brokerage firm to an electronic trading system. If a computer problem exists at your firm, this may prevent or delay your order from reaching the system. If you encounter significant delays, you should call your broker to determine the extent of the problem and what you can to get your order executed.
Alan
Thanks, Alan. I still think it’s unfair. The flash-crash in May should be warning enough of the damage that can be done by “electronic communication”. While the ECN traders may be willing buyer and willing seller, and I use the term “may be” loosely, they can damage the rest of the market while the rest of the market cannot, or is not, trading.
I missed out on SLW but here’s another good one. Last week I bought VIT for $29.37 and sold the $30 option $1.15 which totals a returns of 3.9%. Today the stock is at $31.70 which means my current protection of that return is up to 5.4%. Hope others have this one.
Happy trading.
Brian
I bought TIBX on Monday for $16.21 and sold OCT 17 calls. I then realized that I had made a mistake as there was an earnings call today(Thursday). I bought back the call yesterday for a $5.00 loss per contract and I thought I would hold it thru the ER and resell calls on Friday. As I was waiting for the call to begin at 4:30 and saw that the price was running up in afterhours trading. I then sold the shares at 4:25 for $17.62 and ended up with an 8.6% profit for 4 days. Pretty good for a mistake! This is what I really like about Alan’s system, I feel in control and can make choices about what is going on. Thanks Alan.
@ Mark,
some confusion here. :>)
“As I was waiting for the call to begin at 4:30 and saw that the price was running up in afterhours trading.”
So you saw the calls going up yesterday in after hours trading and sold the shares today before the bell?
Is that what you are saying?
Cheers
Dirk
Alan – Here is one that is new, for me at least. Today I wrote $57 calls on GDX, expiring on Oct. 1. Okay – that is one week. Maybe it is important, maybe not, but how can I tell if this is really a weekly option rather than the end of a Quarterly option? As an aside, I did a STO for .64 only this morning, and when the market closed I could buy it back for .45. I do not intend to, but that seems a success to me. Agree?
Don B.
Don,
GDX isn’t an index ETF, like QQQQ. The 10/01 option is weekly. QQQQ has a 09/30 option, end of quarter. GDX is just a basket of gold stocks, so there is no end of quarter option.
Dirk,
I bought back the calls yesterday and was watching the stock price in the afterhours session today just before the earnings report started. The stock price went way up after the markets closed and I was able to sell them at a good profit. I don’t normally do anything in the afterhours and make sure if you do to always use limit orders.
PREMIUM MEMBERS:
This week’s report of top-performing ETFs has been uploaded to your premium site. The posted securities have shown a 3-month share appreciation between 13-21% while the S&P 500 has been up 3%. We are also charting the top-performing S&P 500 Sector ETFs. This report is found in the “resource/download” section of the premium site dated 9/24/10.
Alan
CAGC
This stock is approaching support at 10 dollars…
SHOW ME THE MONEY!!!
Dave
Don (#37) and all,
I wanted to clarify this issue and thank Don for bringing it up. With all the new products being offered by the CBOE, expirations can get a bit tricky. For the most part we will be dealing with the traditional monthly options that expire on the third Friday of the month (technically Saturday but for our practical purposes it is Friday). Owen pointed out that GDX has weekly but not quarterly expirations so the October 1st expiration must be a weekly…absolutely agreed. But what if a security does have both weekly and quarterlys like QQQQ, IWM and SPY? For the upcoming week it will be easy to distinguish because the quarterlys expire on Thursday September 30th while the weeklys expire on Friday October 1st so the date within the option ticker will differ.
Now let’s look ahead to December 31st when both the quarterlys and weeklys expire on the same day. In this case the exchanges will not create a weekly the week before expiration because the quarterly will serve the same parameters on that week as a new weekly would. It would have the same premium value (intrinsic and time value). Bottom line: when the weekly and quarterly date are the same, there is only one option available per strike price.
Alan
Just bought MELI for $72.50 and sold the 70 strike for $4.01. That’s a 2.2% return with 3.4% downside protection. Not bad for a 3-week return. I could have sold the 72.50 strike for a 3.5% return but decided on the safer choice.
Happy trading.
Brian
What is best strategy for a stock that has runup in price and that I still want to hold? Should I rollup now, or wait until close to option expiration? For example I have BIDU 85 calls which were a good deal when I sold the option (price was in the 85’s when I sold the option-actually was a rollforward of previous 85 call). Now the price is over 97. Even assuming a pullback before expiration, seems unlikely it will go back to 85 so I might consider rollup to either 90 or 95. But should I do now or wait? Obviously my call, but is there a general rule or strategy for this? I have several other October calls with a similar issue.
