beginners corner

Understanding Brokerage Statements for Covered Call Writing: A Real-Life Example with Energy Select Sector SPDR ETF (NYSE: XLE)

Our covered call writing and put-selling broker statements can be confusing when starting our option-selling careers. This article will detail the first 3 steps of our covered call trades (stock purchase, option sale and buy-to-close limit order) using XLE as reflected in one of my broker accounts.

 

Purchase of shares to initiate a covered position

 

XLE: Buy 500 Shares

 

500 shares were bought at $43.74 per-share. This puts us in a “covered” or protected position… we know our cost-basis. The trade was entered as a market order, day only trade.

 

Sell the call options to complete the initial covered call trade and set the 20% BTC limit order

 

XLE: Sell Covered Call and Set BTC Limit Order

  • 5 call contracts were sold at $1.06 and the order was filled
  • Immediately, after entering the trade, a buy-to-close limit order was set at $0.20 (20% of $1.06)
  • The last trade was set at GTC (good until cancelled) and is currently “open”

 

Portfolio position after the covered call trade is executed

 

XLE: Portfolio Positions after Executing a Covered Call Trade

 

  • 500 shares were purchased at a cost-basis of $21,870.00
  • 5 call contracts were sold (negative, reflecting the short position)
  • Total cash generated is $526.00 (also negative reflecting an open short sale)
  • The $526.00 is cash in our brokerage account and available for trading

 

 Discussion

Covered call writing and put-selling are strategies that, once mastered, will allow us the opportunity to beat the market on a consistent basis. Understanding the accounting procedures of a broker statements is also critical to our overall success.

 

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:

Hello Alan, Barry and all the community!

Although, 2020 was a tough year for a lot of reasons, I feel really blessed to have discover your services…I learned lot of really useful things, your weekly letters are great and consistent and another great advantage is that you guys are always there to answer questions.

I’m 41 and have been interested in stock market to make a living from years and years with NO SUCCESS and it’s the first time I feel really confident with the fact to reach that soon.

So, I just wanted to thank you guys and wish a happy new year to all the community from Belgium!

Gaetan

 

Upcoming event

BCI-Only Webinar: Free Webinar Covered Call Writing and Selling Cash-Secured Puts

Covered Call Writing and Selling Cash-Secured Puts: 2 New Strategies Developed by BCI

The VOLQ-covered call strategy and Weekly 10-Delta Put-Selling strategy

August 19, 2021 (Thursday)

8 PM – 9:30 PM ET

  • A link will be posted on the BCI site and emailed to all those on our mailing list as the event approaches
  • No pre-registration needed
  • Our platform allows the first 500 attendees to access the webinar

 

Alan speaking at a Money Show event

***********************************************************************************************************************

Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.

****************************************************************************************************************

Posted on July 17, 2021 by in Investment Basics, Option Trading Basics, Options Trade Execution, Stock Option Strategies

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.
View all posts by Alan Ellman →

24 Responses to “Understanding Brokerage Statements for Covered Call Writing: A Real-Life Example with Energy Select Sector SPDR ETF (NYSE: XLE)”

  1. Steve Y July 17, 2021 2:34 am
    #

    Alan,

    Thanks for your podcast content. Question:

    NKLA

    sold the $16.50 02 Jul Put for $7 credit

    7.2.21 assigned 1 contract at 16.50/share ; -$1650

    sold the $17 09 Jul Call for $42
    bought back this Call for -$7
    $35 net credit

    sold the $15.50 16 Jul Call for $74
    bought back this Call for -$16
    $58 net credit

    sold the $15.50 16 Jul Call for $74
    bought back this Call for -$16
    $58 net credit

    sold the $15 23 Jul Call for $70
    bought back this Call for -$35
    $35 net credit

    panic sold the $13.50 30 Jul Call for $119
    $119 credit
    locked in a $46 net loss if NKLA stays above $13.50 on 7/30/21

    tempted to buy back the $13.50 30 Jul Call.

    Any suggestions or comments?

    Steve Y

    • Alan Ellman July 17, 2021 8:21 am
      #

      Steve,

      If NKLA ends up above $13.50 on the 7/30 expiration, there will be a net loss of $46.00, so not terrible.

