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When we write covered call options and sell cash-secured puts, our goal is to generate cash-flow in a low-risk manner. Frequently, a second important goal is to avoid exercise of the options, which means avoiding the strikes from expiring in-the-money (ITM) or with intrinsic-value. In the case of covered call writing, this will avoid selling our shares and in the cash of cash-secured puts, it means avoiding having the shares put to us. This article will utilize at-the-money (ATM) implied volatility (IV) and the BCI Expected Price Movement Calculator to result in ultra-low-risk trades that generate lower but still significant premium returns, with an approximate probability of 84% of avoiding exercise (expiring ITM).

What is the BCI Expected Price Movement Calculator?

A spreadsheet that generates an approximate trading range for a specific contract cycle, using implied volatility statistics and a conversion formula inherent in the spreadsheet. The formula will recalibrate the published IV annualized stats into one specific for the contract cycle being traded.

Why 84% approximate probability of success?

  • IV is based on 1 standard deviation (approximate 68% probability of falling into the range)
  • Of the 32% that falls outside the 1 standard deviation range, 16% is to the downside and 16% to the upside
  • This results in approximate 84% probability that stock price will not move above or below the 1 standard deviation range
  • For example, if we do not want exercise of a call option, our risk is the 16% to the right of the graphic (green arrow)

Real-life example with Intel Corp. (Nasdaq: INTC)

  • The ATM $38.00 strike (INTC trading at $37.88) has an IV of 31%
  • This is an annualized IV based on 1 standard deviation

Expected Price Movement Calculator

  • If we were seeking an OTM call option, with an approximate 84% probability of avoiding exercise, we would choose a $41.00 or $42.00 strike
  • If we were seeking an OTM put option, with an approximate 84% probability of avoiding exercise, we would choose a $34.00 or $35.00 strike

Discussion

Upper and lower limits of a trading range for our underlying securities can be achieved with an approximate 84% probability of success, using IV and the BCI Expected Trading Range Calculator. This strategy approach is particularly useful when seeking to generate ultra-low risk with lower, but still significant, option returns.



The Blue Collar Investor’s Guide to:

Exit Strategies for Covered Call Writing and Selling Cash-Secured Puts

This book will detail how to enter, manage and calculate trade adjustments for all market conditions. After we select the underlying security and sell the corresponding option, we immediately move into position management mode. There are over 20 exit strategies defined, as well and when and how to implement these plans.

The BCI Trade Management Calculator facilitates the analysis of each exit strategy by showing initial trade entries, initial trade calculations for both each individual trade as well as that of the entire portfolio. From there we learn how to enter our trade adjustments and finally to calculate trade and total portfolio post-adjustment results.

For information & purchase link, click here.


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 have been a premium member since 2018 and have had 2 or 3 questions / issues over that time and am always amazed and delighted at how quickly you respond to resolve the issue.  You are really first rate.

Thanks, 

Michael

Upcoming events

1. Long Island Stock Traders Meetup Group (private investment club- Part I)

Thursday February 15, 2024

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February 22 & 23, 2024

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Thursday, February 22, 2024, at 4:55 pm – 5:25 pm PST

The PCP (put-call-put or “wheel”) Strategy

Friday, February 23, 2024, at 12:00 pm – 12:45 pm PST
Covered Call Writing: A Streamlined Approach

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Tuesday March 12, 2024

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Covered Call Writing Dividend Stocks to Create a 3-Income Strategy

Covered call writing is a low-risk option-selling strategy that generates weekly or monthly cash-flow. By mastering the skill of strike price selection and adding dividend distributions, a potential 3-income strategy can be crafted with a goal of beating the market on a consistent basis.

Topics covered in this webinar include:

  • Strategy analysis
  • Option basics
  • What is covered call writing?
  • Dividend distribution
  • Stock selection
  • Option selection
  • Trade management

Real-life examples will be highlighted with Dow 30 stocks using option-chains and calculation spreadsheets.

Attendees will have the opportunity to participate in written chat box Q&A during the entire webinar.

A deeply discounted comprehensive package of educational products and tools will be offered in the final minutes of the webinar.

4. Long Island Stock Traders Meetup Group (private investment club- Part II)

Thursday March 14, 2024

7:30 PM ET – 9 PM ET

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5. BCI-Only Webinar

Thursday April 11, 2024

8 PM ET – 9:30 PM ET

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All questions related to covered call writing and cash-secured puts will be answered in real time after the webinar presentation.

6. Stock Traders Expo- live event in Orlando Florida

October 17 -20

Details to follow.

Alan speaking at a Money Show event*********************************************************************************************************************

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