Covered call writing can be crafted to meet a myriad of goals in a wide range of market conditions. In May of 2020, the 10-year Treasury Bond yield was 0.65%. Bank interest rates in several countries were negative. At the same time, dividend yield on Dow 30 and S&P 500 dividend-bearing stocks were triple that of the 10-year Treasury. I see this as an opportunity… a 3-income stream opportunity derived from share appreciation, option-premium and dividend capture.
3-income strategy in low interest-rate situations
Blue-chip stocks frequently are cash-rich and generate dividends on a quarterly basis. They have a long history of success and, in addition to the dividends, most have exchange-traded stock options associated with them. This proposed strategy consists of the following steps:
- Buying a portfolio of the best-performing Dow 30 stocks
- Selling out-of-the-money call options
- Capturing corporate dividends
- Managing our covered call positions
Stock selection
We select the top-performing Dow 30 stocks that have been out-performing the S&P 500 in both 3-month and 1-year time frames as shown in our BCI Blue Chip Reports.
Top-Performing Dow 30 Stocks for the June 2020 Contracts
Option selection
For this article, I used the first 5 stocks in the report and checked the option-chains for out-of-the-money strikes that generated 1% – 2% for 1-month initial time-value returns. I entered the option-chain information into the blue cells of the multiple tab of the Ellman Calculator.
Portfolio Calculations: 5 Stocks
The average 1-month return on the option was 2.3% with an additional upside potential average of 3.5%. The maximum 1-month return on this portfolio is 5.8% without exit strategies. On top of these income streams, we can add the dividend income offered by these companies.
Important dates
Ex-dividend date
In order to capture the corporate dividends, we must own the shares prior to and on the ex-dividend date. A free and reliable resource is:
www.dividendinvestor.com
Earnings report date
We should never have an option in place that expires after an earnings report date in a contract month. We should wait for the report to pass and then sell the call option or not use that stock until the report passes. A free reliable resource for ER dates is:
www.earningswhispers.com
Exit strategies
Once we have entered a covered call trade, we move to position management mode. A complete detailed discussion of exit strategies is beyond the scope of this article but all that information is found in my books and online video programs. These include:
- 20%/10% guidelines
- “Hitting a double”
- Rolling-down
- Selling the stock after closing the short call
- Mid-contract unwind exit strategy
- Rolling-out
- Rolling-out-and-up
Discussion
In a low-interest rate scenario (can be used in others, as well) especially, we can set up a low-risk, 3-income stream strategy using blue chip stocks, out-of-the-money call options and dividend capture for each position. As always, the 3-reuired skills are essential for achieving the highest returns:
- Stock selection
- Option selection
- Position management
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:
Hi Alan,
Outside the BCI Poor Man’s Covered Call Calculator, I don’t think there are any others I could find on the internet. I actually started to create my own but bought yours for 2 reasons… well yours was so much more detailed, of course, and also to check my own calculations. Your spreadsheet is simply at a whole new level!!
Thank you for your time and expertise. You have changed my life!!
Best,
Jonathan
Upcoming events
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Tuesday January 19, 2021
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April 10,2021 at 10 AM ET
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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,
Do you have any video’s on these on how to place trades on any platform to automate ( I have StreetSmart Edge from Schwab but that doesn’t matter – looking for different way of placing the stop losses on Covered call buy backs).
Thanks a lot.
Regards,
Sara
Sara,
Yes. here is a link to an article I recently published on this topic:
https://www.thebluecollarinvestor.com/automating-the-20-10-guidelines/
Below is a screenshot of a recent trade I executed showing the 20% BTC limit order changed to 10% on an original option sale for $1.00.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Alan,
Had a TD brokerage account for about 15yrs. Any ways am doing paper trading options and Bought to close OXY and thought it would show the the share price I sold at. It did not. only the sale of option @ .12cents.
Now I’m confused. I was expecting to see the share price of the stock somewhere in the transaction. Am I missing something here?
Thanks,
James
James,
If the trade consisted only of buying-to-close the short call at $0.12, then the shares should still be in your portfolio. That would account for the confusion.
If the shares were also sold, it should be reflected in your brokerage account. Check the “activity” section or trade history of your account.
