Stock and ETF (exchange-traded fund) selection is one of the three required skills needed to achieve the highest level of success when selling options. Covered call writers and put-sellers have varying degrees of personal risk tolerance and trading styles. As a result, over the years and based on member feedback, the BCI team has added additional screening service reports for our members along with our core stock reports. Since we are beginning a new contract month and because we have had such a large growth in premium membership recently, I thought it would be beneficial to write an article showing how we can fund our covered call writing and put-selling portfolios using three of our reports. The securities shown do come from our most recent reports but do not include the 11/18/2016 stock report which was not produced at the time I am writing this article. These are not necessarily specific recommendations but rather intended to show one of the many ways these screened reports can be utilized. In this article, we will fund a portfolio with $100,000.00 cash available.
Reports used to fund our portfolio
Screens for the top-performing exchange-traded funds over the past 3 months that have adequate option liquidity. We will focus in on page 4 of the report that charts the top 3 Select Sector SPDRs which will utilize the top one third of the S&P 500 from a performance perspective. Here is a screenshot taken from the 11/16/2016 report:
Blue Chip report:
Quarterly screen for top-performing Dow 30 stocks. Eligible candidates have out-performed the S&P 500 over the past three months as well as the past one year. Here is a screenshot taken from the 4th quarter, 2016 report:
Premium Stock Report
This report is the foundation of the BCI methodology. It involves fundamental analysis, technical analysis and common sense screening. Here is a partial screenshot taken from the 11/11/2016 report:
Hypothetical allocation of cash assets
ETF Report: 3 Select Sector SPDRs/ $25,000.00/ about $8,000.00 per position
Blue Chip Report: 3 stocks/ $25,000.00/ about $8,000.00 per position
Stock Report: 5 stocks/ $50,000.00/ about $10,000.00 per position
***Some cash must remain unused for potential exit strategy opportunities and to pay trading commissions
Hypothetical selection of securities
ETF Report (top-performing Select sector SPDRs)
- XLF- 400 shares
- XLI- 100 shares
- XLE- 100 shares
Blue Chip Report (watching prices as we are allocating about $8,000.00 per position; avoid expensive stocks)
- INTC- 200 shares
- CAT- 100 shares
- V- 100 shares
Stock report (favoring bold, high industry ranks of “A” or “B” and diversification)
- ETFC (financial)- 200 shares
- ZION (bank)- 200 shares
- GIMO (internet)- 200 shares
- CGNX (Electrical)- 200 shares
- MSCC (chips)- 200 shares
Cost of funding portfolio and cash balance (as of Friday morning 11/18/2016)
Shares will cost $95,087.00 leaving $4913.00 for commissions (must use online discount brokers with LOW commissions) and exit strategy opportunities.
Initial 1-month calculations (as of Friday morning 11/18/2016)
The overall portfolio initial 1-month return average is 2.36% The stock report (bottom five securities) offered the highest initial returns followed by the blue chip report (middle three) and then the ETF report (top three) …no surprise there. Here’s the breakdown of the averages from each report:
- ETF: 1.4%
- Blue Chip: 2.15%
- Stock: 3.1%
Keep in mind that I did not have available this weekend’s stock report which I will be using to fund my personal portfolios next week. Also, the stats were taken on Friday morning but should be reflective of typical returns.
There are many ways to screen for option-selling candidates. This article presented three screens that can be utilized based on personal risk tolerance and strategy goals. I favor the BCI Premium Stock Reports in my portfolios and the ETF Reports in my mother’s one portfolio. There is no right or wrong here as long as our decisions are non-emotional and based on sound fundamental, technical and common sense principles. Finally, (and I know you saw this coming), once our positions are entered, we must be prepared for potential exit strategy opportunities.
Upcoming live events
December 1, 2016
Blue Hour webinar 3: Registration now open and free to premium members. Limited seating…register now.
Thursday at 9 PM ET
Premium members login and scroll down on the left side as shown in the screenshot below (top screenshot). General members can purchase a seat at the Blue Collar store (https://www.thebluecollarinvestor.com/store/) as shown in the lower screenshot:
Event information and registration can be accessed at these links.