Patricia,
First let me congratulate you on making some great selections this month. Your situation is all positive. My first question would be if you want to keep this equity for tax reasons (avoid a short term capital gains). If this is the case, BIDU is probably not the best stock to sell calls on due to its high beta. I’ll assume that is not the case here and you just like the fundamentals and technicals longer term. That being said, this is a GREAT example of a possible “mid-contract unwind exit strategy”. When a strike price goes deep, deep in-the-money, the time value of that premium approaches zero and only intrinsic value remains. That means you can buy back the option and sell the stock and it will cost you nearly nothing. For example, if BIDU is trading @ $97 the $85 call may cost $12 to B-T-C. Buy back the option for $12 and sell the stock for $12 above strike, a wash. Now that cash can be used to enter a new position which should generate at least 2% in the remaining 3 weeks of this cycle. Use the “unwind now” tab of the Elite Calculator for these mid-contract unwind situations. The reason I don’t like to roll up is that it will cost money on the option side and the share value is susceptible to erosion from profit taking after a huge run-up in a short time frame. Of course it can continue to the moon but I like to give myself the best chance to succeed. Here is an article I published relating to this topic:
https://www.thebluecollarinvestor.com/blog/closing-covered-call-positions-mid-contract-the-elite-calculator/
Finally, if the option is exercised and your shares are sold, you can buy back the stock with the cash generated from that sale. The other choice is to wait until expiration Friday approaches and re-evaluate at that time for a possible rolling strategy….a lot can happen in 3 weeks.
Alan
Thank you Allen. Very interesting. I haven’t done anything yet. Will let you know what I decide. I do like the stock for future appreciation. I have held it for several months and made a lot of money with it. I agree 3 weeks is still a lot of time and a lot can happen. I also have a long call option at 100 on this stock (bot at .20) so have a profit on that option. So I am partially hedged on this stock. It’s in an IRA so not worried about short term gains.
Alan,
Sorry for misspelling your name. Best to you and thanks for your response.
Dinner on Patricia everyone!
Congrats again.
Alan
Alan,
I, like Patrica have BIDU calls. I happen to have Oct 80 calls. I have been waiting for the 20% rule which I haven’t hit yet and am curious why you didn’t mention that criteria in your response to her.
Thanks, Mark
Mark,
I’m glad you brought this up. The 20%/10% guidelines do not apply in this case because the share value is appreciating and therefore the corresponding option value is also appreciating. Had the reverse situation occured where the share value went from $97 to $85 we would absolutely be exploring the guidelines you alluded to.
Alan
“Stocks on the Move”
IBD publishes a daily list of stocks up in price that are being bought by the institutional investors. The philosophy of the BCI system is to identify stocks that will be supported by these market movers. That means stocks that are fundamentally and technically sound. These are the stocks we publish on our premium watch list.
Here are the stocks that made the IBD “Stocks on the Move” list yesterday that were also on our premium list:
TIBX
VIT
ARMH
NFLX
ALTR
Also, thanks to Don (#37) for bringing up the topic of weekly options. As the CBOE offers more products the expirations become more complicated and need to be fully understood by our BCI community. This inspired me to write an article on the subject which I am putting the finishing touches on now and should be ready for publication tomorrow.
Alan
Mark,
A little expansion on your #49. As Alan responded, this situation is a stock which has appreciated. If the stock has risen so far, so fast, that there is really nothing to be gained by waiting until expiration Friday, then the question becomes, “Why wait for expiration Friday?”
Example: You buy a stock for $49 and sell the next month $50 call for $2. Your potential gain is $3. Within the next two weeks, for whatever reason (takeover rumor, short covering, a blockbuster new product) the stock climbs to $60. You $50 option is now priced at $10.85.
Let’s look at hanging on to the position: The stock gets called in two weeks for $50. You keep your $3 gain, a four week return of 6.12% (80% annualized)
Let’s look at closing it: You buy the call back for $10.85, for a loss of $8.85. You sell the stock for $60, for a gain of $11. Your net profit is still $2.15, a two week return of 4.39% (114% annualized).
So, here we are back at the “annualized” discussion. On a annualized return basis closing the trade early is a better return. Secondly, and absolutely more importantly, it frees up your capital to make another trade for the remaining two weeks, or one for the next six weeks. Why is that important? Closing the trade early basically cost you $85 of your expected gain. Now, can you find another trade where your newly freed economic soldiers can bring back more than that $85 in the same period? My guess is probably.
Anyway, this is the discussion you should have with yourself: “Can I utilized the freed up cash to make more than it will cost me to close this trade early?” If no, let it get called away. If yes, take the next trade on your watch list and swap it for this one.
Good morning, everybody!
Hi Owen,
great that we have this discussion here, because I am playing around with Alan’s calculator this morning and am trying different scenarios.
But I like also to understand the underlying concept and not just punch in the numbers. . .
I just write down my thoughts and calculation for your above example and wait what you, Alan or somebody else will comment.
Going back to your example for Mark, you would probably make $3 at expiration, because the option is so deep in the money, that the stock will get called away from you.
So, the profit of $3 is almost for sure.
By unwinding now (buying back the call and selling the stock) you will have a profit of $2.15
That is $.85 less than you would have at expiration, right?
Since you have your money back and don’t have to wait for expiration Friday, you can invest the money in another soldier to make some money for the remainder of he month.
And here comes the “but”.
But this new soldier has to make more than @.85, otherwise you could have held your position.
We also have to take the commission in consideration.
I know, in “bigger deals” it might not be a big factor, but with the little deals I do, I have to count the commission Dollars. . .