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 12/31/20.
Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at 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 10 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.
Best,
Barry and The Blue Collar Investor Team
[email protected]
Hello Alan,
I hope you had a nice Christmas and New Years and that you and family are well and safe.
I am trying to better understand the mid-contract exit strategy and was hoping you may be able to shed a little more clarity on this. I totally understand the 20%/10% option buy back protocol with the double & triple hunt afterwards. My cloudiness surrounds while waiting for the BTC level and when to convert dead money to cash.
As I understand it, the option premium will decrease as the stock price drops and we BTC at the 20%/10% level. But how much of a stock drop do we tolerate before the 20% or 10% premium level is reached? Do we wait for the 20%/10% level no mater what as long as the premium is above the buy back levels? Then, once we execute the BTC order when would you recommend initiating the CDMTC approach?
I have all of your books and DVD courses. I have read and reread your “Exit Strategies for Covered Call Writing” book as well as the exit strategy sections of your 2 hardback books. This area seems to be more of an art and I was wondering if you may be able to layout a more mechanical approach for the beginning student?
I’ve attached a PDF of the covered call for REGI that I’m actually trading. I’m paper trading the other positions listed on the 1st page. The option premium for the $75 call is at 30% currently and starting next week I need it to drop to 10% due to it being the 3rd week of the contract period. If I were to close the position out now, I see that I would net a $530.50 gain on the option but loose $821 on the stock for a total net loss of $290.50 or -3.7%. At this point I’m not too worried as the net loss is small. Would there ever be a scenario where the option premium would not be a the BTC level but the stock is taking a large loss?
Thank You,
Alan K
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan,
You are 100% correct that there is an “art” component, in addition to the “science” component, when it comes to position management. This the reason I refer to our exit strategy arsenal as “guidelines” and not “rules”
That said, I have worked hard over the past 2+ decades to make these decisions as mechanical as possible so let’s breakdown your trade:
The Elite-Plus Calculator has some critical data that helps us make the best trading decisions:
1. The breakeven price point is $71.40. Since the current price is $70.82, we are down $0.68 per-share at this point in time.
2. The calculator provides 2 alerts: the (now) 10% guideline at $0.76 (we’re not there yet) and the 7% buyback price point at $73.50 (we were there on12/24).
So, how do we decide? Here’s where the “art” comes into play. We selected REGI for various reasons… fundamental, technical and common-sense. Are those reasons still in play?
If yes, favor the 10% guideline. If no, CDMCP and close the entire trade.
From your question, I can tell that you are doing really well. Keep it going.
Alan
Hi Alan,
Happy New Year…
I am struggling to understand “Calculating 2 months Reuturns using AGH as example” from your book “Complete Encyclopedia for Cover Call Writing V2″ on
Pgs 95-98.
This case studies has 2 parts.
Part 1: First 12 days Return:
I understand the 1.8% total return in the first s12 days, no problems in this part
Part 2: Roll out to the following Month (from Feb to Mar)
Questions:
(i) Comparison (pg 97)
I agree we need to compare Apple with Apple but after we bought back the $120 Feb Call (Part 1) , should the cost now switch to $125 based on the new contract, $125 Mar Call ?
(ii) 2 months final returns (pg 98)
In the book , it show ” …1.8% + 2.42% = 4.22% = 36% annualized…”
The 1.8% return is from the first contract (part 1) which the stock was sold at $120. Why was it included in the final returns?
Thanks very much.
Anthony
Anthony,
My responses:
i: When rolling the option, we are deciding between executing a rolling exit strategy or “allowing assignment” In order to compare apples-to-apples, our cost-basis, at that point in time, is $120.00 This what our shares are worth due to the original contract obligation and what we would receive if we take no action and allow assignment.
ii: The article title is “Calculating Two-Month Returns When Rolling Out and Up” It was actually a 6-week return because the first covered call was entered mid-contract. The reason I published this article was to demonstrate the positive impact exit strategies can offer on our overall portfolio returns.
Alan
Hi Alan,
Thanks for the reply.
I am not sure I understand the first part , “Roll Out Exit” vs “Allow Assignment”
In the roll out scenario, the Feb $120 was bought back, a Mar $125 was sold
This resulted in a loss of 210.
