Comments on: Unusual Strike Prices and Contract Adjustments: A Real-Life Example with ARK Next Generation Internet ETF (NYSE: ARKW) https://www.thebluecollarinvestor.com/unusual-strike-prices-and-contract-adjustments-a-real-life-example-with-ark-next-generation-internet-etf-nyse-arkw/ Learn how to invest by selling stock options. Sun, 27 Jun 2021 11:09:15 +0000 hourly 1 By: Alan Ellman https://www.thebluecollarinvestor.com/unusual-strike-prices-and-contract-adjustments-a-real-life-example-with-ark-next-generation-internet-etf-nyse-arkw/#comment-431419 Sun, 27 Jun 2021 11:09:15 +0000 https://www.thebluecollarinvestor.com/?p=19919#comment-431419 In reply to Robert Glenn.

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

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By: Robert Glenn https://www.thebluecollarinvestor.com/unusual-strike-prices-and-contract-adjustments-a-real-life-example-with-ark-next-generation-internet-etf-nyse-arkw/#comment-430810 Fri, 25 Jun 2021 21:30:25 +0000 https://www.thebluecollarinvestor.com/?p=19919#comment-430810 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

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By: Alan Ellman https://www.thebluecollarinvestor.com/unusual-strike-prices-and-contract-adjustments-a-real-life-example-with-ark-next-generation-internet-etf-nyse-arkw/#comment-430596 Fri, 25 Jun 2021 11:32:20 +0000 https://www.thebluecollarinvestor.com/?p=19919#comment-430596 In reply to 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

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By: William A https://www.thebluecollarinvestor.com/unusual-strike-prices-and-contract-adjustments-a-real-life-example-with-ark-next-generation-internet-etf-nyse-arkw/#comment-430442 Thu, 24 Jun 2021 22:22:06 +0000 https://www.thebluecollarinvestor.com/?p=19919#comment-430442 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

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By: Alan Ellman https://www.thebluecollarinvestor.com/unusual-strike-prices-and-contract-adjustments-a-real-life-example-with-ark-next-generation-internet-etf-nyse-arkw/#comment-430265 Thu, 24 Jun 2021 12:14:25 +0000 https://www.thebluecollarinvestor.com/?p=19919#comment-430265 In reply to 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

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By: William https://www.thebluecollarinvestor.com/unusual-strike-prices-and-contract-adjustments-a-real-life-example-with-ark-next-generation-internet-etf-nyse-arkw/#comment-430226 Thu, 24 Jun 2021 10:07:51 +0000 https://www.thebluecollarinvestor.com/?p=19919#comment-430226 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

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By: Alan Ellman https://www.thebluecollarinvestor.com/unusual-strike-prices-and-contract-adjustments-a-real-life-example-with-ark-next-generation-internet-etf-nyse-arkw/#comment-430108 Wed, 23 Jun 2021 20:55:46 +0000 https://www.thebluecollarinvestor.com/?p=19919#comment-430108 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:

http://www.thebluecollarinvestor.com/member/login.php

NOT A PREMIUM MEMBER? Check out this link:

http://www.thebluecollarinvestor.com/membership.shtml

Alan and the BCI team

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