Please let me know, if my understanding of the unwinding procedure is correct so far.
Cheers
Dirk
Dirk,
Your “but” is a correct assessment. That said, you should not unwind the position if you don’t have a profitable replacement in mind. Our covered call trading is not about who can score the highest precentage return. I can make a 200% return in ten seconds by offering a “wheat” penny to someone for two cents. Big deal.
Our trading is for the purpose of making money, so, yes, if you cannot come up with a trade that will make you more than $85, don’t unwind the current one. And, you are correct that for small amounts, such as $120, a $9 trading fee is a bit uncomfortable. However, I would suggest that you add these fees into the overall calculation to determine if closing the position and opening a new one is worthwhile.
and, Dirk, two things. First, yes I do realize that my penny example is only a 100% return. Second, in my last paragraph I mention a $9 trading charge. If you are paying much more than that you should consider a different broker. TD Ameritrade charges $9.99 + $0.75 per contract. OptionsExpress $14.95. I understand that both directions will double that figure, but, as I said, include the trading costs in yur calculation for the trades.
Thanks Owen,
I hesitated to comment on the 200% because I did not have wanted to ruin your Saturday. :>)
I always include the commissions and charges into my trading calculations.
First I do all the calculations without and deduct them later as a lump sum.
That makes it easier for me.
I use Fidelity and the charge me a flat fee of $7.95 per trade, no matter what, plus S.75 per contract.
I am happy with that.
I use their Active Trader Pro platform and this a terrific tool for me, with news about the stocks in my watchlist or my portfolio popping up, lots of research options, a portfolio manager etc.
There might be other/better systems, but I am used to this one and so far it serves me well.
Cheers
Dirk
Owen,
Thanks for the reply, sorry it took so long to answer I have been at Habitat for Humanity today putting the roof on a house we are building.
I see now what you are saying. I was just looking at the 10% or 20% rule not looking at it this way. Last night after Alan’s reply I put all my positions on a spread sheet showing original expected return, return if I close now, and what is left. It was very enlightening.
Since these where all in the money calls when I sold them I assume that contributed to the situation. I am thinking of rolling them up as that would give me a good return for the remainder of the period however Alan had made a comment to be carefull doing this as profit taking might take place causing them to drop. My thinking at the moment is to review these positions vs what might be on this weeks list.
In any event, thanks to you and Alan for a new way to look at things. This is what is so exciting about Alan’s system. I like the ability to be active and involved in managing my investments instead of just looking at the statement from the money manager. And doing much better than the “professional” too.
Mark
Dirk (#56) & All –
I too use Fidelity and separately their Active Trader Pro platform. Both are fabulous. And the co. telephone service beats most everybody.
If you do have a question, they either have the answer or get you to someone who does have the answer, with almost no waiting. What I wish to add are 1) One can use much of their research information just by going to Fidelity.com. without having an account, and 2) One cannot use the ATP without actually having an account there and actually qualifying with investment activity.
Using their online site is easy, and their fills are just what one might expect them to be. No, I am not on their payroll. 🙂
Don B
Dirk –
What did you mean, in #56, by their having “a portfolio manager”. Am I missing something?
Don B.
Hi Don,
To the portfolio manager:
You probably know how to access your account(s) from inside ATP.
This brings you to a huge account manager with 7 tabs and some of them have special check-marks for different details you would like to see.
Besides seeing with one click your current account balances and “buying power” in cash, and margin there is one nice option for us cc writers.
When you click on the “Profit and Loss” tab and inside this tab check the “Historical Detail”, you have an up-to-the second overview over your stocks and the related covered calls you sold.
Among other things it shows you the quantity and the price you sold a single option/share for and two columns further the real time price.
This is particularly nice in regards to our exit strategies, because you see with one glance, if the option price comes down and close to our 20% respectively to our 10% rule.
In the “Profit/Loss” column it shows the profit of an appreciated option in red and minus.
That looks puzzling at first, but when you think about it, it makes sense.
The red number is the Dollar amount of the appreciation of that particular option after you sold it.
This is the painful number. . .:>) because it shows us what we could have earned, if we would have waited.
But we learned here “never look back” and “be happy with what you made”.
If this number turns green the options is now worth less than you sold it for and has to be watched more carefully in regards to an exit strategy in case it and the underlying stock deteriorates further.
All this does unfortunately not account for the intrinsic value which we have to deduct first when we calculate for the 20% or 10% rule exit.
But there is a little detour to that.
You can export with on click the whole window to an excel sheet and just put in the intrinsic value by hand and with the proper formula in a column, it shows you immediately how close you are to the a particular exit rule.
I would have liked to show a screen cutout here for everyone, but this blog comments are not set up for attachments yet.
I asked Alan about that and he promised to talk to his webmaster.
Then we could all share more ideas. . .
(Hey Alan, I am poking you. . .:>)
Cheers
Dirk
Dirk,
I haven’t forgotten about your suggestion. There is a way to do this and it’s on my webmaster’s to-do list. Lately I have given him a multitude of projects which I will be announcing in the near future.
Thanks for the idea.
Alan