What happened to the $2.52 collected from the Feb $120 contract?
Thanks
Anthony
Anthony,
1. When a strike is in-the-money as expiration approaches, we must decide if we want to retain the shares for the next contract month at the current cost-basis. If yes, we roll the option. Since the original strike was $120.00, that’s what our shares are worth at that point in time. Our choices are to roll the option or take no action which will result in “allowing assignment” where our shares would be sold.
2. The $2.52 was the premium generated from the original trade and is represented by the initial 1.8% time-value return and is factored into the total 4.22% 6-week return.
Alan
Hi Alan
First off, I’d like to express my gratitude for the knowledge you make available so that I’m able to work towards a more comfortable retirement using the BCI covered call strategy. At this stage, I’m in the education & practise phase, still a bit terrified of using my hard earned money but at the same time, keen to get on with it so that my fingers fly freely over the keyboard as I smash out my trades every month (as you describe in one of your video lessons!!)
One of the 5 stocks I selected for the January contract period, GRBK, has failed this week’s list. I checked Finviz where it talks about GRBK having filed form 8-K on 30 December, Yahoo Finance where it shows only 2 Holds under Recommendation Trends and Stockcharts which shows negative technicals as your report describes. I think I also read sometime last week that the number of new homes sold is dropping in the USA.
In my practise, I bought the stock for $23.57, sold an ITM Strike of $22.50 for $1.70 which resulted in a ROO of 2.8% & DP of 4.5% (BE $21.87). The Ask price today is $1.80 & the 20% BTC, as calculated by the Elite Plus Calculator, is $0.34.
My question is whether to act, i.e. sell, in light of all the information even though the BTC guidelines have not yet been met. (My thinking is that if I add $1.80 to the BE $21.87 = $23.67 I would have a loss of 10 c but then be perhaps able to find a stock with better technicals.)
The other stocks I selected, DAR, XPEL, LOGI & BLDR, have passed this week’s screening.
I would much appreciate your thoughts & thanks again for being so generous with your information.
Regards
Shirley
Shirley,
Thank you for your generous comments and keep up your diligent preparation for your option-selling career. Your approach is a sure recipe for success.
Once executed, we manage our trades based on our BCI exit strategy arsenal, not on the stock’s removal or re-emergence to our watch lists.
If news comes out that changes our bullish assumption of the stock, we can close both legs of the trade at any time. In my books/DVDs, I refer to this as the “converting dead money to cash profit” exit strategy or CDMCP. We should also factor in that all the information available to us is already “baked into” the share price. If we no longer have confidence in our stock, we close and move on.
In the case of GRBK, the stock trended up for most of 2020 and is now consolidating (moving sideways). Many chartists consider this a healthy pattern.
The calculations show that the trade is still $1.09 above the breakeven and the downside protection is still allowing for the full initial time-value profit of 2.8%.
Bottom line: Unless we have lost confidence in this stock, the stats say no action is needed at this time.
Alan
Premium Members,
In the current report dated 12/31/20, the stock ASML, does, in fact, have weekly options. This will be updated in this weekend’s report.
Best,
Barry
Hi Alan,
I am trying to understand how to enter schedule D information into the Elite calculator, in particular what data goes into the CODE D3 cells. Do you have a tutorial on this somewhere?
If not, can you tell me if this is correct?
I bought a stock on 11/4/2020, but I don’t think I am supposed to enter that info on this sheet. I sold an option on 12/28/20 for $56 and I bought it back on 11/4/2021 for $45. I then sold a new call, but that would be a new entry.
APHA 12/28/20 01/04/21 56.00 45.00 11.00 24.44% 1274.37%
Thanks for your help.
Andrea
Andrea,
This tab calculates capital gains/losses when an option is sold and then bought back. Note that the acquisition date is after the sale date.
In your trade with APHA, there was a short-term capital gain of 24.44% which annualized to 1274.37% as shown in the screenshot.
I wish you many more trades like this one.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
Alan
Good Morning Alan.
2 questions:
1. In your books you state that the only reason one would consider an exit strategy on expiration Friday is if the stock price is greater than the strike price.
