We enter a covered call writing trade for a particular strike and then that strike disappears. What happened? Is this a bad dream? Actually, this is a bit unusual but not an extremely rare occurrence. Contract adjustments are associated with corporate events like stock splits, mergers & acquisitions and special 1-time cash and stock dividends. This article will highlight a contract adjustment for ARKW resulting from a special 1-time cash dividend. Thanks to Ted for sharing his trade with our BCI community.
Ted’s trade
- 12/17/2020: Buy ARKW at $145.50
- 12/17/2020: STO the 1/15/2021 $145.00 call at $5.30
- 12/28/2020: The $145.00 strike is changed to a $141.11 strike… why?
Initial structuring of ARKW trade with the Ellman Calculator
ARKW: Initial Trade Calculations
The spreadsheet shows an initial 1-month time-value return of 3.3% with a small 0.3% downside protection of that profit.
How to access contract adjustment information
- www.theocc.com
- Search on top left
- Information memos on right side
- Search by keywords (ticker) on left
- Search on bottom
Contract adjustment for ARKW explaining the strike reduction of $1.89
ARKW: 1-Time Special Cash Dividend Contract Adjustment
Discussion
Option contract adjustments are the result of corporate events. In the case of ARKW in December of 2020, there was a 1-time special cash dividend of $1.89 which resulted in both a share price and call strike price reduction by the dividend amount. The Options Clearing Corporation makes sure that buyers and sellers of calls and puts are made whole by these adjustments.
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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 appreciate your taking the time to personally respond to my email. I want to thank you for developing such a helpful website focused on covered calls and puts. After trying to figure out complicated concepts like Butterflies and Iron Condors, I keep returning to your simple but powerful approach to investing, an approach that works!
Keep up the good work,
Lucy
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July 15th
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2-hour Money Masters Course (paid event to The Money Show)
4 Practical Applications to Selling Cash-Secured Puts
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July 12th at 5 PM ET
Covered Call Writing with Invesco QQQ Trust (Nasdaq: QQQ)
Multiple Applications
Weekly and monthly cash flow can be generated by selling call options against shares of large-cap technology companies. QQQ is an exchange-traded fund consisting of 100 of the largest non-financial companies listed on the Nasdaq exchange and frequently an outstanding security for option-selling.
This presentation will include the basics of covered call writing, spreadsheet calculations and the rationale for entering these trades in various market conditions.
This webinar will also detail how to implement the covered call writing strategy with QQQ in 3 types of market environments:
- Normal-to-bull markets
- Bear or volatile markets
- Low interest-rate environments
VOLQ (30-day implied volatility of the Nasdaq 100 index (NDX) will be introduced and applied with real-life detailed examples.
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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.
I am recently retired and a newbie to options. Having reviewed many of the options “offerings” out there, yours seems
the most well documented approaches on Covered Calls. Over the past two weeks, I have been reading your Encyclopedia’s V1 and V2 and Exit Strategies books.
I recently read your blog post “”Using the Nasdaq 100 Volatility Index (VOLQ) in covered call writing decisions”. It was well explained and supported with your other referenced IV blog.
I am trying to follow up on the QQQ covered call strategy and on individual stocks by paper trading and have a newbie type question:
The question is on the QQQ option chain nomenclature (or lack there of) for a “monthly” call option as opposed to “weekly” or “quarterly”.
I have been reviewing both TC2000 platform and ThinkandSwim platforms as well as Yahoo Finance. TC2000 and ThinkandSwim have W and Q for the QQQ but do not have an “M” for monthly.
Is it correct to assume that for example, the option with an expiration of July 16 (3rd Friday) is always the monthly? Any insight would be helpful.
I am a little confused as the Nasdaq.com site says there are 52 Weeklys for QQQ, implying there would be both a weekly and monthly option expiring on July 16.
Thank you.
Best,
David
David,
You are 100% correct that the monthly expiration for QQQ (as well as all other securities) is the 3rd Friday of the calendar month. There is no other additional weekly for securities that do have weekly options.
