In our BCI methodology, we have a 3-pronged approach to stock selection for our covered call writing trades:
- Fundamental analysis
- Technical analysis
- Common-sense principles (minimum trading volume, avoiding earnings reports, among others)
We use a mosaic of all 3 parameters for our choices, where no one category is the sole determining factor. That said, this article will focus in on technical analysis and how it is leveraged in our non-emotional decisions. We will use 2 real-life examples with:
- Axcelis Technologies, Inc. (Nasdaq: ACLS)
- Crocs, Inc. (Nasdaq: CROX)
BCI Premium Stock Report dated 3/31/2023 (partial)
ACLS-CROX: BCI Premium Report on 3-31-2023
Comparing ACLS and CROX
Similarities
- Price ($126 – $133)
- Industry rank (A/A)
- Weeks eligible in BCI Stock Reports (12/15)
- Beta (1.75/1.84)
Differences
- Industry (Chips/Apparel)
- Technical overview (CROX in bold/ ACLS not in bold)
Bullish technical chart for CROX
CROX Price Chart on 4-3-2023
Mixed technical chart for ACLS
ACLS Price Chart on 4-3-2023
Conclusion and discussion
Stock side
If deciding between these 2 securities, all other indicators being equal, we would favor CROX over ACLS because of a stronger price chart.
Option side
We would lean more aggressive with CROX for our strike selections, favoring out-of-the-money (OTM) calls and more defensive for ACLS favoring in-the-money (ITM) calls. It is certainly appropriate to use a mix of OTM & ITM. For example, if we were selling 5 contracts of each, it would be reasonable to sell 4 OTM and 1 ITM for CROX and vice-versa for ACLS. We could also use ratios of 3/2 and 2/3. The actual ratios applied would be dependent on our overall market assessment and personal risk-tolerance.
Premium member benefits video
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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,
Great reports! You always include very pertinent information; your market outlook is very helpful and really useful. I am bullish, but the market seems skittish with the debt ceiling.
Thanks again,
Your very happy premium member, John
Upcoming events
1. Mad Hedge Investors & Traders Summit
Covered Call Writing Blue-Chip Stocks and ETFs
September 13, 2023
12 PM ET
Zoom event:
Covered call writing is a low-risk option-selling strategy. The degree of our liability is directly related to the implied volatility of the underlying securities. Growth and technology companies tend to create greater exposure to the downside than blue-chip companies like those located in the Dow 30 and S&P 500. However, the former will generate higher premium returns. Only you can decide which underlying securities are most appropriate for your portfolios.
This presentation will review option basics, highlight covered call writing and demonstrate a methodology to select the best-performing Dow 30 and S&P 500 securities to facilitate the implementation of our option-selling and cash-generating strategies.
Real-life examples will be presented using recent BCI Premium Stock and ETF reports.
Real time Q&A via chat box questions will be available throughout the entire webinar.
2. Orlando Money Show Live Event
45-minute workshop: Monday October 30th 2:10 PM ET – 2:55 PM ET
Selling Cash-Secured Puts and Strategy Choices After Exercise
2-hour Master’s Class: Tuesday October 31st 9:30 AM ET – 11:30 AM ET
How to Master Covered Call Writing:
A detailed start-to-finish analysis using real-life examples.
Details & Registration information here.
3. AAII Orange County, California Chapter
AAII Investment Club members only
Saturday November 11, 2023
Details to follow.
Alan,
I am a premium member and was listening to several of your Ask Alan videos yesterday. In one you stated that when we roll out it’s always to an in the money strike. Can you explain?
Thank you,
Joyce
Joyce,
When we roll-out, it’s generally because the strike is in-the-money (ITM) as expiration is approaching and we want to retain the shares for the next contract cycle.
If we simply roll-out to the same strike (buy back the $50.00 call and sell a later-dated $50.00 call), rather than roll-out-and-up to an out-of-the-money (OTM) strike(buy back the $50.00 call and sell a later-dated $55.00 call), that $50.00 strike will also be in-the-money for that later-dated strike at the time of the “roll”.