Isnt one in the same situation if you have held positions and stock is lower than strike. Lets say stock has dropped last few days of cycle or it has been hovering around the money for weeks.
Don’t the same roll out strategies still apply?
2. In your book you state that selling calls on ETFs will yield a lower percentage gain than individual stocks.
I decided yesterday to check a few ETFs out and I found the following at yesterdays numbers:
XLE 2/5 strike 38.0 at 1.86 yields 4.9%
ICLN 2/19 strike 29 at 0.9 yields 6.37%
LIT 2/19 strike 63 at 3.70 yields 5.87%
PBW 2/19 strike 105 at 8.85 yields 8.5%.
What am I missing here? I know the period is about 6 weeks rather than 4 weeks but what am I missing here?
Thanks as always
Barry
Barry,
1. If the strike is out-of-the-money at expiration, the option will expire worthless and we will retain the shares to either sell or use for the next contract week or month. no need to roll in this case. If the strike is near-the-money and retaining the shares at the current cost-basis is our goal, then rolling would make sense even if the price is a drop lower than the strike as 4 PM ET approaches. See my articles on “pinning the strike” and after-hours trading:
https://www.thebluecollarinvestor.com/pinning-the-strike-a-covered-call-writing-consideration/
https://www.thebluecollarinvestor.com/expiration-dates-versus-expiration-times-important-clarifications/
2. In general, ETFs have lower implied volatility than individual stocks. This is because they are baskets of stocks, some moving up, some down so as a single security, there is less price movement. That said, there are exceptions as you pointed out.
The reason we added implied volatility stats to our premium member ETF reports is to allow our members the opportunity to make sure the ETF aligns with our personal risk-tolerance. The ETFs mentioned in your questions all have high IV.
Alan
Hi Alan
Love your free content available on the blog page. Easy to comprehend and to the point.
Wish you and your team the best for 2021!
PS: how was your return in 2020 with all the rolling down trades?
Thanks!
Yves
Yves,
In 2020, my portfolios beat the market by 7%. I was in 50% or more cash for several months It wasn’t my best year but kept my track record intact of consistently beating the market. I wish the same or better for our members in 2021.
Alan
Alan
Don’t you foresee danger for selling call if the senate becomes majority democrats?
You said you had come back to normal for selling covered calls.
Thanks for your prompt and honest support.
Happy new year to you and family and Barry
Denis
Denis,
I feel that the market would prefer at least 1 Republican Senator win to keep gridlock alive and well in Congress. However, I do not believe that the market will be significantly negatively impacted should both Democrats win. The main reason is that 0% interest rate promised by the Fed through 2023 and perhaps beyond. The stock market is virtually the only game in town for making money.
This is my opinion as we move into 2021… a bullish bias.
As elite investors we also must be prepared to adjust our assumptions and implement exit strategies opportunities when they present.
Alan
Hello Alan,
I am confused regarding option selection as it relates to Open Interest. In your video Option Selection your example discusses three different options an investor may select but the 72.50 and 77.50 strike prices, shown below, have open interest well under 100. Don’t we exclude strike prices with open interest below 100?
Thanks,
Dave
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Dave,
the BCI “guideline” is “an open interest of 100 contracts or more and/or a bid-ask spread of $0.30 or less. PAYC meets the latter threshold.
Alan
Hi Alan,
I recently bought your book CC writing alt strategies. I have an operational question that I haven’t been able to find an answer for in a while; probably because of how basic it is. I was hoping you could provide some guidance.
The technical term for the PMCC being Long Call Diagonal Debit Spread, suggests to me (and from what I have seen online) that this position should be entered simultaneously as a 2-option trade. Is this necessarily so?
I have had success buying my long LEAP position and then separately shorting my OTM weeklies, since I feel I am able to close the positions more expeditiously if needed. I find that when done as a single trade, it takes more time to close and occasionally fails to do so.
In your opinion, is there a downside to this way of doing it that I haven’t encountered yet? Or are they pretty much equivalent?
Thanks for the guidance,
Best,
Carlos
Carlos,
Many brokerages have platforms that allow the initial trade to be entered as a single 2-option trade (debit spread). The PMCC is generally considered a long-term position such that after the initial trade entry, the short call is the active leg of ensuing trades.