      Now, there are moves you are making that are positive and others that may be able to be improved.

      What I like the most is your awareness of how position management can enhance our overall returns. You certainly can’t be accused of being shy about exit strategies!

      You seem to have 2 of the 3-required skills covered… option selection and position management so let’s focus in on stock selection, the first of the 3-required skills. Why was NKLA selected?

      If it was selected because of the robust option premiums, we have fallen into a common trap made by many retail investors because that leads to enhanced risk to the downside. NKLA has an implied volatility over 100 compared to the S&P 500 about 14, so 7 times greater. This accounts for the high option premium percentile returns.

      What about the technical chart? The screenshot below shows us that using NKLA from a technical perspective is a high-risk decision.

      In the BCI methodology, we have a 3-pronged approach to stock selection: Fundamental analysis, technical analysis and common-sense principles. NKLA does not meet our requirements. This does not mean that we can’t make money with this security but rather we are exposing ourselves to greater risk, win, lose or breakeven.

      You show outstanding potential for successful option trading and that potential can be turned into cash especially if focused on the first of our 3-required skills… stock selection.

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

      Alan

  2. Barry B July 18, 2021 12:48 am
    #

    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 07/16/21.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them on The Blue Collar YouTube Channel. For your convenience, the link to the BCI YouTube Channel is:

    http://www.youtube.com/user/BlueCollarInvestor

    On the front page of the Weekly Stock Report, we now display the Top Performing ETFs, the Top SPDR Sector Funds, and the 4 single Inverse Index Funds. They are sorted using the 1-month performances from the Wednesday night ETF report and the prices from the weekend close.

    Please make sure that you review the new feature that we’ve added…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report.

    Since we are now at the beginning of 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. Bruce July 18, 2021 2:31 am
    #

    Hi Alan,

    During your webinar last Monday you said that implied volatility is based on 1 standard deviation and the likelihood of the expected trading range based on IV is 68%.

    Does this mean that there is a 32% chance of getting exercised if we sell a deep in-the-money call option?

    Thanks for another educational presentation.

    Bruce

    • Alan Ellman July 18, 2021 7:51 am
      #

      Bruce,

      A standard (normal) distribution curve does reflect that, for 1 standard deviation (the basis for most implied volatility stats), we can expect the projected trading range to be realized 68% of the time.

      However, of that remaining 32%, 16% will lie above the projected range and, therefore, not result in exercise.

      Bottom line: Using IV stats, we can project the lower end of the trading range with approximately 84% accuracy.

      Alan

  4. Alan Ellman July 18, 2021 8:09 am
    #

    August contracts:

    Premium members,

    The stock report that was uploaded to your member site last night shows that most of the eligible stocks for the August contracts report earnings during this contract month, This presents challenges to populate our portfolios but, as always, there are solutions. Here are some ideas:

    1. Consider the eligible stocks that report after August contract expiration ( a few).

    2. Consider using stocks that report early in the August contracts and after the report is made public. Keep in mind that the August contracts consist of 5 week so we can still achieve significant time-value using this approach.

    3. Use stocks that also have Weekly options. We can write weekly calls or puts and simply circumvent the week of earnings generating 4 weeks of time-value.

    4. Consider the eligible ETFs where earnings is not a factor.

    There may be challenges but there are always best solutions.

    Alan

  5. Roni July 19, 2021 1:32 pm
    #

    Alan,

    thank you for this post.

    Roni

  6. Alan Ellman July 20, 2021 5:16 pm
    #

    Premium members:

    This week’s 4-page report of top-performing ETFs and analysis of the top-performing Select Sector SPDRs has been uploaded to your premium site. One and three-month analysis are included in the report. Weekly performance has also been incorporated into the report although not part of the screening process. Weekly option availability and implied volatility stats are also incorporated.

    The mid-week market tone is located on page 1 of the report.

    New members check out our ongoing and never-ending training videos (“Ask Alan” and Blue Hour webinars). We add at least one new video each month. Only premium members have access to the entire library of these training tools.

    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

  7. William July 21, 2021 1:53 am
    #

    Hi Alan,

    What adjustments, if any, for IBD’s Uptrend Under Pressure?

    Thanks! Hope you are doing great!

