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Using Implied Volatility and the BCI Expected Price Movement Calculator to Avoid Exercise

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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

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Topics covered in this webinar include:

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15 Responses to “Using Implied Volatility and the BCI Expected Price Movement Calculator to Avoid Exercise”

  1. Keith February 3, 2024 6:40 am #

    Alan,

    Let’s say I own a stock that I want to keep for the next contract and as expiration is close on expiration Friday, the price is a few pennies below the strike (covered call).

    Should I roll that option even though the strike is not in the money?

    If your answer is yes, can you suggest a specific time of day to do the roll?

    Thanks,
    Keith

  2. Alan Ellman February 3, 2024 11:35 am #

    Keith,

    If it is critical that our shares not get sold due to option exercise, it is best to roll a slightly out-of-the-money (OTM) strike as expiration approaches. This means prior to 4 PM ET on expiration Friday.

    There are 2 factors that may result in an OTM strike getting exercised. One is known as “pinning the strike”:

    https://www.thebluecollarinvestor.com/pinning-the-strike-a-covered-call-writing-consideration/

    A 2nd possible factor is that market-makers have until 5:30 PM ET to decide on exercise. This is well past the 4 PM ET, the last time we can control our positions. If news comes out after 4 PM ET, and prior to 5:30 PM ET, that leads market-makers to speculate that share price will open up higher than the (now) OTM strike on Monday, exercise may occur.

    Bottom line: If avoiding exercise, when share price in only pennies below the (now) OTM strike, is critical, roll away.

    Alan

  3. Barry B February 3, 2024 10:03 pm #

    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 02/02/24.

    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:

    https://www.youtube.com/user/BlueCollarInvestor

    Reminder: Premium Member’s pricing is locked into your current rate and will never see a rate increase as long as the membership remains active.

    Best,

    Barry and The Blue Collar Investor Team

  4. Rick February 5, 2024 8:39 am #

    Alan,

    I have viewed the video below which is very helpful.

    Why would you have stocks on a watchlist that has earning so close?

    I have always been taught not to initiate trades when earnings are approaching. You first ten stocks highlighted in yellow have earnings this week.

    Thanks,
    Rick

    https://youtu.be/hJI3dqsOdn4

    • Alan Ellman February 5, 2024 11:31 am #

      Rick,

      I’m happy to clarify.

      You are 100% correct in that we should avoid earnings reports … too risky for our low-risk strategies.

      This is precisely the reason our stock reports highlight (in yellow) securities that are reporting in the current monthly expiration cycle.

      These stocks have passed all the fundamental, technical and common-sense screens, but are not eligible until the earnings report passes. The reports also provide the most up-to-date projected ER dates, so we know when the stock will be eligible. These dates should be double-checked prior to entering a trade with these securities because corporations can change ER dates. Our information is the most up to date from multiple resources.

      The reason we highlight in yellow, is to make sure our premium members are crystal clear that there is a short-term ER concern.

      Alan

      • Barry B February 5, 2024 1:23 pm #

        Hi Rick,

        Another reason we highlight the stocks that are reporting in the current week is that they become eligible for trading after the ER date passes…depending on how the market reacts to the ER. We suggest that you wait about a day or so to see how the analysts react to the actual ER after the announcement. This situation occurs during every earnings season.

        Best,

        Barry

  5. Glenn February 6, 2024 1:55 am #

    Alan,

    If I add a protective put to one of my covered call trades, how do I enter it in the Trade Management Calculator?

    Thanks a lot,
    Glenn

    • Alan Ellman February 6, 2024 6:23 am #

      Glenn,

      Deduct the put debit from the call premium. For example, if the call premium credit was $2.00 and the put costs $0.75, change to call credit to $1.25 and make a note in the Trade Journal column of the Trade Management Calculator (TMC).

      Alan

  6. George February 6, 2024 9:22 am #

    Hi Alan:

    I recently watched your Blue Hour Webinar 15: Turning a 4.9% loss into a 3.2% gain.

    I was especially interested in this topic since most of my trading problems involve managing trades with declining stock prices.

    I usually continue writing calls as the stock price drops to lower the breakeven point. This works about half the time but I do get in trouble when the price increases significantly and/or suddenly and I am forced to roll the short call out and up (sometimes several months out)

    In the video I noticed that you stopped selling calls after point 5. I would typically continue selling calls all the way down and then get in trouble after point 7.

    Do you have any guidelines on when to stop selling calls and just wait for the stock price to recover?

    Thanks,

    George

    CLICK ON IMAGE TO ENLARGE & USE THE BACK ARROW TO RETURN TO BLOG.