QQQ is unique compared to other securities in that it has weekly expirations on Monday, Wednesday and Friday. This is simply a matter of supply and demand. We must be diligent when evaluating these option chains making sure we are looking at the intended contract expiration.
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 06/18/21.
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 this week…Implied Volatility or IV. This is the At The Money (ATM) Implied Volatility for all of the stocks in the report. It is located in the column to the left of the “Beta’ metric. This will now be a permanent feature of the Weekly Stock Report.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Alan:
Can you comment on a covered call writing strategy that I am using. I have dabbled in covered calls for several years, but recently decided to get more serious about it. I am a buy and hold dividend stock investor. My sole objective is to write calls that will expire unexercised, and increase the yield on stocks I currently own and that I intend to hold for the long term, in an IRA:
Expiration dates under three months, before the next earnings’ announcement.
Strike prices 5% above the price when written.
Option less than half of my holdings of the stock. (Psychology – I am still “ahead” on the stock if it is called away.) Allow the stock to be called if in the money at expiration.
I wrote a 7/2/21 call on LLY at $210. The stock jumped 14% on the Biogen Alzheimers drug approval, putting the option deep in the money. An inherent risk of covered calls. This has prompted me to consider stop losses (5% above the strike price?), but my research says that stop losses reduce returns.
My questions are my strike prices, 5% out of the money. And whether I should consider stop losses.
Alvin
Alvin,
A universal 5% above current market value will not work because securities have different implied volatilities. 5% above a low-volatility security is a lot safer than 5% above a high-volatility security.
2 reasonable alternatives are:
1. Use a % initial time-value return which incorporates implied volatility. I use 1/2% per-month in my portfolio overwriting examples.
2. Incorporate Delta which approximates probability of the option expiring in-the-money.
Stop losses: Always set buy-to-close limit orders on the short calls after entering a covered call trade using the 20%/10% guidelines.
Alan
Alan,
What is the smallest portfolio amount that would make sense to allow for a few positions on a monthly basis to start generating steady income?
If I signed up for your newsletter, based on your most common recommendations what is the minimum balance requirement to enable your recommended trades?
Thank You!
Ray
Ray,
A reasonable minimum cash available that would allow proper diversification with exchange-traded funds is between $10k and $15k. Once portfolio value increases to $35k – $50k we can move to individual stocks.
To build portfolio value before options:
https://www.thebluecollarinvestor.com/stock-investing-for-students/
Alan
Hi Alan,
Read your book on cs puts. Thank you.
Have one main question.
Been reading and viewing other info on selling premium and they often mention ways to hedge as well.
What is your take on that?
Thanks,
Vic
Vic,
Managing risk is an integral part of our BCI methodology. Personal risk-tolerance will vary from investor-to-investor. One size does not fit all. Once we have established our personal risk-tolerance, it can be managed in several ways. Here are some ideas:
1. Stock and ETF selection: Use securities with implied volatility that aligns with our personal risk tolerance.
2. Option selection: For bullish (higher-risk, higher-return) positions use, OTM calls and near-the-money puts. For defensive positions, use ITM calls and deeper OTM puts.
3. Add protective puts to our covered call trades (collars).
4. Use deep OTM puts to enter covered call trades (PCP strategy) in bear and volatile markets.
5. Master our exit strategy arsenal to mitigate losses and enhance gains. This is critical to our success.
Alan
Premium members:
The High Dividend Yield Report for the 3rd Quarter 2021 has been uploaded to your member site. Scroll down on the left side of the member page.
Alan
Wealth365 Investor Summit
July 12th at 5 PM ET
Register for free here: Wealth365 Investor Summit
July 12th at 5 PM ET
Register for free here: https://summit.wealth365.com/alan-ellman
Covered Call Writing with Invesco QQQ Trust (Nasdaq: QQQ)
Multiple Applications
Weekly and monthly cash flow can be generated by selling call options against shares of large-cap technology companies. QQQ is an exchange-traded fund consisting of 100 of the largest non-financial companies listed on the Nasdaq exchange and frequently an outstanding security for option-selling.