Now, if we roll-out-and-up, that higher OTM strike can be ITM, OTM or at-the-money (ATM) depending on the share price at the time of the “roll” and the strike selected.
Let’s say we bought a stock for $48.00 and sold the $50.00 call, and as expiration approaches, the stock is trading at $60.00. Here are rolling out-and-up strike hypotheticals with the “moneyness” in parenthesis:
$55.00 (ITM)
$60.00 (ATM)
$65.00 (OTM)
Alan
Alan,
Do you ever use longer dated options or do you stick to weekly and monthly expirations only?
Thanks for all your great information.
Rick
Rick,
I will rarely use options expiring > 1 month out. Some reasons include the fact that shorter-dated options typically generate higher annualized returns, allow us to re-evaluate our bullish assumptions on the underlying securities more frequently and allow us to circumnavigate earnings reports and ex-dividend dates.
One minor exception is when an ex-date is later in a monthly contract and there are no weekly options available, I may go out 2 months to render exercise of that option less likely.
Bottom line: I use weekly and monthly options 99% of the time.
Alan
Rick,
Another reason for shorter-dated options is the reduction of market risk. The longer dated the options are, the greater the opportunity of “bad things” happening…i.e.: a fundamental change with the company, geopolitical issues, a Fed decision, etc.
Best,
Barry
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 09/01/23.
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 members are grandfathered 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
Premium Members,
There was a typo in the Friday closing pricing of the ETF “XLY” in the CEO section of the front page of the Weekly Stock Screen And Watch List 09/01/23. The correct value should be $169.67. The value is correct in the upper portion …the “Top 20 ETFs”.
Thank you John for spotting the typo.
Best,
Barry
Hi Alan
Nice explanation in “Using Technical Analysis”.
For covered calls, do you recommend a stock that is climbing quickly, or one that is just plodding along ? I find with the former, I can get assigned too quickly, because the stock price quickly exceeds the Strike price.
What do you say, sir ?
Cheers
Malcolm
Malcolm,
The answer to your question becomes crystal clear once we have precisely defined our strategy goals. Is our goal to simply generate cash flow leveraging the stock or is to generate cash flow + retain the underlying security?
Actually, in both cases, we want the best-performing stocks, even the ones heading to the moon and passing our strike prices.
Let’s take the “generate cash flow only” strategy first. Shares are rarely exercised early, but if they are, that means we have maximized our returns as the trade was initially crafted, and we have our cash back early to continue to re-invest. A happy ending. If our shares are sold due to exercise, no problem … there are dozens of other elite-performing securities to replace it.
Next, let’s look at the “generate cash flow + retain shares” strategy. This, typically, applies to “portfolio overwriting” where we write covered calls against low cost-basis shares in our long-term buy-and-hold portfolios. Selling shares due to option exercise may result in negative capital gains issues. In this case, we write deep out-of-the-money calls and are prepared to roll options if they are in-the-money as expiration approaches. We should also avoid ex-dividend dates, the most common reason for early exercise.
Bottom line: We always go with the best performers at the time of trade execution and craft and manage our trades based on our pre-defined strategy goals.
Alan
Alan,
Does it make sense to sell a weekly option on a 4 day week like we have now?: Or should I do a 2 week or monthly option?
Thanks,
Bob
Bob,
There will definitely be opportunities to generate significant returns even during a 4-day contract.
As an example (not necessarily a specific recommendation), taken from our recent premium member stock report, DBX is a stock in bold.
After market opens tomorrow (Tuesday), have a look at the DBX option-chain for the 9-8-2023 expiration for near-the-money strikes. Take the “bid” price and divide by the cost of the stock (for covered calls). Once you have calculated that percentage, multiply by 52 to get an annualized return (for perspective). The same analysis can be accomplished for cash-secured puts.
Since we have a robust list from our recent stock report, along with our ETF eligible securities, there will be many more such opportunities.
Alan
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
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https://www.thebluecollarinvestor.com/membership.shtml
Alan and the BCI team