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
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
- 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
- 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
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Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
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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
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
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]
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
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
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
Alan,
thank you for this post.
Roni
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
Hi Alan,
What adjustments, if any, for IBD’s Uptrend Under Pressure?
Thanks! Hope you are doing great!
William
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
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
Hi James,
Selling cash-secured puts and combining that strategy with covered call writing are amongst the best low-risk option strategies available to retail investors. Here is a link to an article on this topic:
https://www.thebluecollarinvestor.com/reversing-delta-with-the-pcp-strategy-a-real-life-example-with-etsy-inc-nasdaq-etsy/
By using leveraged ETFs, we are converting low-risk to higher-risk strategies. This may be appropriate for some but not for most conservative investors.
The advantage is the high implied-volatility which results in greater premiums but the disadvantage is the enhanced risk to the downside.
Appropriate underlyings will vary from investor-to-investor so there is no general right or wrong. For me, the strategies are terrific but not so much for leveraged ETFs… one man’s opinion.
Alan
Thanks a lot for your quick reply and also for sharing this article! 🙂
Do you have any recommended strategy for leveraged ETFs? If you have any article about leveraged ETFs, I would really appreciate if you could share it as well.
BTW, I missed your webinar (Covered Call Writing with Invesco QQQ Trust (Nasdaq: QQQ)). Is there any replay that I can watch?
Thanks!
James,
As I said, I am not a proponent of leveraged ETFs but I have published several articles on this topic over the years. Here are some of the links:
https://www.thebluecollarinvestor.com/covered-call-writing-leveraged-etfs-weekly-options-and-protective-puts/
https://www.thebluecollarinvestor.com/the-mechanics-of-leveraged-exchange-traded-funds-appropriate-for-covered-call-writers/
https://www.thebluecollarinvestor.com/complex-and-leveraged-exchange-traded-funds/
https://www.thebluecollarinvestor.com/beware-of-leveraged-etfs-the-changing-face-of-exchange-traded-funds/
https://www.thebluecollarinvestor.com/leveraged-etfs-and-margin-accounts-for-high-risk-traders-only/
Much of the information I provided during my QQQ webinar will be detailed in an upcoming BCI-only webinar. Here is the preliminary information:
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
Make sure you are on our mailing list to ensure receiving the link. To do so, sign up for our free newsletter on the blog page of this site.
Alan
Perfect! Thanks a lot for sharing so much information! I will go through these articles this weekend.
Once again, I really appreciate all the help and knowledge that you share with all of us… 🙂
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
John,
My responses:
1. Here is a link to our best calculator for both calls and puts and total portfolio positions:
https://thebluecollarinvestor.com/minimembership/calculator-elite-plus-calculator/
2. Using ETFs around earnings season… absolutely… great call.
Alan
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
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
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
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
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.
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
Hi Alan,
Thank you.
I was writing weekly puts and calls
So I will skip next week during earnings
Thank you
Amit