This presentation will include the basics of covered call writing, spreadsheet calculations and the rationale for entering these trades in various market conditions.
This webinar will also detail how to implement the covered call writing strategy with QQQ in 3 types of market environments:
Normal-to-bull markets
Bear or volatile markets
Low interest-rate environments
VOLQ (30-day implied volatility of the Nasdaq 100 index (NDX) will be introduced and applied with real-life detailed examples.
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,
Thank you for your thoughtful and detailed explanations.
I just missed the third Friday of the month. Do you think this week’s report would still be actionable although I would be about a week late (I am going to try monthly options and am trying to consider when to start my membership)? I am also trying to decide if I should try paper trading at least for the first month. I’ve been trading weekly options steadily since the beginning of 2020 and based on the info in your books I have made myself a booklet on what actions to take in each scenario. I am not sure if it would be OK to jump right in or better to paper trade first?
Thanks again for all your help!
Best regards,
William
William,
It is okay to enter a monthly contract a week into that expiration period. We must set lower initial time-value return goals as Theta has slightly eroded our premiums.
I definitely recommend paper-trading for1 – 3 months before initiating real-life trades depending on previous experience. As we master all the rules and guidelines in the BCI methodology, errors will become fewer and returns higher. It is best to make mistakes with hypothetical portfolios. I certainly made my share of errors as I was developing the BCI methodology back in the 1990s. Paper-trading for a few months is time well spent.
Alan
Hi Alan,
Hope you are doing well. I always enjoy your presentations at the trader conferences.
In my IRA account yesterday, I purchased a deep-in-money covered call for ATT (T) at the January 2023 expiration — T was trading at about $28.78 and I sold the 25 strike price for $4.18 resulting in net debt of $24.60. I get a $40 ($.40 /share) capital gain if T remains above $25 at expiration.
The goal of my risk averse strategy is to maximize income. Given that T currently pays a high quarterly dividend of $.52 (the next ex-date is 7/9),
I was wondering if you think the option will be exercised early in order to take this juicy dividend? I hope this happens before one of the upcoming dividend ex dates because I will be able to get my $40 return sooner. I realize that T plans to cut its dividend by about 50% in mid-22 when its deal with discovery closes.
Please let me know if I am thinking about this situation correctly.
Best wishes,
William A
William,
Early exercise of a covered call option due to ex-dividend dates is rare but possible. When it does occur, it is usually the result of investor error and most likely to occur the day prior to the ex-date, 7/8 in this case.
The factors that will make early exercise more likely (but still extremely rare) are:
1. The ex-date is close to the contract expiration date (not the case here).
2. The call strike is in-the-money (applies here).
3. The time-value of the option premium is less than the dividend about to be distributed (applies here).
Bottom line: Early exercise is possible but extremely rare.
Alan
Hello Alan
Recently, I’ve had three instances of ITM call writes that preceded large gap-ups in the underlying stocks values. I was wondering if rolling mid-contract down the calendar to capture future, potential intrinsic value in advance of existing calls becoming ‘stuck’ deep ITM is a viable strategy. I may want to maintain a long-term investment in these companies due to their future developments.
The wait-and-see approach can difficult to stomach when the stock values keep going up !
Thanks
Robert,
When retaining our shares for the long haul is an integral part of our strategy goals, focusing in on out-of-the-money call options would better suit our needs.
We then define our initial time-value return goal range and then the strike to be selected will become apparent. The deeper out-of-the-money we go, the lower our returns but the more protection we have against exercise. Determining these parameters prior to entering our trades is critical.
If the stock price gaps up past our short call strike, we call roll the option up in the same contract month or out to the next contract month.
If we roll-up in the same contract month, we will have a time-value credit and the unrealized share gain will negate most of the cost-to-close but we are at risk of share decline (profit-taking).
If we are at the end of the current contract, rolling-out or out-and-up would make sense to retain the shares.
They key takeaway here is the to structure the initial trade such that it accommodates all aspects of our strategy goals.
Alan