    William

    • Alan Ellman July 21, 2021 6:18 am
      #

      William,

      The market has seen increased volatility the past few days making substantial moves in both directions. This impacts the algorithm IBD uses to assess market conditions. The market had a nice recovery yesterday and futures are looking positive pre-market this morning so it is possible “uptrend under pressure” can change back to “confirmed uptrend” soon.

      One approach when there is overall market concern is to take more defensive positions with new trades (ITM calls, deeper OTM puts, protective puts, lower IV underlyings etc.).

      Bottom line: If the market volatility continues, we can move from more aggressive to more defensive positions with new trades. All others are managed as set forth in our exit strategy arsenal.

      Alan

  8. James July 21, 2021 2:16 pm
    #

    Hi Alan,

    Thanks for sharing your knowledge about options!

    I’ve recently started trading options as well as following you, and basically my strategy is to sell weekly cash-secured puts with 3x leveraged ETFs such as UPRO, TQQQ, TNA, FAS, LABU, and some tech ETFs (ARKK, ARKF, ARKG) with a probabiliy between 85% and 90% to be OTM on expiration. In somes cases where I’ve been assigned to some of these puts that expired ITM, I immediately sold covered call options the next Monday with the same strike price I was assigned to, so the only gain I’m looking at is the option premium.

    I would really appreciate if you could share any comment on this strategy.

    Would you have any recommendation on how to improve the risk/reward? How’s your experience with 3x leveraged ETFs?

    Thanks!

    James

  9. John July 21, 2021 6:43 pm
    #

    Hi Alan,

    I’m a new member and and enjoying your very educational presentations. Your teaching style is excellent !

    Question 1) I’m finding the Daily Call calculator to be very useful in following my test call sells on a daily basis. Great for educational purposes also. Do you have an equivalent spread sheet for Puts also? You suggest following them on a daily basis also.

    Question 2) I know you have to avoid selling covered calls for stocks around their earnings reports. Is it a good idea to go to possible ETF’s instead, since they don’t have ER’s?

    Thanks,

    John

  10. Marc July 22, 2021 10:05 am
    #

    Hello Alan,

    How do I know for sure when the deadline for option assignment is?

    Is it the OCC time of 5:30pm Friday expiration? Or is it at the broker cutoff of 4PM Friday of the expiration date?

    Respectfully,

    Marc

    • Alan Ellman July 22, 2021 11:40 am
      #

      Marc,

      It’s 5:30 PM ET on expiration Friday.

      We have until 4 PM ET to make adjustments to our trades. The market-makers have until 5:30 PM ET to notify the OCC of assignment notices.

      If a strike expires OTM at 4 PM but unexpected news comes out leading market-makers to believe that the strike may be ITM when the market opens on Monday, exercise is possible (but rare).

      Alan

      • Marc July 22, 2021 2:56 pm
        #

        Thanks for the help, Alan. We use the 4pm Friday prices though? Example: the stock price changes at 5pm during Friday extended hours trading to make the option seller price now in the money (Wasn’t at 4pm) , you are saying it can be exercised on Monday. morning?

        Respectfully,

        Marc

        • Alan Ellman July 23, 2021 7:08 am
          #

          Marc,

          You frequently will see the exercise over the weekend on our online accounts. Many brokerages will send email or text notifications of these trades.

          Alan

  11. Amit July 22, 2021 3:51 pm
    #

    Hi Alan,

    Good day,

    I have another quick question for you.

    I sold a put and got called last week, so this week i sold a call, and will continue to do that until it gets called.

    My questions is as follows:
    Next week, the stock (OSTK) has it’s earnings. Should I continue to sell calls next week, even though they have earnings, or should i take a week break?

    Thanks
    Amit.

    • Alan Ellman July 22, 2021 5:42 pm
      #

      Amit,

      Since OSTK has weekly options, we can write weekly options, avoiding the week of earnings announcement and move back to monthlys after the report passes. This assumes OSTK still meets our system screening requirements.

      Alan

      • Amit July 22, 2021 7:45 pm
        #

        Hi Alan,

        Thank you.

        I was writing weekly puts and calls

        So I will skip next week during earnings

        Thank you
        Amit