When selling cash-secured puts, our strikes are selected based on our initial time-value return goal range and personal risk-tolerance. In the BCI methodology, we use only out-of-the-money (OTM) cash-secured puts unless our objective is to purchase a stock at a discount and have those shares put to us sooner rather than later. There are times when market conditions are such that we want to take extreme defensive positions while still having the goal to beat the market significantly. This is the approach I took shortly after the initiation of the COVID-19 crisis in the US that began in March 2020.
Defensive put-selling strategy
We select an elite-performing security based on fundamental, technical and common-sense parameters. We then look to deep OTM puts that have Deltas of 10 or less (Delta is negative for puts). We then sell put strikes with a target annualized return of 10% – 15% based on initial time-value return. Delta can be defined in multiple ways. For this article, it will be defined as the percent chance the option will expire in-the-money (ITM) or with intrinsic-value. Stated differently, our trades have a 90%+ chance of not being exercised.
Bullish Price chart of ETSY on 12/14/2020
1: Bullish exponential moving average trends
2: Bullish MACD histogram trend and momentum
3: Bullish stochastic oscillator momentum
4: Average volume
Option-chain for ETSY on 12-14-2020
The $150.00 (Delta of -0.05) and $152.50 (Delta of -0.08) strikes show bid prices of $0.31 and $0.44 respectively.
ETSY calculations with the BCI Put-Selling Calculator
The annualized returns for the $150.00 and $152.50 strikes are 15.12% and 21.12% respectively.
Significant annualized returns can be realized by employing an ultra-conservative put-selling strategy where Delta will allow us to create a low-risk/high-return strategy. Keep in mind that this a low-risk, not a no-risk strategy so our position management arsenal must be mastered and implemented when indicated.
For more information on selling cash-secured puts
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:
You are one of the best teachers and mentors I have seen in my professional life of fifty-plus years.
Thank you, sir,
1. How to Trade It Podcast
1st week in June: A link to the interview will posted on this site and in social media when provided to BCI
Interview with Casey Stubbs
The focus will be on an analysis of covered call writing from a beginner’s perspective
2. Mad Hedge Traders and Investors Summit
June 8th – June 10th
The Many Uses of Stock Options: Portfolio Overwriting & the Stock Repair Strategy
Details to follow.
3. Money Show Virtual Expo
July 13th – July 15th
2-hour Money Masters Course (paid event to The Money Show)
4 Practical Applications to Selling Cash-Secured Puts
Details to follow
4. Wealth365 Investor Summit
Week of July 12th – 17th
Multiple Applications of Invesco QQQ Trust (QQQ) in Our Option-Selling Portfolios
Details to be posted when finalized
Market tone data is now located on page 1 of our premium member stock reports and page 1 of our mid-week ETF reports.
First of all huge thanks for sharing your amazing knowledge regarding option selling. I have found covered call writing as an very interesting investing method.
I bought your books last summer and my goal was to start covered call writing in the end of the year 2020. Due to some difficult times in our family I didn’t have time/energy to learn this method on a time a had planned.
Now I have read your covered call Encyclopedia couple of times and many parts of it several times. I have watched all your podcasts and looked your video lessons multiple times. Now I go through Ask Alan videos. I have also looked some of your webinars many times. At the moment I am doing paper trading with Etnatraiding. Now my goal is to start investing with real money in July or August.
I have started to have a hint of understanding about covered call writing. My goal is to master it and all the required skills needed, well I have still a lot of work to do. My longer term goal is to come financially independent. My plan is to start with 120 000 USD (maybe 50000 USD in the beginning) and add about 2400 USD monthly and invest all the profits again. I have planned to start with the goal of 1-3%/month and raise that to 2-4% when my confidence is better. I have planned to have 5-8 stocks and at least five different industries.
I have some questions and I am very grateful if you have time to answer them. I have joined to BCI premium Membership and used weekly stock screen and watch list.
Regarding the stock selection how much you investigate those companies that you use in covered call writing? Do you look 10-K? Do you look income statement or balance sheet? Do you care about the debt of the company or what about the management? Or is it enough just to pick stocks from the weekly stock screen and watch list? I have used to invest in stocks as a buy and hold way and that’s why I ask these questions.
With exit strategies do you start to roll down in third week of the four week contract and fourth week of the five week contract? Do you still roll down in a last week of the contract month? I did it with my paper trading. I had couple of options in the last week of the contract month where I bought back the option with 10% guideline. I looked for the technicals and I didn’t want to keep these stocks anymore and I sold them. Do you recommend to use that cash already now and buy new better performing stocks and sell June call? Or what would you recommend?