Whether you enter the initial trade as a single or 2-step trade, we must be sure it meets our initial trade structuring formula.
Alan
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 option and implied volatility stats are also incorporated.
The mid-week market tone is located on page 1 of the report.
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
Hello again Alan.
I am getting into some positive but complicated issues for which I seek your guidance.
One that illustrates this is the following:
SIVB 11/16 buy 100 shares @354.09
11/16 sell to open exp 12/18/20 strike 360 @ 11.70
12/9 BTC @5.97
12/9 STO exp 1/15/21 strke 370 @ 10.30.
today stock at $417 up 8% today.
The earnings report scheduled for 1/21/21. Otherwise I would clearly roll out and up at exp on 1/15/21. What do you think I should do?
I actually have several situations where the stock has significantly risen but earnings report in next cycle or 2.
Obviously I can’t get out now as BTC is very high.
Thanks again.
Barry
Barry,
I’m pleased that you recognize these as “positive” issues. You are maximizing your trade returns and we can’t do any better than that.
We generally look to roll options as expiration approaches (close to or on expiration Friday).If the stock still meets our system requirements, we roll the option as long as the calculations meet our initial time-value return goal range.
We avoid earnings reports because one disappointing ER can wipe out an entire month’s premiums. In rare scenarios, we hold a stock through the ER and then write the call.
Right now, SIVR is our best friend. It could quickly become our worst enemy.
On or near expiration Friday, if the strike is ITM, the cost-to-close is mostly intrinsic-value which is negated by the enhancement of share value. Use the “Unwind Now” tab of the Elite or Elite-Plus Calculators to determine the time-value cost-to-close.
Bottom line: If the strike is ITM and there is an upcoming ER in the next contract cycle, we usually “allow assignment” In rare situations, where we have confidence in a favorable ER, we buy back the option and write the call after the report passes. The former is much more common than the latter.
Alan
Alan,
Thank you for this encouraging article. I certainly agree with all your views.
As I am totally focused on monthly CC trades, I did enter MSFT 01/15/2021 225.00 C on Monday 12/21/20 for an OTM premium of 5.29.
My buyback order of 0.55 was filled yesterday and MSFT closed at 212.25, so today my paper loss is 557.00 = 2.5%, not too bad.
So I am waiting for a rebound, or will sell the shares if it drops further. My limit with such a blue-chip stock is a 5% loss.
As MSFT is one of the tickers in your article I wanted to say that there are no holy cows in this game. 🙂
Roni
Forgot to say that I paid 222.56 for the stock.
Well, here is the beauty of the BCI methodology:
MSFT has recovered today and is trading now at approx. 218.00.
So I have many alternatives:
Wait to hit a double.
Or roll down to 01/15 – 217.50 strike, and get a 345.00 premium or maybe 01/15/ 220.00 with a premium of 230.00?
This would take me back to a slightly profitable trade if exercised.
Or roll out to 01/22, as ER is expected for 01/27.
Or lots of other possibilities.
I chose to wait – Roni
Impressive work, Roni… not surprised… Alan
Thank you, Alan.
Each losing position is very complicated to manage after a buyback order is filled. The decision to chose one of the multiple alternatives is so important and stressful that it makes me want to share with others.
Roni
Hello Alan,
I do not understand the statement below from the bottom of page one on the ETF report. Can you explain?
“I have changed my 20% to 10% BTC limit orders last weekend”.
Thank You,
Dave
Dave,
After entering a Monthly covered call trade, I immediately enter a buy-to-close limit order at 20% (of original option premium sale price). The weekend prior to the final 2 weeks of the contract, I change the BTC limit order to 10%.
Let’s say the original option was sold for $2.00 for a 4-week contract. The BTC limit order is initially set at $0.40 and changed to $0.20 in the latter half of the contract.
Alan
Wealth365 Summit
Tuesday January 19, 2021
10 Am ET
Covered Call Writing Dividend Stocks to Create a 3-Income Strategy
Hosted by:
Dr. Alan Ellman, President of The Blue Collar Investor Corp.
Barry Bergman, BCI Managing Director
Click here to register: https://summit.wealth365.com/alan-ellman