    • Alan Ellman February 6, 2024 1:26 pm #

      George,

      Since I have produced > 500 videos over the past 16 years, I had to go back to review its contents. Pretty interesting series of trades!

      This particular video was produced several years ago, and I can’t remember if these trades were from one of my portfolios or one of our members. Either way, my response is the same.

      It does appear that there should have been more action taken between points 5 & 6. Whether it was me or one of our members (let’s say me), it was investor error.

      Now, the 20%/10% BTC GTC limit orders are always in place, and once these thresholds are reached, I am more likely to wait for share recovery (and look to “hit a double”) in the 1st half of a contract, and more likely to roll-down in the latter half of a contract.

      Bottom line: It does appear that there were more exit strategy opportunities (between 5 & 6), which would have made the final results even more impressive.

      Alan

  7. Clare February 7, 2024 1:11 am #

    Hello Alan,

    I am hoping you can shed some insight on a problem I had with a recent trade.

    I am a BCI member and have been writing cc and csp now for some time and never heard of this happening.

    I purchased 100 shares of a stock at 39.44 and sold the call at a 40 strike price. No problem with that and it settled normally.

    After several days i noticed that the strike price on the call had been changed to 39. My brokerage firm gave me several reasons why this happened, none of which made any sense to me and all tied into an upcoming dividend payment.

    I am not expecting to be able to change this, but to understand what triggered the change so as to avoid it in the future.

    Thank you for any information you can give me on this.
    Clare

    • Alan Ellman February 7, 2024 6:53 am #

      Clare,

      Glad to help. Here’s what (most likely) occurred.

      The company announced a special 1-time cash dividend. This could be an additional dividend over and above the scheduled quarterly dividend.

      On the ex-dividend date (date we must own the shares to be eligible to capture the special dividend), share value will drop by $1.00, the amount of the dividend. Other, usual factors, will determine the final price that day.

      Now, let’s look at this scenario through the eyes of a call buyer (not us), who purchased the $40.00 call. Now the stock value will decline by $1.00 (+ other factors, but $1.00 because of the ex-date). That’s not fair to the call buyer. So, the Options Clearing Corporation (OIC) adjusts the strike prices to make buyers and sellers of calls and puts “whole”

      Nobody wins or loses as a result of this corporate action. This includes you, the covered call writer. If you still own the shares on the ex-date, you will receive $1.00 per-share on the pay date (after the ex-date).

      Even though share price declined on the ex-date (not accounting for other factors), you will be compensated with the dividend distribution.

      The parameters of your trade changed, but you have suffered no losses as a result of this contract adjustment.

      Alan

  8. John February 7, 2024 7:01 am #

    Alan,

    I’m about a year old using the approach in your seminars and books.

    My returns are about 1.5 to 2 percent per month, and I’m not very risk tolerant, but I think I will more so be as I grown.

    It’s really rather amazing in that some income can be derived even when the market goes down a little. That not very intuitive, but it’s true. I’m very happy to have learned about ITM options, coupled with a quality watch list.

    I wanted to ask you about other stuff – what other income opportunities do you engage in day to day, other than managing your monthly option sales.

    It seems to me that there should be more to do each day. No? Or does the enterprise you and Barry are running take up the rest of the time you have?

    Regards,

    John

  9. Alan Ellman February 7, 2024 12:50 pm #

    John,

    Over the years, I had multiple income streams outside of options. Here are the major ones:

    1. My 1st career, my dental practice (sold in 2013 to dedicate full time to BCI).

    2. I owned a vitamin store and online business (also sold).

    3. My wife and I owned a real-estate investment business, buying & selling commercial and residential properties throughout the US (sold all properties, the last was in 2022).

    I recommend diversifying into multiple asset classes while building portfolio wealth, not just stocks and stock options.

    I consider myself extremely fortunate that I no longer require multiple income streams, so I simplified my investments by focusing in on stocks and stock options, what I do best and where I have enjoyed consistent and significant success.

    I also hold cash equivalents (CDs, money markets, and savings) which require little attention.

    I’m happy to share what I’ve done and currently do. Each investor must make a personal decision as to what is appropriate for their families.

    Alan

  10. Alan Ellman February 7, 2024 4:57 pm #

    Premium members:

    This week’s 4-page report of top-performing ETFs has been uploaded to your premium site. The Select Sector SPDR section is now crafted to align with our streamlined (CEO) approach to covered call writing. The report also lists Top-performing ETFs with Weekly options, mid-week market tone as well as the implied volatility of all eligible candidates.

    Premium member video link:

    https://youtu.be/EXMO-KwZuJs

    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

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