Do you record all your trades to excel or? If you record them do you a have sheet that you share with your premium Memberships?
With Kind Regards,
Welcome to our BCI community. Your motivation and due-diligence is quite impressive. My responses:
1. There is no need to delve deeper into corporate financial statements. We use Investor Business Daily’s Smart Select screen which identifies the elite-performers from a fundamental perspective and that allows the BCI team to screen the universe of thousands of stocks from a fundamental perspective in a practical and user-friendly manner. You can assume the stocks in our watch list are sound fundamentally at the time of the screening and we update weekly.
2. You are 100% correct. The BCI “guidelines” are to favor rolling-down starting in the 3rd week of a 4-week contract and in the 4th week of a 5-week contract.
3. If we close a position in the last week of a contract, we wait until the Monday after expiration to enter new positions. The time-value loss will be little or none and we will avoid 1 weekend of risk.
4. The best tools currently available in the BCI arsenal for logging-in trades are:
– The Elite-Plus Calculator
– The Schedule D of the Elite Calculator
For the past 6 months, the BCI team has been working on a new project to develop an option-selling trading log which will include all management steps and calculations. It is quite challenging but we are close. We hope to have this perfected and ready for distribution in the next 2 – 3 months. Stay tuned.
I can’t tell you how fortunate the BCI team feels to have so many members, not only in the US, but also in dozens of countries outside the US.
Please keep in touch.
Thank you very much for your answers!
1. Great, that saves a lot off time.
3. Very understandable.
4. Sounds excellent, I’ll wait to see what will you develop. Before that I will use Elite plus calculator.
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 05/21/21.
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:
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
Barry and The Blue Collar Investor Team
maybe the dotted line ——- should be above SCWB?
Correction: I mean the first dotted line – – – – – should be above SCHW
The June options expiration date is 06/18/21 and the July expiration date is 07/16/21. So QFIN ER date falls within the June month and SCHW falls within the July month…based on currently available information. The “bold” box holds the ER Date(s) for the upcoming June month and the dotted line defines the July expiration month. So, unless I am misinterpreting your comment, the report is formatted in the proper manner.
Let me know…
Alright Barry, now I understand.
Thanks – Roni
If I wanted a technology presence in my portfolio, would you recommend I use QQQ or XLK?
Thanks for your response.
These 2 securities are both excellent ETFs for your goal of having a technology presence in your portfolio. If we created a comparison chart of price action, they would be similar with one slightly out-performing in 1 time-frame and the other in a different time-frame.
The implied volatility of QQQ and XLK have been historically similar meaning the risk and returns are also similar.
One advantage of XLK is that the price is much lower and one advantage of QQQ is that we can integrate the Nasdaq-100 Volatility Index (VOLQ) into our option-selling strategies:
Bottom line: Both work quite well to achieve the goal of technology presence in a portfolio.
Another excellent idea from the guru of option investing!
I eagerly await the opportunity to purchase the planned option-selling trading log.
We are 6 months into developing this tool and getting close… a couple of more months.
I am new to this and learning learning learning…
I live in Sydney Australia and wanted to know if there’s any tricks or extra steps for myself to trade in the US markets.
I am going to join your premium membership but need to know where I can trade from – I have been told I should start an account with: Interactive Broker.
Looking forward you your response
In our BCI community, we are fortunate to have a large percentage of international members, many from Australia… welcome.
Most of the large online discount brokers allow international members to trade on US exchanges. Interactive Brokers is one of them.
There is a file of reliable online discount brokers in the “Free Resources” link of our web site to assist with your investigation. You will have many choices.
I’m not sure why I don’t understand the following line on your what now tab example, but can you please tell me what “the bought up value in closing the option” means? I understand all of the other aspects of the what now tab except this one for whatever reason.
Glad to help.
This applies to closing an in-the-money call option when we roll-out-and-up or close both legs of a covered call trade. Let’s set up an example:
Buy BCI at $48.00
Sell a $50.00 1-month call at $1.50
At expiration (or time of closing), BCI trading at $52.00
The cost-to-close is $2.10
On initial glance, it appears that we have lost money since we generated $1.50 on the option sale and paid $2.10 to close that position. To fully understand the entire trade, let’s review how we structured the trade:
We generated an initial time-value return of 3.1% ($1.50/$48.00). If BCI moved up to the $50.00 strike by expiration, there was an opportunity for an additional 4.2% of upside potential for a maximum 1-month return of 7.3%.