***Thanks for submitting so many great questions. I will respond to 3 or 4 as part of the webinar presentation.
December 6, 2016
Options Industry Council Webinar Summit
Tuesday afternoon…1:30 PM ET:
FREE…compliments of the OIC
Those who register but cannot make the live event will be sent a link to the presentation recording.
February 27, 2017
Stock Trader’s Expo
Marriott Marquis Hotel, NYC
1:30 PM ET
Exhibit hall Booth 208 (February 26th – 28th) … come say hi to the BCI team
Global stocks moved up this week on continued hopes that looser US fiscal policy will quicken the pace of global economic growth. Volatility, as measured by the Chicago Board Options Exchange Volatility Index (VIX) fell to 12.85 from 15.5 a week ago. Oil prices rose slightly ahead of a meeting between Saudi and Russian oil ministers, who are trying to broker a production cut. This week’s reports and international news of importance:
- US Federal Reserve Board chair Janet Yellen told the Joint Economic Committee of the US Congress that the economy is making very good progress and that a hike in interest rates could come relatively soon
- Markets have fully priced in a 25 basis point hike in the federal funds rate target at the next Federal Open Market Committee (FOMC) meeting in December
- The results of the US presidential election have not altered the Fed’s assessment, she said
- With the resignation of Chair Mary Jo White, the five-member US Securities and Exchange Commission will be down to just two members in the final weeks of the Obama administration. One Democrat and one Republican will remain, giving the Trump administration the opportunity to reshape the commission
- President-elect Donald Trump has begun to fill out his cabinet and senior staff appointments. The first cabinet post announced was Alabama senator Jeff Sessions (R. Ala.), who will serve as attorney general, if confirmed by the Senate. Reince Priebus, the chairman of the Republican National Committee, has been appointed White House chief of staff, while Lt. Gen. Michael Flynn will serve as national security advisor. Kansas congressman Mike Pompeo will head the Central Intelligence Agency
- The United States reported a 0.8% rise in retail sales, while September sales were revised upward to 1%. The strong data adds to the Fed’s already compelling case for a December rate increase
- In the United Kingdom, October sales rose at their fastest pace in 14 years, jumping 1.9%
- Housing starts surged to a nine-year high in October, jumping 25.5%
- The Bank of Japan was able to halt a slide in Japanese government bonds this week without actually having to make any purchases
- Reuters reported this week that multinational corporations are selling their Venezuelan operations at steep discounts. Supply shortages and runaway inflation are cited as the principal reasons
- The German central bank this week issued a financial stability report in which it found that, while the country’s banks are robust, they suffer from weak profitability and may be underestimating the risks of falling asset prices and rising interest rates
- The Mexican peso’s plunge in the wake of the election of Donald Trump has forced the Bank of Mexico to raise interest rates to their highest level in over seven years
THE WEEK AHEAD
- US existing home sales data are released on Tuesday, November 22nd
- Global flash purchasing managers’ indices are released on Wednesday, November 23rd
- The minutes of the November meeting of the FOMC are released on Wednesday, November 23rd
- US markets are closed for Thanksgiving on Thursday, November 24th
- Germany reports third quarter gross domestic product data on Thursday, November 24th
For the week, the S&P 500 rose by 0.81% for a year-to-date return of +6.75%.
IBD: Market in confirmed uptrend
GMI: 5/6- Buy signal since market close of November 10, 2016
BCI: The market has successfully absorbed the election results and so it’s back to business as usual for The Ellman portfolios. I plan to fully fund my portfolios and that of my mother with securities selected from the 3 reports alluded to in this article. I will take a cautious approach by selling an equal number of in-the-money and out-of-the-money strikes.
WHAT THE BROAD MARKET INDICATORS (S&P 500 AND VIX) ARE TELLING US
The 6-month charts point to a bullish outlook. In the past six months the S&P 500 was up 6% while the VIX declined by 20%.
Wishing you the best in investing,
Alan ([email protected])