Portfolio overwriting is a covered call writing-like strategy. We use it with our long-term buy-and-hold portfolios in non-sheltered accounts with the objectives to generate additional cash-flow while still retaining the shares. Share retention is a required objective to avoid potential negative capital gains tax issues. In my books and online videos, I suggest a 6% – 8% annualized return target that can be adjusted to meet our strategy goals. In this article, I will provide another approach to selecting the out-of-the-money covered call strikes to meet both goals using implied volatility and projected trading range over the course of the contracts.

 

Strategy protocol

  • Locate an elite-performing stock or ETF
  • Access the mean implied volatility for that security (cboe.com, ivolatility.com, all brokerages)
  • Convert the annualized IV stat to a contract specific IV (BCI Expected Trading Range Calculator) to generate a projected trading range
  •  Use the upper end of that range to select the most appropriate strike
  • Selecting a strike at the upper end of the IV-based trading range will result in an 84% probability of success trade
  • Access an option-chain to view option premiums
  • Use the BCI Trade Management Calculator to confirm the returns meet our stated goals

 

PYPL Implied Volatility: 33.07

 

PYPL: Implied Volatility as per iVolatility.com

 

PYPL trading range calculations: BCI Trading Range Calculator

PYPL: Expected Trading Range Based on Implied Volatility

 

The spreadsheet shows a projected trading range between $269.81 and $326.33 with the current price at $298.07. For portfolio overwriting, we will check the strikes near $326.33.

***The formula inherent in the spreadsheet is located at the bottom of the screenshot in red.

 

Option-chain data for 1-month August 20, 2021, expirations

 

PYPL Option-Chain on 7-21-2021

 

We will use the published bid prices for the $325.00 and $330.00 strikes.

 

PYPL calculations using the BCI Trade Management Calculator

 

PYPL: Calculations for Upper End Trading Range Strikes

 

  • The $325.00 strike generates an initial annualized return of 10.82%, with an additional 9.03% of upside potential
  • The $330.00 strike generates an initial annualized return of 8.49%, with an additional 10.71% of upside potential
  • If our target annualized return is 8% – 10%, both strikes will meet our goals. The deeper out-of-the-money $330.00 strike is safer and still meets our time-value stated goal

 

Discussion

Implied volatility can be used to establish a trading range specific for every option contract period. When portfolio overwriting, we establish an upper end of the trading range and check to make sure that the targeted strikes will meet our stated strategy income goals.

 

Your generous testimonials

Over the years, the BCI community has been incredibly gracious by sending our BCI teaemail 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,

Based on my few weeks of doing covered calls and cash-secured puts with the knowledge I have gained from your books and videos, it is working out great, even in this terrible market.

Your weekly stock and ETF lists are also great. I’m sure I’ll have some pointed questions for you or the larger BCI community, but so far, so good!

Thank you, Simon

 

Upcoming events

1.Money Show Canada Virtual Event

Analyzing a 1-Month Covered Call Writing Portfolio from Start-To-Finish

A real-life example with a $100k ETF Select Sector SPDR portfolio 

May 24, 2022

10:40 AM ET – 11:10 AM ET

Covered call writing is a low-risk option-selling strategy that generates weekly or monthly cash flow. This presentation will demonstrate how to implement this strategy using a database of only 11 exchange-traded funds for a 1-month option contract cycle. These are real-life trades taken directly from one of Dr. Ellman’s portfolios with screenshots verifying each trade. A final monthly contract result compared to the performance of the S&P 500 will be calculated.

Topics included in this webinar:

  • What are the Select Sector SPDRs?
  • How to establish a covered call writing portfolio
  • What is the role of diversification?
  • What is the role of cash allocation?
  • Calculating initial returns
  • Analyzing each trade in the monthly contract
  • Final results
  • Next steps

Register for free here

 

2. Mad Hedge Investor Summit

June 15th, 2022

12 PM ET – 1 PM ET

Topic & registration link to follow

 

3.American Association of Individual Investors: Greensboro North Carolina Chapter

Saturday June 18, 2022

10 AM – 12 PM ET

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

Using both covered call writing and selling cash-secured in a multi-tiered low-risk option-selling strategy where we either generate cash-flow or buy a stock at a discount.

Zoom webinar for Chapter members

 

4. Money Show Orlando live event

October 30th – November 1st, 2022

OMNI ORLANDO RESORT AT CHAMPIONSGATE

Visit Alan, Barry and members of the BCI team at Booth # 415

Details to follow.

 

Alan speaking at a Money Show event

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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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