Since our contract obligation is to sell at $50.00, at no time while the short call is in place can our shares be worth more than $50.00. This is how we structured the trade. We cap the upside in return for a potential 1-month return of 7.3%.
Let’s move to the point we are closing the short call as the stock price moved up to $52.00:
The cost-to-close is $2.10. Of that, $2.00 is intrinsic-value as the strike is now $2.00 lower than current market value. Yes, we do pay that $2.00 of intrinsic-value but that is mitigated because now are shares are worth current market value $52.00 because the short call is no longer in place. In our BCI methodology, that $2.00 is referred to as “bought-up” value.
To get a true picture of the entire trade, if we are incorporating the $2.00 debit from the intrinsic-value component of the cost-to-close, we must also incorporate the $2.00 credit of “bought-up” value.
Gotcha….makes sense now….thanks! I’m back in the game BTW…happy to be sellin puts/calls!
I promised to keep you posted on my WSM trade.
Yesterday I sold my 200 shares at 164.89 with a slight profit of 1% which is not very good since this trade was a loser from my past two cycles.
WSM was expected to publish ER on June 16, but yesterday confirmed ER for tomorrow 05/26, therefore I sold the shares immediately.
Today WSM is trading at 167.00 and I could have done much better, but that is hindsight. Maybe it will trade even higher tomorrow before ER, or maybe I could have waited until after the ER and get very lucky, but I am not a gambler.
The lesson I learned from this experience is:
Better cut your losses immediately after expiry, and invest the cash on a better candidate.
The education and lessons-learned never ends. Great call on avoiding the risk of an earnings report.
When we close a position mid-contract or after expiration we need a replacement security. This is why we update our stock and ETF Reports every week.
Thanks for sharing.
I replaced WSM with one of the bold tickers from this week’s report.
Also, I reinvested all my cash with tickers from this week’s report, and I am now 100% invested in 06/18/21 CC trades.
I see a potential divergent on the ETSY chart and since it is at its new high. If possible can you do a side by side comparison between ETSY OTM short put and ETSY near or equal to ATM long put (delta <= 0.5).
Using the strategy discussed in this article, we would not use a put strike with a Delta of 50 but happy to provide a comparison based on this morning’s option-chain.
The screenshot below of the BCI Elite Put-Selling Calculator shows that the 10-Delta $152.50 strike generates an annualized initial-time value return of 15.48% while the 50-Delta $167.50 strike shows an annualized return of 96.68%. The former has about a 10% probability of exercise while the latter a 50% probability of exercise.
CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.
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.
For your convenience, here is the link to login to the premium site:
NOT A PREMIUM MEMBER? Check out this link:
Alan and the BCI team
I just set my june contracts up,65 contracts,2.16% ROO,2.56% return tot,over 22 ETFs and a few stocks,when you reiterate that you look for 2 to 4 % return on ETFs and 4-6% on stocks and you are also 2to1 OTM are you talking about the % R00 or % tot return,
As you know,the farther out from ATM,the less ROO. My selection of candidates gets awful thin looking for OTM stocks and still get the returns you look for on their ROO if still wanting 2-4% say on a ETF or 4-6% on a stock,
Thank you,i Love your screens.
When I use an individual stock, my initial time-value return goal range for 1-month near-the-money strikes is 2% – 4%. When I use an ETF, it is 1% – 2%. These stats are archived in all my publications and videos.
ETFs generally have lower IV (there are exceptions) than individual stocks because they are baskets of stocks, some going up in price, some down. As a whole, the implied volatility and therefore risk and premium returns are lower. Once again, there are exceptions and that is why the BCI team shows IV stats in our ETF reports.
4% -6% for stocks and 2% – 4% for ETFs is not typical for our watch lists.
Have you ever heard that 80% or more of options expire worthless?
The popular idea that most options expire worthless is false. According to a comprehensive study from the ISE, with over thirty years of data, only 30% of options expire worthless. About 10% are exercised and the remaining 60% are closed through offsetting transactions (statistics presented in 2004 by Alex Jacobson, Vice President, International Securities Exchange.) So, it is much more likely that an option contract will be closed by an offsetting transaction than allowed to expire worthless at the expiration. Since 2004 the exercise rules for options have changed such that any option that is expiring in-the-money (ITM) will be automatically exercised. This may have caused an increase in the 10% statistic above as well.
I was aware but not with such precise numbers.
I have copied your post and added it to my “investment data” file.
Thank you – Roni
Thanks for reminding me of this. It sounded familiar and I found this article by Alan on this topic:
Good luck with your investing,